Brokerages probed as Beijing ups the ante

China investigates country’s largest securities houses and detains high-ranking official at Citic Securities after market rout.

China is investigating some of the country’s leading securities houses and has detained a senior executive at Citic Securities, providing further evidence that some state officials are increasingly leaning on their authoritarian instincts to help end the A-share mayhem.

Four of China’s largest brokerages – Haitong Securities, GF Securities, Huatai Securities, and Founder Securities – said in separate filings late Tuesday that they were being investigated by the China Securities Regulatory Commission for their suspected failure to “review and verify clients’ identities.”

The moves would “awe the delinquents” and “purify” the capital markets, the official Xinhua News Agency said in a commentary on Wednesday. “As the investigations continue, more criminals and their hidden crimes will be exposed.”

Elsewhere, Xu Gang, a managing director at Citic Securities, was among eight staff members at China's largest brokerage by assets who were taken away by Chinese police for investigation on Tuesday night, sources familiar with the matter told FinanceAsia.

“The priority for the government is to maintain the [market] stability. After the monetary policy failed to prop up the market, the government could only step in to arrest people, hoping to revive the market,” said one source with knowledge of the matter. “But it would be hard because investors are losing confidence.”

Xu's detention appeared to come out of the blue.

“It’s quite unexpected. He was at work yesterday and even updated his Wechat friends’ circle,” said a second source at Citic, referring to a feature of the popular messaging app that allows users to share photos, texts, and links with friends. A screenshot of Xu’s Wechat update was seen by FinanceAsia.

The police have yet to disclose their reasons for the detentions, although Xinhua reported earlier that they were detained on suspicion of involvement in illegal securities trading. The agency added another two people connected to the CSRC were also detained.

Xu, who used to lead Citic’s brokerage business, was replaced last week by Liu Jun, head of the company’s asset management division. Xu was also assigned to take charge of the relatively underdeveloped back-office and IT services.

Getting tough

He is the highest-ranking Chinese brokerage official being investigated so far as Beijing ups the ante  in its attempts to steady panicky investors and put an end to the country's disorderly share slide.

On Monday the powerful Ministry of Public Security launched a three-month nationwide campaign against underground banks to stem illegal capital flows in and out of the country.
Citic Securities said in an exchange filing on Wednesday that it had not "received any notice" on the investigation.

“All the businesses of the company are under normal operations,” it said. Other brokers made similar statements in their filings.

On Wednesday in Hong Kong, the share price of Citic, Haitong, and Huatai fell 2.41%, 1.5%, and 0.3%, respectively, while GF Securities's advanced 4.3%. Shanghai-listed Founder saw its share price fall 4.1%.

China's latest regulatory and police investigations come against a backdrop of tumbling stock markets, with the benchmark Shanghai Composite index losing more than 40% since mid-June, wiping out all of this year’s gains.

The Chinese authorities, who had warned domestic media against spreading market rumours, also took aim at the well-regarded financial magazine Caijing on Tuesday.

One journalist at Caijing was taken away by Chinese police on suspicion of fabricating and spreading false trading information, according to Xinhua.

The publisher issued a statement on Wednesday saying the detainee was Wang Xiaolu, who last month wrote about the government’s plans to withdraw funds deployed to rescue the stock market. The CSRC subsequently denied the exit report.

“We are responsible for reporters who do proper reporting and writing and protect them to perform their duties in accordance with the law,” Caijing said.

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