Yesterday FinanceAsia reported the China Securities Regulatory Commission has opened an investigation into Hundsun Technologies, apparently over suspicions the company’s trading platform amplified China’s stock market crash.
Hundsun is far more than a purveyor of electronic equities trading systems. It is at the heart of Chinese finance, described by analyst Paul Schulte as “the mother of all information lodes”.
In his forthcoming book, The Next Revolution In Our Credit-Driven Economy (reviewed in the July print edition of our sibling brand, AsianInvestor), Schulte wrote, “Imagine a company that is like IBM and Cisco and that has built the infrastructure for Pimco, Fidelity, JP Morgan, Prudential and Bank of America Merrill Lynch.”
Jack Ma’s personal investment vehicle, Zhejiang Rongxin, bought a controlling interest of 22% from the original 12 founding software developers for $522 million, in 2014.
Because of the sensitive nature of technological infrastructure for the banking sector, foreigners cannot own Hundsun, which is why it is situated outside of listed entities such as Alibaba, although the other 78% is listed on the Shanghai Stock Exchange. Those shares were suspended last week, but resumed trading Monday.
According to Schulte, Hundsun built the technological platforms underlying many of China’s securities, banking, asset management, insurance, treasury management, and currency exchange businesses.
It also handles solutions for anti-money laundering, internal compliance for banks, and internal controls for trading. It has built the systems for a new futures and options exchange. And – in what has now landed it in hot water with the CSRC – Hundsun operates systems to manage fund sales, securities lending and margin accounts.
Schulte speculates that much if not all of this information is stored in AliCloud, Alibaba’s self-built cloud server. There it may be analysed in conjunction with data from other Alibaba companies catering to e-commerce, travel, payments, credit ratings and entertainment.
In other words, argues Schulte, Hundsun’s infrastructure combined with other parts of Alibaba’s empire enables the company to understand trends better than the government itself, from estimating GDP growth rates to reading fund flows among asset classes, to identifying trails of dirty money.
Schulte says the government and the Chinese military have given Jack Ma and his various companies tacit approval, similar to the way companies in the US such as Palantir, a data and analytics provider, are connected to America’s national security apparatus.
But that does not render such companies immune from regulatory oversight. “History,” Schulte wrote, “shows us that regulation almost always arises out of abuse.” The financial technology industry’s biggest threat, he added, is “conservative regulators who lack the imagination to see that a great trend has begun that is virtually unstoppable.”
He also warned that the anti-corruption campaign of Chinese president Xi Jinping, while perhaps overdue, threatens the openness upon which fintech thrives.
In a filing with the stock exchange Hundsun said speculation that its Homs trading system has triggered the stock market collapse was “unobjective and unprofessional”.
Hundsun is not famous, but Alibaba, Tencent and Baidu are, and they have also come under occasional attack by government regulators who have seen power ceded to this new generation of tech entrepreneurs.
Alibaba faced criticism from the State Administration for Industry and Commerce earlier this year for allowing counterfeit goods to trade on its websites. Jack Ma forced the regulator to back down.
But this time a lot more is at stake: the Communist Party has struggled to impose its will on the stock market, whose collapse threatens its overall credibility and aura of invincibility. Securities regulators may be trying to avoid the blame themselves, so they are turning their guns on newfangled companies that have rapidly acquired far greater influence on China’s emerging consumer economy. Other peer-to-peer electronic lenders have already pledged to halt some margin lending activity. How far will Hundsun bend to help the Party engineer another stock market rally?