China Stock Turmoil 2015

Mystery of the missing chairman: Guotai Junan case makes Western firms wary of Chinese bosses’ connections

PUBLISHED : Thursday, 26 November, 2015, 6:42pm
UPDATED : Thursday, 26 November, 2015, 6:42pm

To lose one senior executive might be unfortunate; to lose more than a dozen is more than just carelessness, its deeply troubling. That’s the reaction in the Chinese securities industry to the news that Yim Fung, chairman of Guotai Junan Securities Hong Kong, has not been heard from in more than a week.

A source close to the Shenzhen government told the South China Morning Post he may have fled as Yim’s family members and employer would have been notified by now if he was under detention. While it is still unclear where Yim is, his disappearance as part of a growing cast of fund managers, brokerage house heads and regulators caught up in a government dragnet, purportedly aimed at clamping down on market misconduct activities, which is forcing industry players to reassess their exposure.

READ MORE: Guotai Junan under scrutiny more than a week before chairman’s disappearance

Michelle Leung, head of fund manager Xingtai Capital Management, said even though mostly high-profile people were being targeted, “No one likes what’s going on and a lot of A-share managers who are shorting the market are not happy. It’s a pretty tough situation.”

The recent detentions is on one hand a continuation of a three-year campaign against corruption and at the same time a response to the summer’s market meltdown when Chinese stocks plunged more than 40 per cent, prompting a hurried government bailout. ‘Malicious’ short-selling as well as insider trading quickly became targets for investigation as the authorities intervened with heavy-handed measures to stem the slide.

Western financial firms now want to know about the political relationships among senior executives at Chinese counterparts, said Bill Sims, managing director of risk consultancy Stroz Friedberg.

“Foreign firms involved in the securities and finance sectors in China are increasingly anxious and are taking the recent spate of arrests very seriously. Given the interconnected relationships that many Western firms have with Chinese finance firms, there is increasing concern as to the potential reputational damage that foreign firms could face.”

Financial industry investigations will likely persist for a while though they will focus on individual executives rather than companies as a whole, wrote Macquarie Research analysts Matthew Smith and Steve Zeng last week in a report.

“We do not think that shareholders will bear the direct brunt of any action (i.e., we don’t expect significant corporate fines), although this could change in the future as the brokers become more internationalised.”

A Hong Kong permanent resident and functional-constituency vote holder, Yim – also known as Yan Feng – was a well-known fixture in the city’s business community. Some have speculated his disappearance is linked to the arrest of regulatory boss and former Guotai Junan executive Yao Gang.

In any country companies need to understand the enforcement environment, said a Hong Kong criminal lawyer who declined to be named. Besides obeying the law, there is not much more fund managers can do, he said “except compensate employees more (for the risk)”.