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 People working at domestic securities firms report an ugly mood
after news in the past week of increased scrutiny of the sector by
authorities. A nervous inertia is slowing new business as staff are
encouraged to report their bosses or colleagues for corruption.
"It's creating a very dog-eat-dog environment," said a partner at a
Chinese mutual fund. "People collect evidence on their bosses,
because if they get rid of their boss, it means that they can get
promoted faster."
Foreigners operating in China or investing in the mainland through
Hong Kong are also worried about becoming entangled in the widening
regulatory net.
"Everyone is absolutely terrified of China," said a director at an
international brokerage in Hong Kong, echoing the sentiment of many
in the industry contacted by Reuters. Most did not want to be
identified due to the sensitivity of the issue.
The crackdown on the securities industry - from hedge funds and
institutional fund managers to brokers and banks - began after the
mid-year equity market crash wiped around 40 percent off mainland
share prices, which Beijing blamed partly on "malicious"
short-selling and insider trading.
Even though domestic stock markets have rebounded steadily by about
25 percent since the pit of the crash in August, market executives
say the regulatory atmosphere has not relaxed.
Authorities have revealed little about the specific reasons for the
probes, but three sources told Reuters they believed some of the
investigations involved suspicions of insider trading relating to
trades by China's "national team" - the big brokerages and fund
managers dragooned into buying stocks as part of unprecedented
measures to prop up the market.
"PUPPET CEO"?
Chinese shares tumbled more than 5 percent last Friday, the biggest
one-day drop since the nadir of the summer rout, after Reuters
reported the country's fourth-biggest brokerage was under
investigation.
The launch of a probe into China Haitong Securities added to
investigations by the China Securities Regulatory Commission (CSRC)
into bigger rivals CITIC securities and Guosen Securities.
Haitong, along with Guotai Junan Securities, is also being probed by
anti-corruption investigators, state-run news agency Xinhua said.
Bloomberg reported on Friday that a former Beijing police chief who
put away one of China's top Communist Party officials has been put
in charge of the corruption campaign of the securities industry.
"They put a notice on all the floors with the number that you can
call anonymously to encourage people to dial in. They say they just
want people to report corruption," said a source at Guotai Junan.
Guotai Junan, CITIC and Guosen did not respond to requests for
comment and a Haitong spokesman referred Reuters to the company's
public statements. CSRC and anti-corruption authorities did not
respond to requests for comment.
Brokers, consultants and lawyers said foreign investors operating in
China were becoming increasingly reluctant to speak publicly on
market issues in case they attract adverse attention from
regulators.
While they welcome the need to investigate and prosecute rule
breakers, they say a lack of legal recourse in China creates the
fear about being caught up in the net. When authorities call
executives in, they say they are never sure if they are being asked
to help with enquiries or are under suspicion and when they might be
released.
A lawyer who has assisted foreign firms caught up in the probes said
some were introducing new onshore compliance programs, although that
did not guarantee keeping out of trouble.
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"You can't 'comply' because there is no rule of law," he said. "The
best thing you can do is establish processes for who is likely to be
taken away, and how to make sure they aren't disappeared forever."
Chinese corruption investigators typically cast a wide net, often
dragging in dozens of the primary target's business associates. That
unnerves many investors.
"Until very recently, if you wanted to advance your business on the
mainland you had to have certain key relationships, but yesterday's
super-asset can quickly become today's liability," said Steve
Vickers, CEO of Steve Vickers and Associates, a political and
corporate risk consultancy based in Hong Kong.
Another consultant said he had even been asked by foreign investors
about the feasibility of hiring a mainland "puppet CEO" who would
take instructions from offshore but be on the hook for any
investigation.
"But no-one is stupid enough to agree to that," he added.
THERE WILL BE BLOOD
On Sunday, CITIC, Haitong and Guosen all confirmed they were being
investigated by the CSRC over suspected rule breaches. Haitong's
chairman was quoted by the official Shanghai Securities News saying
it will tighten risk controls and make strict checks on clients.
The brokerages have said they are operating normally, but several
industry sources said the investigations were having a chilling
effect.
"At the moment, if you don't do what the CSRC asks you to do, there
will be blood," said a source at a large U.S. hedge fund operating
in China.
Shen Weizheng, an asset manager at Shanghai-based Ivy Capital, said
he had planned to launch an overseas investment fund in co-operation
with CITIC Securities, using the brokerage's cross-border swap
business. But regulators suspended the over-the-counter swap
business out of the blue.
"I signed the business agreement last week and submitted it to CITIC
for approval. Now, the business is suspended," he said. "I'm very
disappointed."
More complicated structured products or innovative financing have
been most impacted, said a source at top-five bank leasing company,
as firms seek to avoid scrutiny while regulators pore through
records.
"We want to remain low-key right now, don't want to bring trouble on
ourselves," said the source. "Everything will start up again,
though, as soon as they leave." ($1=6.3986 yuan)
(Reporting by Engen Tham, Michelle Price, Samuel Shen, David Lin and
Watson Zhang; Writing by Alex Richardson; Editing by Neil Fullick)
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