China Financial Crackdown Intensifies as Funds, Banks Targeted

  • Agricultural Bank president said taken away to assist probe
  • Executives at Yishidun, Huaxin, Zexi detained, says Xinhua

The Communist Party’s Central Commission for Discipline Inspection is carrying out its first broad checks on the finance industry since President Xi Jinping became the party’s head in November 2012.

Photographer: Johannes Eisele/AFP via Getty Images

China’s crackdown on its financial industry is intensifying as authorities investigate strategies blamed for exacerbating a $5 trillion stock-market rout.

Shanghai police raided hedge fund Zexi Investment on Sunday, taking away computers and other materials, according to a person familiar with the matter. General manager Xu Xiang was detained, the official Xinhua news agency reported. Executives at Yishidun International Trading and Huaxin Futures were arrested, Xinhua said in a separate report.

Adding to evidence that a clampdown on the financial industry is spreading, Agricultural Bank of China Ltd. President Zhang Yun was taken away to assist authorities with an investigation, people familiar with the matter said on Monday, without giving details.

The Communist Party’s Central Commission for Discipline Inspection is carrying out its first broad checks on the finance industry since President Xi Jinping became the party’s head in November 2012. The summer’s stock-market rout in China has triggered investigations that have snared executives from the country’s biggest securities firm as well as a fund managers and a top regulatory official.

"The biggest-ever storm is brewing for China’s financial industry and more heads will roll," said Hu Xingdou, an economics professor at the Beijing Institute of Technology.

‘Illegal Profit’

Xu, who founded the top-performing hedge fund firm Zexi, was detained on charges including insider trading and stock manipulation, the Xinhua reported. Two executives at Jiangsu-based Yishidun International Trading and the technical director at Shanghai-based Huaxin Futures were arrested after a police investigation showed they made 2 billion yuan ($316 million) in “illegal profit," Xinhua reported separately, citing the Ministry of Public Security. reported earlier on Monday that Agricultural Bank’s Zhang had been taken away and didn’t attend a disciplinary committee meeting. Assisting with an investigation doesn’t mean Zhang is accused of wrongdoing.

Calls made to Zexu’s office went unanswered, as did calls to Huaxin. Yishidun’s phone number isn’t registered, according to public records searches. A press officer at Agricultural Bank, China’s fourth-largest lender by market value, declined to comment.

Highlighting the tense environment sparked by the probes, Chinese social media was set abuzz Monday morning by a false report of a man associated with the insider trading probe who was shot and killed by police while trying to escape apprehension. The report was retracted less than an hour after being posted to various websites, including that of China National Radio. The report was fake and improperly used the Xinhua name, according to post on news agency’s microblog. Xinhua said it has reported the issue to the police.

Top Performers

Zexi, which managed four funds that are among China’s top 10 hedge funds in the June to August period, according to Shenzhen Rongzhi Investment Consultant Co., occupies half of the ninth floor in the BEA Finance Tower in Shanghai’s Lujiazui financial district. The office was closed around 8 a.m., with a stack of Monday’s newspapers left by the front door. Zexi doesn’t short in the market and doesn’t even own a stock index-futures account, the firm told the Economic Daily’s website, in an article posted Sept. 24.

The Shanghai police told the building’s management to lock Zexi’s office door so nobody -- including employees -- can enter, said the person familiar, who asked not to be identified because the matter isn’t public. Two calls to the Shanghai police department’s press office went unanswered, and a press office official who was reached on his mobile phone said he couldn’t respond to queries.

‘Foreign’ Support

Yishidun and Huaxin had “foreign technological support" in developing high-frequency trading software, Xinhua said, without naming any firms.

China’s securities regulator released draft rules last month that would increase its oversight of algorithmic trading. Those who use automated orders to buy and sell stocks would need to report certain information and wait for a review before they’re allowed to execute their strategies. Orders shouldn’t originate from offshore computers or domestic systems that are controlled from overseas, according to the China Securities Regulatory Commission’s proposal.

Authorities are targeting futures because selling the contracts is one of the easiest ways for investors to make large wagers against stocks. It’s also a favored product for short-term speculators as the exchange allows participants to buy and sell the same contract in a single day.

Yet futures are also a popular tool among sophisticated investors with longer-term horizons. For hedge funds, they provide an easy way to adjust exposure to market swings. And large institutions use them to make cost-effective asset-allocation changes.

— With assistance by Jun Luo, Sree Vidya Bhaktavatsalam, and Dingmin Zhang

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