Rare leniency by Chinese security watchdog saved three brokers US$60 million

The Chinese security market watchdog has made a rare U-turn and reversed its decision to fine three major security firms a total of 414.55 million yuan (about US$59.9 million) for allegedly assisting “malicious short selling” during the 2015 stock market meltdown.

Citic Securities, Haitong Securities and Guosen Securities，announced on Monday night they had been informed by the China Securities Regulatory Commission (CSRC) that the alleged wrongdoing could not be established and the authority had decided to close their cases.

The decision to throw out the charges after an investigation lasting more than three years spared the companies having to pay the fines set by the watchdog in 2015, according to a report by Thepaper.cn.

The three brokers had been accused by the regulator of providing margin financing and securities lending for Citadel Shanghai Trading, which used those facilities to short-sell China stocks during the 2015 rout, dubbed the biggest reversal in decades by some market watchers.

Bears and short-sellers dare not wade into China’s equity slump for fear of regulator’s wrath

One of the biggest sell-offs in Chinese stock market history was triggered on June 12 of that year. Overleveraged A-shares on the Shanghai Stock Exchange lost one third of their market capitalisation within a month and by early July more than half of Shanghai stock market’s listed companies had filed to halt trading in a desperate attempt to prevent further drops.

Shanghai and Shenzhen exchanges had to restrict transactions to 38 securities accounts with “abnormal transactions”.

On the evening of August 2, international hedge fund Citadel confirmed that the account of Citadel Shanghai Trading had been suspended by the authorities.

China stocks tumble, pushing equity valuations below 2015 market lows

“Citadel has been actively investing in the region for 15 years, and has always maintained a constructive dialogue with regulators, including during the recent market volatility,” Citadel said at the time. “We continue to comply with all local laws and regulations.”

On August 5 that year, the state-run Xinhua news agency published an investigative report on Citadel Shanghai Trading’s role in the stock market crash.

Xinhua also revealed that Citic Securities had formerly owned 20 per cent of Citadel Shanghai via a subsidiary. Citic clarified later that it had sold the shareholding in November 2014.

The Chinese authorities said “foreign forces” were among the short-sellers profiteering from providing margin financing and securities lending, reaping huge returns from intentionally unsettling the market.

Once China’s hedge fund guru, Xu Xiang sentenced to 5.5 years in prison for market manipulation

A major crackdown by the Chinese authorities followed. Eleven top managers from Citic Securities were detained in August 2015, including its general manager Cheng Boming. One of its founders, Wang Dongming, announced his retirement.

In May 2015, Citic Securities was handed a net fine of 308 million yuan by the CSRC, the biggest ever issued. Haitong and Guosen Securities later received 2.55 million yuan and 104 million yuan fines respectively.

On November 1, 2015, hedge fund manager Xu Xiang, nicknamed China’s Warren Buffett, was arrested for allegedly manipulating the stock market, jailed for 5½ years and fined 11 billion yuan.

A source who is a veteran at Citic said he was “happy” with the outcome but declined to comment further.

Chinese financial commentator Yao Hongen said on his blog: “People only want to make money in the stock market. There is no ‘well-intentioned’ buying and no ‘vicious’ short-selling.”