China stocks tumble as brokerages disclose regulatory probes

By Faisal Ahmed

China’s stocks tumbled the most since the depths of a $5-trillion plunge in August as some of the nation’s largest brokerages disclosed regulatory probes, industrial profits fell and two more companies said they’re struggling to repay bonds.
The Shanghai Composite Index sank 5.5 per cent, with a gauge of volatility surging from the lowest level since March. Citic Securities and Guosen Securities plunged by the daily limit in Shanghai after saying they were under investigation for alleged rule violations. Haitong Securities is also being probed, according to people with knowledge of the matter. Industrial profits slid 4.6 per cent last month, data showed on Friday, compared with a 0.1 per cent drop in September.

The probe into the finance industry comes as the government widens an anti-corruption campaign and seeks to assign blame for the selloff earlier this year. Authorities are testing the strength of a nascent bull market by lifting a freeze on initial public offerings and scrapping a rule requiring brokerages to hold netlong positions, just as the earliest indicators for November signal a deterioration in economic growth. A Chinese fertiliser maker and a pig iron producer became the latest companies to flag debt troubles after at least six defaults this year.

“The sharp decline will raise questions whether the authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

Friday’s losses pared the Shanghai Composite’s gain since its August 26 low to 17 per cent. The Hang Seng China Enterprises Index slid 2.5 per cent in Hong Kong. The Hang Seng Index retreated 1.9 per cent.

A gauge of financial shares on the CSI 300 slumped 5 per cent. Citic Securities and Guosen Securities both dropped 10 per cent. Haitong International Securities Group slid 7.5 per cent for the biggest decline since August 24 in Hong Kong.

Citic Securities said it received a notice from the China Securities Regulatory Commission on Thursday saying it will be investigated because it allegedly violated regulations on the supervision and administration of securities firms. The brokerage said it will cooperate with the probe and its operations are normal. Guosen Securities, which is based in Shenzhen, also said it was being investigated by the CSRC for similar alleged rule violations.

The finance crackdown has intensified in recent weeks and ensnared a prominent hedge fund manager and a CSRC vice chairman. Citic Securities president Cheng Boming is among seven of the company’s executives named by Xinhua News Agency as being under investigation. Brokerage Guotai Junan International Holdings said on Monday it had lost contact with its chairman, spurring a 12 per cent slump in the firm’s shares.