Twenty years after bringing down a major British bank, Nick Leeson is sounding alarm bells about China. Unless the country reforms its stock markets, he warns, it's only a matter of time until his earlier disaster repeats itself on a larger scale.
In 1995, Leeson was a 28 year-old master-of-the-universe wannabe running a trading desk in Singapore for Barings Bank. When markets turned against him, he tried to hide his losses with unauthorized trades -- trades that were enabled by the lax oversight on Singapore's then-underdeveloped exchanges. Eventually, Leeson's losses mushroomed to $1.4 billion, shaking world markets and toppling a 223-year-old bank that held an account for Queen Elizabeth and financed the Napoleonic Wars. (Leeson, for his part, ended up in jail, where he wrote a book about his experience called "Rogue Trader.")
Leeson is now warning that another Asian market could be ripe for similar manipulation. "In Singapore it was all about systems not being there to handle the volumes that were coming in,” Leeson, now 48, told the South China Morning Post this week. In that sense, he suggests, 1990s Singapore bears a close resemblance to today's China.
As Leeson points out, China's new stock connect plan -- which aims to link markets in Shanghai and Hong Kong -- has caused the country's hectic trading activity to become even more frantic. Trading volume exploded within days of the plan's debut last month. It hit a high of $38 billion on April 9, and has remained roughly twice what average transactions were before its introduction.
What troubles Leeson is that China's market infrastructure may be getting overwhelmed by an avalanche of buy orders. There's a mismatch between the flood of data on stock dealing and the ability of regulators to track who is trading what -- and how they're doing it. That opens the door to all sorts of troubling (and potentially illegal) activity.
"You have to keep pace with it and get ahead of the curve and typically [regulators] are behind it," said Leeson. "Wherever you’ve got change or a need to consolidate [information], there are opportunities for wrongdoing." He added that "anybody who is going to do something wrong is not standing still, whether that is cybercrime or anything else within the financial industry."
Chinese regulators are starting to grasp the problem. On May 12, one day after Leeson's warning, Securities and Futures Commission Chairman Carlson Tong Ka-shing pledged to clamp down on "any unusual share movement.” But capital flows have accelerated so much -- with millions of mainlanders having signed up for multiple trading accounts each -- that it's not clear if regulators will know where to start. (President Xi Jinping's crackdown on international media hasn't helped matters. Shielded from the scrutiny of journalists, corporate China has become more opaque in its financial dealings.)
Unless Beijing builds a more open and predictable financial system at home, it will always be at risk of exporting its potential for instability. That's worth keeping in mind as China lobbies companies like MSCI Inc. to include its $7.8 trillion stock market on global indexes.
The indexes should wait until Beijing provides clearer proof of share ownership on its markets, crafts more predictable taxation policies, offers more hedging tools to traders and relaxes curbs on money flowing back into China. As long as China's financial reforms lag, Beijing shouldn't be given new channels to affect world markets. If China's stock markets are included on global indexes, it would allow China's economic troubles -- data yesterday showed investment is now the slowest in 14 years and credit growth is weakening -- to spill over to other countries. It would also provide an opportunity for financial fraudsters in China to expand their operations.
China shouldn't delay in taking bold and credible steps to create a transparent and reliable financial system. Otherwise, as Leeson warns, the country's rogue stock markets are liable to attract the world's rogue traders.
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