Beijing probes Jack Ma-backed company

China’s securities regulator opens investigation into Hundsun Technologies. Hundsun rejects claims that its Homs system helped to amplify recent stock market losses.
China’s securities regulator has opened a probe into Hundsun Technologies, a Chinese financial-services software provider controlled by Alibaba founder Jack Ma, as Beijing cracks down on the previously unregulated grey market in margin finance.
Deng Ge, a spokesman for the China Securities Regulatory Commission, said late Monday that officials from the regulator went to Hundsun’s offices to “check the relevant evidence and supervise the company to strictly abide by the CSRC regulations.” 
Earlier in the day, Hangzhou-based Hundsun rejected claims that its popular Homs trading platform helped to amplify China's recent stock market slump. In a Shanghai stock exchange filing, it dismissed the idea aired by some market participants and domestic media that it was somehow to blame.
“Currently, there are rumours in the market saying our Homs system triggered the stock market volatility. This view is very unobjective and unprofessional,” Hundsun said.

The company said the Homs system, launched in 2012, was originally designed for small- and medium-sized asset management companies. However, many grey market margin lenders have flocked to the system to make it the dominant platform for trading with off-market margin finance, according to market participants.

So-called “peizi” companies or “fund-matching” companies have become a strong force in China's grey market in margin loans. Such lending usually takes place beyond the jurisdiction of the CSRC, which mainly regulates margin lending by brokers.

The Homs system can divide an official securities account registered with a broker into multiple sub-accounts, allowing hundreds of investors to trade independently within it. According to the CSRC, the number of sub-accounts under the HOMS system once reached 370,000 at its peak but declined to 190,000 in late June, as the securities regulator moved to curb grey market trading.

For some market insiders, the sophisticated inner workings of the Homs system could be a major headache for regulators.

“The brokers or the regulators [can] only see that [official] account. They have no idea of whom are operating these sub-accounts,” one Hong Kong-based portfolio manager at a large Chinese asset management firm told FinanceAsia. “Because you don’t even need real names or ID numbers for trading with HOMS. It could be all virtual.”

Shenwan Hongyuan, a leading domestic broker, estimated on June 29 that there was as much as Rmb2 trillion ($326 billion) in off-market margin financing in China. However, the CSRC on the same day was quoted by the official Xinhua News Agency saying that the risk associated with margin trading was controllable and that “share financing via [the] Homs system also dropped greatly.”

Even so, during the dramatic three-week selloff that ensued after Chinese stock markets hit seven-year highs in mid-June, grey market margin lenders with Homs trading accounts began liquidating the leveraged stocks of investors in their sub-accounts to meet margin calls. The move triggered a further selling-off and added to market volatility.

Tougher tone

Hundson’s Monday announcement came after the Chinese securities regulator stepped up its measures at the weekend to clamp down on off-market margin trading, in its latest effort to stabilise the country’s still-volatile stock markets.

“Some institutional or individual investors have been using [trading systems] to set up ‘virtual’ securities accounts for clients,” the CSRC said in a statement late on Sunday. “This illicit conduct has damaged other investors’ legitimate interests and seriously disturbed the stock market order.”

The latest warning by the CSRC about Chinese broker cooperation with fund matching lenders came after both the Shanghai and Shenzhen markets seemingly touched bottom last week and pulled off the biggest two-day gain in years. But this time the regulator's tone was tougher.

“In recent days, as the market has become stabilised, these illegal practices have staged a comeback, and could again threaten the stock market’s smooth running. It must be cleaned up,” the CSRC said.

CSRC visit

CSRC officials on Monday morning visited Hundsun’s headquarters in Hangzhou, the capital of Zhejiang province, and talked to senior executives about the Homs system.

One employee at Hundson told FinanceAsia that the company ordered all staff to “strictly remain silent on the issue and not to talk to media about it” as Homs prospects could affect “everyone’s salary.”

Established in 1995, Hundson was purchased last year by Zhejiang Finance Credit Network Technology, a company owned by Chinese billionaire Jack Ma, in a move seen beefing up Alibaba’s presence in finance.

Hundson, like hundreds of others Chinese companies, also halted trading in its shares early last week to avoid the stock market onslaught. On Monday, it resumed trading and advanced by 10%, the daily upwards limit.

Meanwhile, at least four Chinese peer-to-peer margin lending platforms announced on Monday that they will stop providing capital to borrowers who collateralise shares.
Miniu, a major one which operates through the Homs system, said the decision was made after the company “studied in-depth” the latest CSRC directive.
“It is a typical Chinese way of dealing with problems,” the Hong Kong-based portfolio manager said. “The government shouldn’t let financial products develop like that first. After they are over-developed, it just stepped in, rather than regulate them properly at the beginning.” 
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