China stock probes send shivers through investment community

SHANGHAI — Investigations by Chinese authorities into wild stock market swings are spreading fear among China-based investors, with some unsure if they are simply helping with inquiries or actually under suspicion, executives in the financial community said.

Chinese fund managers say they have come under increasing pressure from Beijing as authorities’ attempts to revive the country’s stock markets hit headwinds, with some investors now being called in to explain trading strategies to regulators every two weeks.

One manager at a major fund, part of the “national team” of investors and brokerages charged with buying stocks to revive prices, said a friend, also an executive at a large fund, was recently summoned for a meeting with regulators, along with all other mutual funds that had engaged in short-selling activity.

“If I don’t come back, look after my wife,” his friend told him, handing the manager his home telephone number.

China has unleashed a volley of measures to try to prop up its stock markets  that have fallen around 40 per cent since mid-June, pushing domestic brokerages and fund managers to buy up shares and banning investors with large stakes from selling their holdings for six months.

The authorities’ meddling has unnerved many investors, leaving them questioning China’s commitment to liberalising its capital markets and the long-term future of the country’s stock markets themselves.

Adding to those concerns is the fact that authorities have also been probing investment funds’ trading strategies, looking into whether they have been engaging in alleged “malicious” short-selling or market manipulation.

On Monday, Bloomberg reported that Li Yifei, the China chairwoman of Man Group Plc., one of the world’s largest hedge funds, had been taken into custody to help with inquiries.

Reuters has not independently confirmed the report, while Li’s husband has said she is having “normal” discussions with regulators. Man Group shares fell as much as 6 per cent on Tuesday following Bloomberg’s story.

Foreign fund fears

Sources told Reuters that the increased tempo of meetings with regulators has become intimidating, especially for foreign funds used to relying on their Chinese brokers to represent them when dealing with Beijing.

While foreign investors are unlikely to be a major factor behind stock market swings, given their relatively low participation in the market compared with domestic players, they are seen as more politically vulnerable to investigations.

“The foreign fund community definitely feels like it is being monitored more carefully than it’s been in a very long time,” said one foreign fund manager.

“Nobody is pointing at you and saying you are doing anything illegal. But it’s enough to ask people to walk through all their trades, and ‘why is this account trading so much?’ That ramps up the pressure,” he added.

Some Chinese believe the collapse in Chinese stocks was engineered by foreigners, and there has been speculation that it was caused by the US government to embarrass China as the International Monetary Fund (IMF) considered, including the yuan in its currency basket.

There are no signs yet the pressure has caused foreign funds to withdraw from the market altogether or pull out staff from the country.

But fund experts say there is a risk that if foreign investors feel intimidated enough that they can no longer employ trading strategies to allow them to profit from volatility, they may eventually have little choice but to leave, for the short term at least.

“This crisis has highlighted the need for a China-specific investment model. Simply porting strategies that worked in the US is not feasible,” said Daniel Celeghin, a consultant to hedge funds as Hhad of Asia Pacific for Casey Quirk based in Hong Kong.

For Chinese funds though, the option to pack up and leave isn’t there, and if the volatility continues, the pressure on them is likely to intensify.

The “national team” fund manager said that as well as meetings with regulators, they are now calling him every day to ask how much he is selling and buying.

On Monday, Chinese state media announced a slew of confessions following investigations into dramatic stock market fluctuations, including from a reporter who said he had spread false information that had caused “panic and disorder”.

An official from China’s securities regulator, and four senior executives from China’s largest brokerage, CITIC Securities, confessed to insider dealing, the official Xinhua news agency reported.

Authorities have announced crackdowns on fabricated trading information, alleged malicious short selling and other strategies seen as weakening confidence in the stock market.

Wang Xiaolu, a reporter at the respected Caijing business magazine, read a confession about his reporting on the stock market on a national state television broadcast on Monday.

“I shouldn’t have sought to make a big splash just for the sake of sensationalism,” he said on China Central Television, adding that his actions had “brought great harm upon the country and investors”.

It was not possible to verify whether Wang was forced to make the confession or did so of his own free will.

Chinese state media often publish confessions of those detained in high-profile cases before they are tried in court, a practice that rule of law advocates say violates the rights of the accused to due process.

Xinhua said Wang had confessed to writing about the Chinese stock market “based on hearsay and his own subjective guesses”.

Xinhua also said Liu Shufan, an official with the China Securities Regulatory Commission (CSRC), had confessed to insider trading, forging official seals and using his position to boost a company’s share price in return for several million yuan of bribes. 

Xinhua added that Xu Gang, Liu Wei, Fang Qingli and Chen Rongjie, whom it described as senior executives at CITIC Securities, had confessed to insider trading, although it gave few details.

A CITIC Securities spokesman declined to comment. On Sunday, the brokerage said several senior managers had been asked to assist with a public security investigation and that the company was actively cooperating with the request.

Eight CITIC employees were being investigated for suspected illegal securities trading, Xinhua has previously said.

Separately, China is urging listed companies to merge and restructure, according to an official statement, as the government seeks to avert a stock rout and encourage investors to return to the market.

China will strongly encourage mergers and acquisitions involving listed firms to help push reform of state companies and inject vitality into the economy, said a joint statement released by four government agencies late Monday.

The notice also stressed measures to boost the stock market, including encouraging firms to pay cash dividends to optimise investor returns and encourage investors to hold stock for the long-term, and urging companies to buy back their own stock — which should see prices rise.

China last year announced a combination of its top two train makers, state-owned China CNR Corp. and CSR Corp., into a single huge conglomerate — sending their shares soaring.

Market speculation about possible mergers between state giants has since focussed on energy, shipping and telecommunications.

But energy giant Sinopec has denied reports that the government was planning to merge the firm with another domestic energy behemoth, China National Petroleum Corp.

Bloomberg News reported last month that Beijing may merge two of its largest shipping companies, and there was recent speculation that top telecom firms China Unicom and China Telecom would merge as the government swapped the two companies’ chairmen.

China will simplify mergers and acquisition approvals, expand ways for companies to fund deals, and push banks to finance cross-border mergers, the government agencies’ statement said.

State media reported in April that the official Assets Supervision and Administration Commission, which manages state firms under the direct supervision of the central government, was considering merging scores of the biggest such enterprises to create around 40 national champions from the existing 111.