Chief of Biggest Chinese Broker Swept Up in Stock-Rout Probe

How Serious Is the Citic Securities Investigation?
  • Investigation of Citic's Cheng adds to industry crackdowns
  • China probing other executives after $5 trillion market losses

The president of China’s biggest brokerage has been swept up in a widening campaign to root out financial wrongdoing and assign blame for the nation’s $5 trillion stock rout. 

The probe of Citic Securities Co. President Cheng Boming comes after the state-run Xinhua News Agency reported last month that four executives at Citic had admitted to so-called insider trading. The firm is part of Citic Group, the nation’s first state-owned investment corporation, which was set up in 1979 as part of paramount leader Deng Xiaoping’s push to modernize the country.

Citic Securities President Cheng Boming.
Citic Securities President Cheng Boming.
Photographer: Lucas Schifres/Bloomberg

Since the market crash, China’s targets have ranged from so-called “malicious” short sellers to a journalist from business magazine Caijing whose report was alleged to have caused market panic. Authorities say they want to “purify” the market.

“There does seem to be a bit of a witch hunt for a scapegoat at the moment, but I think this is mostly signaling by the authorities that they will not tolerate what they perceive as ‘unhelpful’ selling in the market,” Tony Hann, a London-based money manager at Blackfriars Asset Management, which oversees about $350 million, said in an e-mail.

Citic confirmed the police investigation of Cheng in a statement to Shanghai’s stock exchange. A brokerage spokeswoman declined to comment further. 

Insider Trading

Shares of the company fell 1.2 percent in Shanghai to 13.36 yuan, the lowest intraday level since Nov. 7, as of 9:38 a.m. local time. The stock has slumped 58 percent since June amid a rout in Chinese equities that dragged down the benchmark index from a more than seven-year high.

Citic Securities is one of the brokerages whose booming margin lending had helped fuel the stock-market’s prior rally.

Xinhua reported last month that eight people at Citic Securities were suspected of illegal securities trading. Besides Cheng, Citic on Tuesday named two other staff members, including one person from the firm’s information technology center, as being under investigation for suspected insider trading. Executives earlier named by state media as having confessed to that offense include managing directors Xu Gang and Liu Wei.

“The rumor of this investigation had already been on the streets for some time,” said Castor Pang, the head of research at Core-Pacific Yamaichi Hong Kong, referring to the Cheng probe. “The central government may use this case to accelerate its probe into insider trading and tighten regulation further.”

While China’s definition of insider trading covers non-public information that could affect the price of a company’s securities, the nation’s rules also say that the securities regulator can decide what fits in the category.

“Citic Securities should come out and clarify what’s happening and tell investors if they have any management changes,” said Linus Yip, a Hong Kong-based strategist at First Shanghai Securities Ltd. “That’s the only way to calm investors down.”

Equity Swaps

The Wall Street Journal reported on Tuesday that Citic Securities had promoted new investment products, in particular cross-border equity swaps that were popular with global hedge funds, citing people familiar with the situation. The swaps allow an investor in one country to place a bet on a stock or index in another without being there, as a middleman handles both sides of the deal, the newspaper said.

The swaps gave foreigners a way to sidestep quotas that limit their
participation in China’s markets because the transactions were initiated in
Hong Kong, it said.

The Citic spokeswoman declined to comment on the newspaper’s report.

Cutting Leverage

Besides regulatory clampdowns and investigations, the government has squeezed out some of the leverage that fueled the stock boom and intervened in the market by purchasing shares.

The market collapse put an abrupt end to Citic Securities’s ascent among the world’s biggest brokerages by market capitalization. Less than a year ago, the firm came close to matching Switzerland’s UBS Group AG. Now, it’s sinking closer to Japan’s Nomura Holdings Inc.

Since its inception, Citic Group has been the “pilot of national economic reform and an important window on China’s opening to the outside world,” according to its website.

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