China stock market regulator shines light on grey market financing
The grey market financing sector that helped inflate the mainland stock market bubble by offering speculators margin loans worth more than 2 trillion yuan (HK$2.5 trillion) received a rude jolt on Monday, when the securities regulator started an investigation of Hundsun Technologies, a financial information firm that connects the shadow banking system with brokerages.
The China Securities Regulatory Commission’s (CSRC) efforts to clean up the unofficial margin financing businesses demonstrate how Beijing can quickly veer off the road to financial innovation and into trouble.
Hundsun, controlled by Alibaba founder Jack Ma Yun, links small institutions such as hedge funds and online peer-to-peer lending operators with brokerages via its cloud-based HOMS platform.
When the margin lending businesses were rampant, no one actually waved a flag
HOMS was established in May 2012 and grew rapidly on the back of the mainland leadership’s desire to revamp traditional commerce models with the bold use of the latest internet technologies.
During the mainland market’s recent boom, institutions using HOMS and similar systems offered margin loans worth more than 2 trillion yuan to individual investors, according to the CSRC, with HOMS accounting for at least 500 billion yuan.
Such grey market financing is technically illegal but the regulators turned a blind eye to the business from late last year, when a strong rally started on the A-share market.
Institutions could use it to lend small players up to 10 times their initial capital to trade shares, at annual interest rates of up to 20 per cent.
“When the margin lending businesses were rampant, no one actually waved a flag,” said Fang Peilin, an entrepreneur in Wenzhou, Zhejiang province. “It wasn’t fair to moralise about the platforms because, after all, they were only offering services to facilitate share trading.”