[The authorities are canvassing industry
players in several cities, including Beijing and Shanghai . Police
officers under the Chinese Ministry of Public Security specializing in economic
crimes have joined agents from the nation’s securities regulator on inspections
of investment funds and brokerage firms. The authorities are combing records
and questioning transactions that appear to profit from or contribute to a
falling market, according to employees of investment firms who, like others who
spoke anonymously, said they feared reprisals.]
By Edward Wong, Neil Gough and
Alexandra Stevenson
Day traders at a brokerage house in
has fallen 37 percent since the market sell-off began in June. Credit
Kevin
Frayer/Getty Images
|
The Communist Party’s response
to China ’s
months long stock market crisis has been swift and forceful. In addition to
spending as much as $235 billion to buy shares and bolster prices, the
authorities have imposed a range of extraordinary restrictions on the sale of
stocks — and backed them with the full weight of a security apparatus usually
more focused on political dissent than equity trades.
The strategy appears to have
succeeded, at least for now, in softening the impact of the Chinese market’s
biggest rout since the global financial crisis of 2008. But the new limits on
trading and the efforts by the police and regulators to enforce them have
unsettled investors at home and abroad who are unsure exactly what types of
transactions are being banned or criminalized.
After decades of watching China
make slow but steady progress in building Western-style financial markets, many
are now asking whether the party is reversing course — and whether Chinese
officials are willing to tolerate the sometimes turbulent waves of selling that
are inherent to such markets.
“What’s happening in China is
definitively spooking people,” said Dawn Fitzpatrick, the chief investment officer
of O’Connor, a $5.6 billion hedge fund owned by UBS . “They’ve
set themselves back a couple of years” in terms of attracting investment, she
added.
Anxiety in the industry surged
last week after Li Yifei, the prominent China chief
of the world’s largest publicly traded hedge fund, disappeared and Bloomberg
News reported that she had been taken into custody to assist a police inquiry
into market volatility. Her employer, the London-based Man Group, did little to
dispel fears, declining to comment on her whereabouts.
Ms. Li resurfaced on Sunday and
denied that she had been detained, saying that she had been in “an industry
meeting” and “meditating” at a Taoist retreat. But many in the finance sector
are unconvinced.
“There is, generally, a very
nervous atmosphere, as people wait to see the outcome of some of these
investigations and how deep the rabbit hole goes,” said Effie Vasilopoulos, a
partner at the Hong Kong office of the Sidley Austin law firm who works with
hedge funds that invest in mainland China. “How wide a net is the government
going to cast in terms of looking at foreign firms and their operations — not
just onshore, but also offshore as well?”
The authorities are canvassing
industry players in several cities, including Beijing and Shanghai . Police
officers under the Chinese Ministry of Public Security specializing in economic
crimes have joined agents from the nation’s securities regulator on inspections
of investment funds and brokerage firms. The authorities are combing records
and questioning transactions that appear to profit from or contribute to a
falling market, according to employees of investment firms who, like others who
spoke anonymously, said they feared reprisals.
Police officers have downloaded
extensive trading data and asked fund managers why they sold shares when the
market was going down, prompting discussions about basic investment strategy. Officers
have bluntly told some fund managers to just stop selling.
While regulators and law
enforcement elsewhere in the world routinely meet with investment companies to
monitor trading for potential abuse and illegal activity, they seldom do so
with the aim of steering the direction of the markets.
The government has offered few
details about the various investigations, contributing to the atmosphere of
uncertainty. In late August, it announced the arrests of eight executives at
state-owned Citic Securities, the country’s largest brokerage firm and
investment bank, including four members of its senior management, on suspicion
of insider trading.
At least four other brokerage
firms said last month that they were being investigated by regulators for
failing to properly identify their clients.
While insider trading is common
in China ’s
relatively opaque markets, the investigations also serve the government’s short-term
goal of discouraging sales and stabilizing prices, said Chris Powers, a senior
consultant at Z-Ben Advisors, a financial consulting firm in Shanghai . “Is
this more about limiting supposed market manipulation, or is it about sending a
message to the market as a whole and using these cases as examples?” he asked.
Starting in the middle of last
year, China ’s
markets enjoyed a breathtaking rally driven by record levels of margin
financing, or borrowing to invest in stocks, and strong signals of government
support, including cheery reports on the bull market in official news outlets
like People’s Daily. But the Shanghai
composite index has fallen 37 percent since the sell-off began in June, and the
government has intervened directly and repeatedly in an attempt to support
prices.
The measures include
restrictions on short-selling, or betting that stocks will fall. Regulators in
the United States took
similar action for a month at the height of the 2008 financial crisis, but the
Chinese authorities have been vague about what kinds of transactions have been
prohibited and for how long. The police have said they are investigating
“malicious” short-selling but have not said what that entails.
The crackdown on short-selling
and other trading strategies has been particularly disruptive for hedge funds, which
depend on such trades to balance risks and limit losses.
“They seem to be harassing
anybody that they thought was selling or was short,” said one hedge fund
manager in Hong Kong who
does not have investments on the mainland. “Hello, it’s a hedge fund — they are
long and short — but China is
only looking at the short side.”
The government has also
suspended initial public offerings and prohibited investors who own more than 5
percent of a company from selling shares.
While central banks in the United
States , Europe and Japan have
used unconventional monetary policy in recent years to stimulate growth and
lift markets, China ’s
intervention has been more direct, with the government ordering brokerage firms
to contribute to a bailout fund. In a report this week, analysts at Goldman
Sachs estimated that entities directed by the Chinese government have spent
about 1.5 trillion renminbi, or $235 billion, buying shares to support the
market.
While opening its wallet, the
state is also wielding a cudgel. At the end of August, Wang Xiaolu, a
journalist for the respected financial newsmagazine Caijing, was detained by
the police and shown on state television apologizing for an article suggesting
the government might scale back its bailout of the market. Nearly 200 others
have been punished in a special police campaign against “spreading rumors,”
including some detained for discussing the stock market.
Censors have ordered the Chinese
news media to avoid any reporting that might result in a market sell-off. With
the economy growing at its slowest pace in a quarter-century and the party
leadership worried about social unrest, discussion of the markets can draw
official scrutiny almost as quickly as political speech.
“Like many other bad ideas, the
Chinese have finally adopted the Western practice” of discouraging financial
critics and banning short-selling when markets turn down, said James S. Chanos,
the prominent American short-seller who has bet on a downturn in China for more
than five years. “It has never worked here, and does not appear to be working
there, either.”
One hedge-fund manager based in Hong
Kong said that he was cashing out most of the nearly $500 million he
has invested in the mainland because of fears that his money could get tied up
by new rules, with no legal recourse.
“I’m worried about more systemic
risks” and “the witch hunt that is going on,” he said.
Another fund manager, in Singapore , said
his colleagues in China were
finding ways to take vacations outside of China
because of a perception in the industry that the environment was becoming
increasingly hostile.
The state news media has stoked
the flames in the campaign against short-sellers, hedge funds and other
investors, especially foreign ones. In July, the official newspaper of China ’s
state banks, Financial News, ran an editorial that accused Morgan Stanley, Goldman
Sachs and other foreign investment banks of trying to cause a market “stampede”
and said that outsiders wanted to prevent China from
becoming a strong financial power.
Another article, on the popular
Chinese website Sina, criticized Citadel Securities, a Chicago-based investment
firm. One of the firm’s accounts in China was
among a group of 34 that officials suspended in July and August for suspicious
automated trading activity.
Though foreign investors are
being singled out, only about 1 percent of China ’s $6.4
trillion domestic market value is owned by such investors, according to
estimates by UBS , the
investment bank.
In recent years, some financial
officials and regulators have started developing more sophisticated investment
tools for the Chinese stock market, such as futures and derivatives. But
regulators are unlikely in the current environment to continue with such
experiments, analysts said. On Sept. 2, China ’s
futures exchange, an important platform for hedging, announced new restrictions
that quickly led to a severe drop in trading volume.
“Now we’re seeing the regulators
trying to stuff the genie back into the bottle,” said Victor Shih, a political
economist at the University of California , San
Diego , who has worked for a hedge fund.
“For investors, if you can’t
hedge, it makes it hard to mitigate any sort of risk,” he added, arguing that
would “ultimately limit the wealth of the equities market” in China .
Anne Stevenson-Yang, co-founder
of J Capital Research, which analyzes the Chinese economy for investors, said
the restrictions on selling had turned the Chinese stock market into “a roach
motel for capital.”
“You can enter,” she said, “but
if you want to leave, you have to be really fleet about it, because you’re
mostly not going to get out.”
Edward Wong reported from Beijing , Neil
Gough from Hong Kong and
Alexandra Stevenson from New York . Mia
Li and Kiki Zhao contributed research from Beijing .