Regulation in mainland China’s financial markets has come under the spotlight again after the disappearance last month of the head of a Shanghai-based hedge fund that has put at risk some 35 billion yuan (US$5.1 billion) of investors’ money.
Zhu Yidong, 36, the chairman of Shanghai Fuxing Group, disappeared at the beginning of July, about five months after China Central Television (CCTV) reported that he had pocketed illicit gains of 600 million yuan by manipulating the stock price of Shenzhen-listed Dalian Insulator Group between 2016 and 2017.
The case is the latest to dog China’s financial system, which has long struggled with lax regulation and corruption. In February the new head of discipline at the country’s central bank blamed a corrupt alliance of “rats and cats” for the lack of order and heightened risk in the system, while the country’s top leadership has vowed to tackle the problem.
“The hedge fund sector is not well regulated,” said Wang Feng, the chairman of Shanghai-based financial service firm Ye Lang Capital. “At least, the regulators and custodian banks should have stepped up oversight on Fuxing’s funds when investigations into its suspicious market manipulations began.”
The Fuxing scandal is set to become the biggest crisis to hit mainland China’s 12.6 trillion yuan hedge fund sector since the arrest in 2015 of Xu Xiang, who was widely known as the mainland’s most successful hedge fund manager. Xu was sentenced to five and a half years in prison and fined 11 billion yuan by an intermediate court in Qingdao for market manipulation in January 2017.
As of the end of 2017, market regulator the China Securities Regulatory Commission (CSRC) had handled about 230 cases involving wrongdoing by hedge funds, most of which were either overstatements of performance to woo investors or the illegal use of investors’ money to chase returns from other high-risk investments.
In June, the CSRC slapped a combined fine of 1 million yuan on Liu Xiaodong, owner of Shenzhen Finder Fund Management, fund manager Yang Wei and trader Li Rubo. for using so-called rat accounts to trade shares for their own. Rat accounts are opened by fund managers in the names of friends or relatives, who profit illegally from inside information by trading shares through the accounts.
Hundreds of Fuxing investors have vented their dismay toward banking and securities regulators, criticising them for slack supervision.
“It is a scandalous case that fully exposes regulatory loopholes to the public,” said Julia Zhang, a Shanghai-based office worker who is among the hundreds of Fuxing investors petitioning the regulators. “Since Fuxing is a licensed fund manager under the supervision of the regulators, the relevant authorities are also responsible for our potential losses.
“We need the regulators and police to work together to help investors get their money back,” she said.
The Asset Management Association of China, which oversees hedge funds, said in a statement that it had ordered the custodian banks to freeze Fuxing’s accounts to help investors recover their investment. The company’s offices in Shanghai have been closed down. Shanghai police would not comment on whether a case has been opened into Fuxing.
“The scandal has exacerbated investors’ bearish sentiment toward the country’s financial markets,” said Zhou Ling, an asset manager at Shanghai Shiva Investment. “Unlike the P2P players, licensed hedge funds are believed to be under stricter regulatory scrutiny.”
He was referring to ongoing problems in the peer-to-peer lending business in China that the government has been trying to clear up since 2016.
Many of the P2P platforms, which are technically information providers that match investors with borrowers, have been found to have illegally raised money from depositors, which they re-lent to cash-hungry businesses at lofty interest rates, promising their depositors returns of at least 8 per cent.
Hundreds of the platforms collapsed amid the crackdown, with most of them unable to repay savers’ money. The number of P2P firms may shrink to under 200 in three years from 3,800 in 2015 because most do not meet regulatory requirements, according to a recent report by China International Capital Corp.
Authors: Daniel Ren, Maggie Zhang