We’ve spent quite a bit of time over the last five months documenting China’s epic “kill the chicken to scare the monkey” campaign.
In the wake of a dramatic unwind in the half dozen or so backdoor margin lending channels that helped to pump some CNY1.5 trillion into Chinese equities during the first half of the year, Beijing embarked on an epic quest to shore up the market. Initially, authorities attempted to stabilize things by pumping hundreds of billions of yuan into the market via CSF. When that became too expensive, the Politburo simply started arresting people.
The witch hunt (and that’s exactly what it is) spread quickly to a number of high profile brokerage houses and before you knew it, China was arresting members of the plunge protection team.
Money managers were so terrified by late September that at least one market participant told a friend [8] to “look after his wife” in the event he didn’t come home after being “summoned” by Chinese investigators.
On November 18, Guotai Junan Chairman and CEO Yim Fung simply disappeared [9]. “We can’t find him,” the company said in a statement. As it turns out, Yim was “taken away” by authorities in connection to an investigation into CSRC vice chairman Yao Gang.
Now, we get a look at the new face behind Xi's crackdown on "malicious" sellers:
That's Fu Zhenghua, who Bloomberg describes [10] as "a 60-year-old former Beijing police chief who led a corruption case against one of China’s richest men and busted a huge prostitution ring in 2010."
Zhang Lifan, a Beijing-based political commentator told Bloomberg that Fu is "a capable assistant to Xi because his cutthroat style would help the investigation get to the very bottom of things, and to make sure things under Xi’s full control."
Yes, Xi needs to "get to the bottom of things"- so much so that Beijing has created a hotline for people to call should they see any short sellers. "They put a notice on all the floors with the number that you can call anonymously to encourage people to dial in," an unnamed source at the abovementioned Guotai Junan told Reuters [11]. "They say they just want people to report corruption."
But tipsters aren't just "reporting corruption", they're angling to get their bosses fired on trumped up charges. "It's creating a very dog-eat-dog environment. People collect evidence on their bosses, because if they get rid of their boss, it means that they can get promoted faster," said a partner at a Chinese mutual who also spoke to Reuters.
At a meeting in July - when the wheels first started to come off for China's equity miracle - Fu told officials from the securities regulator, the police, and the party’s anti-corruption watchdog to be on the look out for "malicious" shorts. Fu has a reputation for no being afraid to ruffle the feathers of powerful Chinese. As Bloomberg documents, he "cut his teeth in investigating financial crimes in 2008, when he put away Huang Guangyu, China’s richest man at the time [who] was sentenced to 14 years in prison for bribery and insider trading." Subsequently, a former Assistant Public Security Minister was convicted of corruption over his links to Huang. He received a suspended death sentence.
Fu's other exploits include an infamous prostitution bust, a campaign against "popular bloggers whose sometimes anti-establishment comments drew the ire of party leaders," and a decree prohibiting police officers from drinking alcohol outside of their homes.
All of this has foreign firms running scared. "Everyone is absolutely terrified of China," a director at an international brokerage in Hong Kong quoted by Reuters said this week. "At the moment, if you don't do what the CSRC asks you to do, there will be blood," another source at a "large US hedge fund" warned.
We'll close with a particularly amusing quote from an attorney who helps foreign firms ensnared by Fu:
"You can't 'comply' because there is no rule of law. The best thing you can do is establish processes for who is likely to be taken away, and how to make sure they aren't disappeared forever."
