The arrests or investigations targeting the finance industry in the aftermath of China’s summer market crash have intensified in recent weeks according to Bloomberg, creating a climate of fear among China’s finance firms and chilling their investment strategies. As one professor of Chinese economy noted, "some in the political leadership sought to find scapegoats to blame" for the market crash which along with massive intervention "created uncertainty and anxiety that can only undermine the effort to make these markets work better."
The high-drama highway arrest of a prominent hedge fund manager. Seizures of computers and phones at Chinese mutual funds. The investigations of the president of Citic Securities Co. and at least six other employees. Now, add the probe of China’s former gatekeeper of the IPO process himself.
About a third of China’s futures-focused hedge funds had to stop trading as regulators restricted practices such as short-selling, but as Bloomberg details,
Howbuy Investment Management Co. in September said it stopped providing data on premature fund liquidations because the information was too sensitive. The Shanghai-based fund research firm had previously said almost 1,300 hedge funds closed this year amid the stock rout.
The authorities’ goal was to root out practices such as insider trading as part of China’s anti-corruption campaign, and a desire by "some in the political leadership to find scapegoats to blame" for the market crash, according to Barry Naughton, a professor of Chinese economy at the University of California in San Diego.
“Together these are creating uncertainty and anxiety that can only undermine the effort to make these markets work better,” he said by e-mail.
The government’s response to the market crash was intervention: state-directed purchases of shares, a ban on initial public offerings and restrictions on previously allowed practices, such as short selling and trading in stock-index futures. Next, high-ranking industry figures came under scrutiny as officials investigated trading strategies, decried “malicious short sellers” and vowed to “purify” the market.
Policy makers say “now we’re innovating, so you can all come in -- using high-frequency trading, hedging, whatever -- to play in our markets,” Gao Xiqing, a former vice chairman of the China Securities Regulatory Commission, told a forum in Beijing on Nov. 6. “A few days later, you say no, the rules we made are not right, there are problems with your trading, and we’re putting you in jail for a while first.”
At least 16 people have been arrested, are being investigated or have been taken away from their job duties to assist authorities, according to statements and announcements compiled by Bloomberg News.
In the latest probe announced last week, Yao Gang, a vice chairman at the CSRC, is under investigation for “alleged serious disciplinary violations,” the Communist Party’s Central Commission for Discipline Inspection said. Known as China’s "King of IPOs," he supervised China’s initial public offerings until earlier this year, when he changed to approve bonds and futures, according to Caixin magazine. He joins two other CSRC officials being investigated, one of whom, Zhang Yujun, was formerly the general manager of the Shanghai and Shenzhen stock exchanges.
The securities regulator carried out unannounced inspections of several Chinese investment firms including Harvest Fund Management earlier this month, taking away hard drives and mobile phones, according to people familiar with the seizures. Police in Shanghai also confiscated computers and froze $1 billion of shares in listed companies connected to Xu Xiang, the manager of Zexi Investment known as “hedge fund brother No. 1,” who was arrested Nov. 1 on a highway between Shanghai and Ningbo.
Among Xu’s fellow money managers who performed well this year, anxiety has been palpable following his arrest, according to hedge fund manager Lu Weidong, chairman of Xinhong Investment based in China’s southern city of Dongguan. Lu’s Fuguo No. 1 fund was the best-performer among the 236 Chinese multi-strategy hedge funds from June to August, according to Shenzhen Rongzhi Investment Consultant Co., which tracks the data.
It isn’t uncommon for Chinese money managers to trade on unpublished information, according to Lu. Everybody that ever traded on such tips would “restrain themselves a bit” going forward, Lu said by phone.
“People are worried,” he said.
"The extent of this round of clampdown in the financial industry has surpassed everybody’s expectations," Hao Hong, chief China strategist at Bocom International Holdings Co. in Hong Kong.said. "Over the longer term, the clampdown on corruption in the financial industry will level the playing field in the market for smaller investors."
However, the arrests or investigations targeting the finance industry are creating a climate of fear among China’s finance firms and chilling their investment strategies.