Fear and loathing in Beijing rattles Chinese brokers

By:
Elliot Wilson
Published on:

Arrests, disappearances and suicides rock industry; investor unease at hard-nosed Beijing.

It was a treacherous and even dangerous end to the year for many executives at China’s under-pressure broking houses. Arrests, disappearances and suicides rocked an industry still struggling to deal with the fallout from a mid-year stock market rout that wiped $5 trillion off the value of mainland shares, unsettled the country’s political elite, and led to talk of looming financial crisis in the world’s second-largest economy. 

In late November, Wang Dongming, chairman of Citic Securities, was forced out of his job after seven of the brokerage’s senior personnel, including president Cheng Boming, were either charged with or probed over insider trading. It was a bitter pill to swallow for the country’s leading investment bank, an institution that boasts of its strong ties to government.

Lost contact

Wang’s fate could have been worse. A host of leading figures in China’s financial firmament simply disappeared in the final weeks of the year, undermining trust in their companies and shredding the value of their domestic and foreign listed securities. On November 23, shares in Hong Kong-listed Guotai Junan International Holdings slumped more than 17% after the firm said it had lost contact with chairman and chief executive, Yim Fung. As Euromoney went to press, Yim’s whereabouts remained unknown.

Guo Guangchang-160x186
Guo Guangchang, Fosun
On December 11, mainland investment group Fosun International said police had detained 48-year-old founder-chairman, Guo Guangchang, at Shanghai airport.


Fosun, which immediately suspended trading in its Hong Kong shares, stopped short of calling it an arrest, with chief executive, Liang Xinjun, claiming that Guo was "assisting the authorities" with an external investigation and that his detention was "not because the company has problems". 

Guo re-emerged from detention four days later, but refused to give an explanation for his extended disappearance.

One of the country’s most visible businessmen, Guo boasts a fortune estimated at $9 billion, and enjoys comparisons with Warren Buffett. In recent years, Fosun has become one of China’s fastest-growing and most acquisitive firms. It owns insurance and banking assets in Germany, Belgium and Portugal, and launched a hostile €675 million ($740 million) takeover bid for financial services group RJH International in July. French investment bank Oddo & Cie trumped it in November, by tendering a €760 million offer for the Brussels-based owner of Kleinwort Benson. But it completed a deal in the same month, when it bought Bermuda-based insurer Ironshore for $1.8 billion.

To many, a clear line can be drawn through accusations of market rigging and insider trading, which have dogged mainland brokerages since last summer, and a broader push by China’s president Xi Jinping to tackle the endemic and corrosive corruption that is undermining the economy and, some insiders fear, threatening the ruling Party’s very future. 

A slew of senior executives at leading banks were also removed from their posts in 2015. In May, Wang Yaoting, vice president at Hua Xia Bank, was publicly charged with taking bribes worth $164,000; in November Zhang Yun, president of Agricultural Bank of China, the country’s third largest lender, was formally "taken away to assist an investigation", state media reported, using a well-worn euphemism for corruption-related arrests. 

Knocks

Domestic investment bankers increasingly live in fear of being singled out by Beijing. "It’s pretty nasty out there," said a European investment manager living in Shanghai. "Everyone is keeping their heads down, hoping that no one knocks on their door."

Fraser Howie, co-author of Red Capitalism, said any senior executive at a Chinese bank or brokerage should be "very worried indeed", while experts warned of more arrests to come. "There will be lots of other cases of insider trading, wrongdoing and stock manipulation," predicted Xiang Songzuo, chief economist at Agricultural Bank of China in Beijing. 

Since June 2015, according to the state-run Securities Times, more than 30 senior executives at leading financial firms have gone missing, killed themselves, or faced government probes. In September a director of Founder Securities, Zhao Dajian, was arrested by police as part of a wider investigation. A month later, the president of Guosen Securities, Chen Hongqiao, hanged himself at his house in the southern city of Shenzhen, following the arrest of Zhang Yujun, his former boss at the China Securities Regulatory Commission. 

Two immediate challenges present themselves in 2016. First, can Beijing reform a broking industry that has frequently suffered stock manipulation and insider trading?

Xi’s determination to reform the onshore IPO process in the first quarter of the year, by transitioning from the current approval-based mechanism to a registration-based system, is laudable. Yet experts wonder how much corruption that move will really dispel in a one-Party state where power is structured vertically.

Second, China desperately needs to tap new sources of foreign capital to inject fresh life into its slowing economy. Yet Beijing’s hard-nosed attitude to the country’s financial elites has unnerved foreign investors.