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 Chinese fund managers say they have come under increasing pressure
from Beijing as authorities' attempts to revive the country's stock
markets hit headwinds, with some investors now being called in to
explain trading strategies to regulators every two weeks.
Ironically, the impact may be the opposite of what is intended. By
frightening fund managers, Beijing risks accelerating the market
selloff and puts other wider policy goals, including the increased
use of the yuan abroad, at risk.
One manager at a major fund - part of the "national team" of
investors and brokerages charged with buying stocks to revive prices
– said a friend, also an executive at a large fund, was recently
summoned for a meeting with regulators, along with all other mutual
funds that had engaged in short-selling activity.
"If I don't come back, look after my wife," his friend told him,
handing the manager his home telephone number.
China has unleashed a volley of measures to try to prop up its stock
markets <.CSI300> <.SSEC> that have fallen around 40 percent since
mid-June, pushing domestic brokerages and fund managers to buy up
shares and banning investors with large stakes from selling their
holdings for six months.
The authorities' meddling has unnerved many investors, leaving them
questioning China's commitment to liberalizing its capital markets
and the long-term future of the country's stock markets themselves.
Adding to those concerns is the fact that authorities have also been
probing investment funds' trading strategies, looking into whether
they have been engaging in alleged "malicious" short-selling or
market manipulation.
On Monday, Bloomberg reported that Li Yifei, the China chairwoman of
Man Group Plc <EMG.L>, one of the world's largest hedge funds, had
been taken into custody to help with inquiries.
Reuters has not independently confirmed the report, while Li's
husband has said she is having "normal" discussions with regulators.
Man Group shares fell as much as 6 percent on Tuesday following
Bloomberg's story.
FOREIGN FUND FEARS
Sources told Reuters that the increased tempo of meetings with
regulators has become intimidating, especially for foreign funds
used to relying on their Chinese brokers to represent them when
dealing with Beijing.
While foreign investors are unlikely to be a major factor behind
stock market swings, given their relatively low participation in the
market compared with domestic players, they are seen as more
politically vulnerable to investigations.
"The foreign fund community definitely feels like it is being
monitored more carefully than it's been in a very long time," said
one foreign fund manager.
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"Nobody is pointing at you and saying you are doing anything
illegal. But it's enough to ask people to walk through all their
trades, and 'why is this account trading so much?' That ramps up the
pressure".
Some Chinese believe the collapse in Chinese stocks was engineered
by foreigners, and there has been speculation that it was caused by
the U.S. government to embarrass China as the International Monetary
Fund (IMF) considered including the yuan in its currency basket.
Some market participants have also said that gyrations in Chinese
shares could lead to U.S. index provider MSCI further delaying the
inclusion of A-shares in its benchmark emerging markets index.
If implemented, the inclusion would draw hundreds of billions of
dollars into Chinese stocks and strengthen the yuan's global
stature.
MSCI said on Tuesday that recent volatility in Chinese shares, and
the authorities' interventions to stop the rout, would not be a
factor in deciding whether to include China-listed shares.
There are no signs yet that pressure has caused foreign funds to
withdraw from the market altogether or pull out staff from the
country.
But fund experts say there is a risk that if foreign investors feel
intimidated enough that they can no longer employ trading strategies
to allow them to profit from volatility, they may eventually have
little choice but to leave, for the short term at least.
"This crisis has highlighted the need for a China-specific
investment model. Simply porting strategies that worked in the U.S.
is not feasible," said Daniel Celeghin, a consultant to hedge funds
as Head of Asia Pacific for Casey Quirk based in Hong Kong.
For Chinese funds though, the option to pack up and leave isn't
there, and if the volatility continues, the pressure on them is
likely to intensify.
The "national team" fund manager said that as well as meetings with
regulators, they are now calling him every day to ask how much he is
selling and buying.
(Additional reporting by Sam Shen in Shanghai, Michelle Price in
Hong Kong and Lawrence Delevingne in New York; Writing by Rachel
Armstrong; Editing by Mike Collett-White)
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