Major Chinese Brokerage Guosen Under Investigation

Late on Thursday, it was announced that China’s securities regulator was investigating one of the country’s largest brokerage firms, Citic. Citic and rival Guosen Securities, also being investigated, fell 10% each, the maximum one-day drop allowed.

The move was widely seen as an endorsement by Chinese regulatory authorities of a stock market rebound off of what was widely panned as the start of a new global recession.

China Haitong Securities is also under investigation by the CSRC for alleged violations of securities regulations, two people with knowledge of the matter told Reuters, declining to be identified because they were not authorised to speak to the media.

Authorities are probing “malicious” short sellers and have arrested star fund managers following this summer’s stock market rout.

The Shanghai Composite Index ended 5.5 per cent down, and the Shenzhen Component Index closed 6.3 per cent lower, bringing back painful memories of the panic-driven sell-off that struck Chinese equities in the summer that wiped trillions of dollars off valuations.

Hong Kong’s Hang Seng Index fell 1.9% on Friday and 3% for the week. “It has a negative impact on investor sentiment”, said Hong Hao, managing director and chief China strategist at BOCOM International.

In its monthly report to the securities association, CITIC reported inaccurate numbers on its over-the-counter derivative business, the Securities Association of China said in a statement posted on its official website.

Financial shares led the decline as 18 of China’s 23 listed brokerages plunged by 10 percent, dogged by fresh crackdown on irregularities in the industry. Figures released Friday by the country’s statistical agency showed industrial profits had fallen 4.6 percent in October from the level of a year earlier.

“Xi Jinping is trying to change a rather long-held culture where those who obtain powerful positions believe that the rules don’t apply to them, and that clearly is changing and he has changed behaviour”, said Professor Paul Gillis, from Peking University’s Guanghua School of Management.

The Nikkei 225 Stock Average slid 0.3 percent, falling from a three-month high. Australia’s S&P/ASX 200 Index slipped 0.2 percent, while New Zealand’s S&P/NZX 50 Index added 0.2 percent. Haitong Securities halted trading in its shares in Hong Kong and Shanghai in the morning, before confirming the investigation.

In September, profits fell 0.1 per cent from a year earlier.