Banking & Finance

Crocodiles skinned

Regulators act against market mavericks

Liu-Shiyu-w

Liu Shiyu: crocodiles beware

Hong Kong newspapers have long described predatory financiers with the Cantonese word for “crocodiles”.

During the Asian financial crisis in 1998 “hitting the big crocodiles” was the phrase for the government’s $15 billion intervention in the stock market to fend off international speculators. And the jargon has found its way across the border since then. During the Chinese stock market meltdown of 2015 (see WiC288), foreign financiers such as George Soros were singled out by the state media as “financial crocodiles” dining on the misery of retail investors.

More recently the crocs have been back. However, this time the regulators have been targeting local investors whose speculative moves have been deemed as detrimental to the health of the stock market in general.

Liu Shiyu, head of the CSRC (Chinese Securities Regulatory Commission) has taken on the lead role in attacking the alligators. A few days after the alleged grabbing of Chinese billionaire Xiao Jianhua (also dubbed “China’s most mysterious financial crocodile”, see WiC354), Liu vowed to hunt down the “big capitalist crocodiles” who “skin and suck blood” from retail investors.

At a press conference on Sunday Liu lashed out again. “I was shocked by the chaos that I saw in financial markets after I came into office,” he confessed. “These so-called barbarians, demons, evil creatures or financial crocodiles have taken advantage of loopholes in the system and grabbed what they want by cheating or force, under the cloak of legality and at the expense of small investors.”

Asked to name the culprits, he responded: “How can I continue my work if I tell you who they are?”

The CSRC has backed the bluster with action. Xu Xiang, a top hedge fund manager arrested in late 2015 for insider trading and market manipulation (see WiC302) was sentenced to five and a half years in jail last month. His Zexi Investment was also slapped with a Rmb11 billion ($1.6 billion) fine, the largest yet for financial malfeasance.

The insurance sector has also been feeling the regulators’ wrath. In the past year the leading insurers have plunged into the stock market, making aggressive raids on listed companies (often building up stakes in firms that lack a controlling shareholder). The moves have fuelled speculation that takeovers could be imminent, triggering fluctuations in stock prices.

Take China Vanke: the biggest property developer by market capitalisation, it was embroiled in a buyout battle as conglomerates Baoneng and Evergrande both amassed sizable stakes.

Both raiders have been chastised by Liu’s counterpart in the past week, with the China Insurance Regulatory Commission announcing that Baoneng boss Yao Zhenhua will be banned from the insurance industry for 10 years.

Since 2015 Baoneng has accumulated a 25% stake in Vanke’s Shenzhen-listed shares (worth Rmb50 billion currently) but regulators objected to the purchase of the shares with insurance premiums generated by Foresea’s life insurance products. The concern is that shorter-term, higher-cost financing isn’t appropriate for making longer-term investment, and that some insurance companies are at risk of breaching rules in which no more than 30% of their assets can be invested in equities.

Just a day after barring Yao, the CIRC dished out more punishment to Evergrande Life, suspending it from trading Chinese stocks for 12 months. Evergrande was punished partly because its “irregular use of insurance funds in stock trading” last year had caused “grave social consequences”, according to the formal statement .

Will the banking regulator flex its muscles more as well? Guo Shuqing has just been switched from running Shandong province to chairing instead the CBRC (the China Banking Regulatory Commission). Guo rose to prominence during a 17-month period as head of the CSRC, issuing a series of directives largely aimed at curbing market irregularities. After the dual-pronged attack from the securities and insurance chiefs, the attention turns to whether Guo will use his new role to chew up more of the crocodiles by choking off their access to bank loans.


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