China Calm Shattered as Brokerage Probe Sparks Selloff in Stocks

Updated on
  • Citic Securities leads losses after revealing investigation
  • Industrial profits drop 4.6% in October as slowdown deepens

China’s stocks tumbled the most since the depths of a $5 trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.

The Shanghai Composite Index sank 5.5 percent, with a gauge of volatility surging from the lowest level since March. Citic Securities Co. and Guosen Securities Co. plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities Co., whose shares were suspended from trading, is also being probed. Industrial profits slid 4.6 percent last month, data showed Friday, compared with a 0.1 percent drop in September.

China Investigates Citic Securities

The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold net-long positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertilizer maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.

Brokerages Plunge

“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17 percent. The Hang Seng China Enterprises Index slid 2.5 percent in Hong Kong. The Hang Seng Index retreated 1.9 percent.

A gauge of financial shares on the CSI 300 slumped 5 percent. Citic Securities and Guosen Securities both dropped 10 percent. Haitong International Securities Group Ltd. slid 7.5 percent for the biggest decline since Aug. 24 in Hong Kong.


Citic Securities said it received a notice from the China Securities Regulatory Commission on Thursday saying it will be investigated because it allegedly violated regulations on the supervision and administration of securities firms. The brokerage said it will cooperate with the probe and its operations are normal. Guosen Securities also said it was being investigated by the CSRC for similar alleged rule violations. Haitong Securities said after the market close it was being probed without providing details.

The finance crackdown has intensified in recent weeks and ensnared a prominent hedge-fund manager and a CSRC vice chairman. Citic Securities President Cheng Boming is among seven of the company’s executives named by Xinhua News Agency as being under investigation. Brokerage Guotai Junan International Holdings Ltd. said Monday it had lost contact with its chairman, spurring a 12 percent slump in the firm’s shares.

An industrial explosives maker will become the first IPO to be priced since the regulator lifted a five-month freeze on new share sales imposed during the height of the rout. Ten companies will market new shares next week. The final 28 IPOs under the existing online lottery system will probably tie up 3.4 trillion yuan ($532 billion), according to the median of six analyst estimates compiled by Bloomberg.

IPO Resumption

"There’s need for consolidation after the market has seen a pretty decent rebound and brokerages’ investigations and the IPO resumption are among the excuses for investors to exit," said Sun Jianbo, a strategist at Galaxy Securities Co. “The consolidation might continue for one to two months.”

Indexes tracking industrial companies and commodity producers lost more than 6 percent.

China’s economy is still showing a muted response to waves of monetary and fiscal easing as of the half-way mark for the last quarter of the year, some of the earliest indicators suggest. A privately compiled purchasing managers’ index and a gauge based on search engine interest in small and medium-sized businesses deteriorated this month, while a sentiment indicator dropped sharply from October.

China’s worst economic slowdown in a quarter century is also weighing on companies’ ability to repay bonds. China Shanshui Cement Group Ltd. this month became at least the sixth company in 2015 to default on yuan-denominated domestic notes. State-owned steel trader Sinosteel Co. postponed a bond payment for a second time last week.

Jiangsu Lvling Runfa Chemical Co. is asking its guarantor to repay 53.1 million yuan in bond principal and interest due Dec. 4, according to a statement posted on Chinamoney’s website. Sichuan Shengda Group Ltd. is uncertain it can repay notes due in 2018 that holders can opt to sell back early on Dec. 5, it said.

The yuan weakened 0.3 percent to 6.4522 per dollar in offshore trading in Hong Kong. The International Monetary Fund’s executive committee is scheduled to meet on Monday to decide on the yuan’s weighting in the lender’s basket of reserve currencies.

— With assistance by Shidong Zhang, and Kyoungwha Kim

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