Crackdown on brokers hits China share prices

Chinese stocks fell by more than 5 per cent yesterday as a renewed crackdown against the largest brokerages and deteriorating profits generated by industrial companies triggered the biggest one-day loss for three months.

The Shanghai composite index closed 5.5 per cent down, while the Shenzhen composite, which follows stocks on the country’s second exchange, fell by 6.1 per cent.

Analysts blamed the downturn on regulators’ widening investigations into some of the country’s leading brokerages, as officials continue their efforts to stamp out the “malicious” short-selling that the government blames for the summer market meltdown that forced a huge state bailout.

Guosen Securities, the eighth-largest broker in the country, said that the China Securities Regulatory Commission was investigating suspected rule violations.

Citic Securities, the leading stockbroker, also confirmed yesterday that it and Guosen were being investigated after several executives had been questioned about insider trading. Shares in both brokers promptly fell by the full 10 per cent daily limit.

“The biggest reason for such a sudden drop today is because of the regulator’s investigation of the top brokers. It has triggered a broader sell-off,” Chen Xingyu, a Phillip Securities analyst, said. “CSRC’s investigation suggests the firms could be in some serious trouble.”

Michelle Leung, the chief executive of Xingtai Capital Management, a fund manager, told the South China Morning Post: “No one likes what’s going on and a lot of A-share managers who are shorting the market are not happy. It’s a pretty tough situation.”

Other brokers understood to be under investigation for possible misconduct include Haitong Securities, the fourth largest by market capitalisation, and Guotai Junan Securities, whose chairman, Yim Fung, has disappeared, the Post reported.

Some observers found solace in gallows humour. “Who could predict on America’s Black Friday the biggest discount is from China’s A shares?” one wrote on the Sina Weibo microblogging platform.

Investors also were deterred from buying after the CSRC urged brokerages to reduce the leverage available to clients, as well as disappointing economic data, which revealed that profits earned by Chinese industrial companies had fallen for the fifth consecutive month.