Beijing’s crackdown on brokerages designed to shake up China’s power-money structure, say analysts

Beijing is trying to rid mainland stock markets of collusion between power and money by stepping up investigations of securities companies, analysts said, while warning of shocks to markets that had just stabilised.

Three of China’s top 10 brokerage companies by assets – Citic Securities, Guosen Securities and Haitong Securities – reported late this week that they were being investigated by the China Securities Regulatory Commission (CSRC), all suspected for having breached the mainland securities regulations.

At a press briefing on Friday the CSRC did not detail the matters being looked into, but analysts said the crackdown indicated Beijing was intent on shaking up China’s political/economic structure.

“Clearly [Communist Party general secretary] Xi Jinping is trying to change a rather long-held culture where those who obtain powerful positions believe that the rules don’t apply to them, and that clearly is changing and he has changed behaviour,” said Professor Paul Gillis, from Peking University’s Guanghua School of Management.

“Its my sense this started out as a search for the guilty to blame someone for the major market correction. But I think it has morphed into an effort to clean up the industry and to try to take market manipulating practices out of the markets so the markets can operate more fairly, and in that way I would link it back to the anti-corruption campaign.”

Probes targeting market wrongdoing started with individuals and smaller fund houses from July, and were gradually upgraded as senior executives including Citic Securities president Cheng Boming were taken by police for investigation from mid September.

Guosen Securities’ president Chen Hongqiao, hanged himself in his Shenzhen home in late October, after his former boss Zhang Yujun, an assistant chairman at the CSRC, was taken in for questioning in September.

This month, before the investigation of the brokerage houses was announced, CSRC vice-chairman Yao Gang became the most senior figure to be caught up in the crackdown.

Some brokers and market analysts declined to comment citing political sensitivities, but several said they believed more companies and individuals would come under investigation.

Leon Qi, an analyst with Daiwa Securities, said it was hard to predict the targets and scale of the investigation, but the current situation already “added uncertainties”.

Hong Hao, chief strategist with Bocomm International, said short-term volatilities were inevitable given the upgraded investigation.

“This kind of investigation seems rare in China, but is quite common in the US. It actually marks the maturity of a market, which should be positive to investors in a long run,” Hong said.

All the brokerage companies plunged on Friday, as panicked investors dumped their holdings.

Citic Securities and Guosen Securities both hit the daily downward limit of 10 per cent before markets closed in Shanghai and Shenzhen. Haitong Securities fell 3.79 per cent in Hong Kong before it suspended trading.

Guotai Junan, another troubled brokerage, whose Hong Kong boss is missing, closed 7.99 per cent lower in Shanghai and its Hong Kong-listed branch, Guotai Junan International, dropped 7.75 per cent.

Before they plunged on Friday, the mainland’s stock markets had only just stabilised, with the benchmark Shanghai Composite Index rebounding 20 per cent from an August low. However if fell 5.5 per cent on Friday, with brokerages leading the way down.

On Monday, the CSRC lifted a ban on net selling by brokerages. On Friday it confirmed it had ordered domestic brokerages to cease using total return swaps, a derivative tool that finances clients’ stock purchases through swaps and other over-the-counter contracts, to avoid any repeat of the summer’s meltdown from a leverage-driven rally.

Daiwa’s Qi said it estimated the outstanding balance of total return swaps stood at 200 billion yuan, and it would bring big volatilities to the market next week if the CSRC required positions to be cleared in a few days.