The Right Remedy

Leshi's 13 Days of Pain

After nine months, China's invisible hand could do with some exercise.
Photographer: liulolo/Getty Images

If two lizards are crawling up a wall in China, there's bound to be someone betting which one will make it to the top first.

In a country obsessed with gambling, Leshi Internet Information & Technology Corp., whose shares resumed trading Wednesday after a nine-month halt, is the latest focus. This time, the speculation is centered around how many days the Beijing-based company can fall by the daily 10 percent limit before finding a bottom. According to mutual funds' best estimates, it's at least 13.

How Low Can You Go?

Shares in Leshi Internet Information & Technology resumed trading Wednesday after nine months and promptly fell by the 10 percent daily limit

At its peak in May 2015, Leshi was such a big name. As the sixth-largest firm on the Shenzhen stock exchange, institutional investors piled in. Asset-management companies, including China Post & Capital Fund Management Co., still own about 10 percent of the Netflix-style streaming company; even sovereign fund Central Huijin Asset Management has a stake.

Swept Up

As the sixth-largest firm on the Shenzhen bourse back in 2015, Leshi attracted many asset managers and even China's domestic sovereign fund, Central Huijin Asset Management

Source: Bloomberg

But mutual funds can't wait about during a nine-month share suspension. China Post & Capital has had to write down its stake repeatedly, estimating in November that Leshi was worth about 3.92 yuan ($0.61 cents) a share, 75 percent less than the 15.33 yuan at which it was halted. (The stock hit 13.80 yuan within seconds Wednesday, with no takers.)

Using that forecast, buyers of Leshi stock aren't expected to emerge until mid-February, just before the start of Chinese New Year. That's right when traders pack up their bags and head home. It's perhaps no surprise that the 2.5-billion-yuan China Post Strategic Emerging Industries Fund is down 26 percent over the past 12 months.

The damage goes well beyond a few funds, though.

Pledging shares to supercharge one's business expansion is a common technique in China, and Leshi founder Jia Yueting is no exception. He's pledged almost all of his 25 percent stake to a dozen brokerages. Unable to liquidate those shares, the brokerages have had to resort to China's convoluted legal system. Ping An Securities Group (Holdings) Ltd. is suing Jia, trying to claw back about 470 million yuan, according to a December filing.

It would be wrong of China's securities regulator to treat this as an isolated event. Last month, the Shenzhen Stock Exchange removed Leshi from its Composite Index and ChiNext Index, hoping once it resumed trading, the benchmarks wouldn't be affected.

Biggest Loser

Shenzhen's stock market is the big laggard compared to the Shanghai and Hong Kong bourses

Source: Bloomberg

Note: The Beautiful 50 refers to the Shanghai Stock Exchange 50 Index, which includes 50 "influential" blue-chips.

As I wrote back then, Leshi is the reason why Shenzhen's stock market, sometimes referred to as China's Nasdaq, was a big loser in 2017. It's natural for company fortunes to wax and wane, just let the market discover how much they're worth. But after Leshi's ultra-long trading halt, are mutual funds going to be willing to buy into high-flying tech stocks again? Likewise, while there's nothing inherently wrong with pledging shares or borrowing on margin, brokerages may hesitate if their collateral could be frozen for months.

China watchers will no doubt be mesmerized by how far Leshi has fallen from grace, but that's a healthy thing. At least the invisible hand of the market is working.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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