With its market dominance, banking talent, global ambition and sterling political connections, Citic Securities fancied itself the Goldman Sachs of China.
Citic Securities, the brokerage arm of the biggest state-owned financial conglomerate, rode China's stock market boom and a surge in corporate borrowing. The company's stock price tripled in six months.
Now, Citic Securities is in the cross hairs, as Beijing looks into how the government's aggressive intervention failed to stem a wrenching market fall that wiped out nearly $5 trillion in stock gains.
On Tuesday, the company said that three of its executives, including its president, Cheng Boming, were being investigated on suspicion of insider trading. That followed the announcement in August that eight company employees, including at least two top executives, were suspected of illegal securities trading, Xinhua, the official news agency, said at the time. That a financial company as embedded in the Communist Party elite as Citic Securities has fallen on hard times highlights the uncertainty in Chinese stock markets, the broader economy and the political climate in Beijing.
As President Xi Jinping heads to the United States next week for the first state visit by a Chinese leader in more than four years, his government is striving to restore confidence in its ability to manage the world's second-largest economy, after that of America. But the state's panicked response to the stock market slide and its surprise currency devaluation last month are causing concerns about China's growth prospects. In this environment, the usual rules don't seem to apply, putting financial stalwarts like Citic Securities on shaky ground.
Even the company's political connections have not provided protection.
The Georgetown-educated chairman of Citic Securities, Wang Dongming, is the son of a former Chinese diplomat. The father of Liu Lefei, a vice chairman, is the Communist Party's propaganda chief and a member of the ruling seven-member Politburo Standing Committee. Citic Securities also finds itself fending off rumours on Chinese websites and on social media. Shares of the company are off by almost two-thirds since peaking in late April.
As with much involving the Chinese government, a lack of information is making it difficult to discern exactly what is happening.
Citic Securities is an important member of the government-controlled "national team" that carries out the will of the state in financial markets. With the government now trying to prop up the markets, big brokerage firms like Citic Securities are tasked with buying stocks to help stabilise shares. Which stocks brokerages are buying and how those purchases are managed is veiled in secrecy. But some experts on China's financial system worry that such information could be leaking out, giving some investors an unfair advantage.
"You've got a dreadful situation that the Chinese government's put themselves in, because there are clearly people in the know about what the government's intentions are, what it's buying," said Fraser J T Howie, a longtime banker in Asia and a co-author of "Red Capitalism: The Fragile Foundation of China's Extraordinary Rise."
"People could easily look to front-run them," he added.
In the case of Citic Securities, regulators have said little about the inquiry in August into the eight corporate officials. But on Tuesday, they made clear that the president, as well as two other officials, were under investigation for "insider dealing and leaking inside information," the company said in a stock exchange announcement.
Calls to Citic Securities' board secretary and a press officer went unanswered.
On August 30, the company said it was "actively initiating measures to conscientiously probe into problems that may exist in its businesses" and to "deeply analyse and resolutely rectify any problems identified."
The authorities are broadly looking at the role of financial players in the market rout, adding to the sense of anxiety in the markets.
Late Wednesday, the Communist Party's anti-corruption watchdog agency announced that an assistant chairman at the main stock market overseer was being investigated for "serious disciplinary violations," language indicating that a corruption investigation was underway. Another official at the agency, the China Securities Regulatory Commission, confessed in late August to insider trading, forgery and accepting bribes.
A reporter for Caijing magazine apologised in a televised confession for getting information "through abnormal channels" and putting his "own subjective views" in a July article that said the government was considering withdrawing its support of the market. The editor in chief of Caijing is the brother of the Citic Securities chairman.
"It seems like the government will not give up until it reaches its goal," said Liu Shengjun, the executive deputy director of the Lujiazui Institute of International Finance at the China Europe International Business School, "and that it has to save the market no matter what it takes."
The dearth of information is breeding rumours, complicating matters for big players like Citic Securities.
In recent days, Chinese social media, including the Twitter-like Weibo microblog as well as the WeChat messaging app, swirled with speculation about a Shanghai private equity company called Zexi Investment, run by Xu Xiang, and who is called "China's Carl Icahn" by financial news media. Two of Zexi's funds, both partnerships with state-owned companies, have risen more than 300 per cent this year through September 11, defying the broader stock market slump.
Market chatter centered on a Shanghai-based clothing retailer, which reached a four-year high in August even though it was unprofitable in the first half of 2015. Zexi publicly denied allegations that it had told Citic Securities to buy a retailer so that its share price would rise, saying in a statement that it had sold its stake this year, well before the government's market intervention. It called the speculation "fabrications from nowhere and malicious attacks."
Officials at Zexi, the retailer and Citic Securities were not available to comment on the matter.
It is an uncomfortable new spotlight for Citic Securities.
The brokerage firm's parent, the Citic Group, is one of the most prominent companies in China. Founded in 1979, the Citic Group originally served as China's investment arm when the country was just starting to open its economy to the outside world. The sons and daughters of many of the Communist Party's senior officials in the 1980s, the so-called eight immortals, served as top executives at the conglomerate.
Citic Securities, started in 1995, has been the top equity underwriter in China for years. In the last five years, the brokerage firm has raised more than $30 billion for companies in China, including for marquee players like the state-owned nuclear power company, according to data from Bloomberg.
Global asset management companies have flocked to Citic Securities as the go-to broker for Chinese securities, a particularly complex market to navigate. The company is also expanding outside China, acquiring the CLSA Group in 2013.
Citic Securities is also the biggest shareholder in the Citic Private Equity Fund Management Company, one of the biggest private equity firms in China, whose chairman is Liu, the son of the propaganda chief. The company has made early investments in big businesses that later had successful initial public offerings, like the New China Life Insurance Company in 2011.
The chairman of Citic Securities, Wang, has been cited in the Chinese news media as saying he wants his company to become known as the Goldman Sachs of China.
But the official inquiry into Citic Securities shows that there are limits to political connections in China, especially as industries such as finance become more professional and competitive, said Liu of the Lujiazui Institute.
He points to the declining market share of the China International Capital Corporation, the country's first investment bank, which until October was headed by the son of a former premier. Its dominance in underwriting shares was supplanted by Citic Securities in recent years.
Citic Securities, the brokerage arm of the biggest state-owned financial conglomerate, rode China's stock market boom and a surge in corporate borrowing. The company's stock price tripled in six months.
Now, Citic Securities is in the cross hairs, as Beijing looks into how the government's aggressive intervention failed to stem a wrenching market fall that wiped out nearly $5 trillion in stock gains.
On Tuesday, the company said that three of its executives, including its president, Cheng Boming, were being investigated on suspicion of insider trading. That followed the announcement in August that eight company employees, including at least two top executives, were suspected of illegal securities trading, Xinhua, the official news agency, said at the time. That a financial company as embedded in the Communist Party elite as Citic Securities has fallen on hard times highlights the uncertainty in Chinese stock markets, the broader economy and the political climate in Beijing.
As President Xi Jinping heads to the United States next week for the first state visit by a Chinese leader in more than four years, his government is striving to restore confidence in its ability to manage the world's second-largest economy, after that of America. But the state's panicked response to the stock market slide and its surprise currency devaluation last month are causing concerns about China's growth prospects. In this environment, the usual rules don't seem to apply, putting financial stalwarts like Citic Securities on shaky ground.
Even the company's political connections have not provided protection.
The Georgetown-educated chairman of Citic Securities, Wang Dongming, is the son of a former Chinese diplomat. The father of Liu Lefei, a vice chairman, is the Communist Party's propaganda chief and a member of the ruling seven-member Politburo Standing Committee. Citic Securities also finds itself fending off rumours on Chinese websites and on social media. Shares of the company are off by almost two-thirds since peaking in late April.
As with much involving the Chinese government, a lack of information is making it difficult to discern exactly what is happening.
Citic Securities is an important member of the government-controlled "national team" that carries out the will of the state in financial markets. With the government now trying to prop up the markets, big brokerage firms like Citic Securities are tasked with buying stocks to help stabilise shares. Which stocks brokerages are buying and how those purchases are managed is veiled in secrecy. But some experts on China's financial system worry that such information could be leaking out, giving some investors an unfair advantage.
"You've got a dreadful situation that the Chinese government's put themselves in, because there are clearly people in the know about what the government's intentions are, what it's buying," said Fraser J T Howie, a longtime banker in Asia and a co-author of "Red Capitalism: The Fragile Foundation of China's Extraordinary Rise."
"People could easily look to front-run them," he added.
In the case of Citic Securities, regulators have said little about the inquiry in August into the eight corporate officials. But on Tuesday, they made clear that the president, as well as two other officials, were under investigation for "insider dealing and leaking inside information," the company said in a stock exchange announcement.
Calls to Citic Securities' board secretary and a press officer went unanswered.
On August 30, the company said it was "actively initiating measures to conscientiously probe into problems that may exist in its businesses" and to "deeply analyse and resolutely rectify any problems identified."
The authorities are broadly looking at the role of financial players in the market rout, adding to the sense of anxiety in the markets.
Late Wednesday, the Communist Party's anti-corruption watchdog agency announced that an assistant chairman at the main stock market overseer was being investigated for "serious disciplinary violations," language indicating that a corruption investigation was underway. Another official at the agency, the China Securities Regulatory Commission, confessed in late August to insider trading, forgery and accepting bribes.
A reporter for Caijing magazine apologised in a televised confession for getting information "through abnormal channels" and putting his "own subjective views" in a July article that said the government was considering withdrawing its support of the market. The editor in chief of Caijing is the brother of the Citic Securities chairman.
"It seems like the government will not give up until it reaches its goal," said Liu Shengjun, the executive deputy director of the Lujiazui Institute of International Finance at the China Europe International Business School, "and that it has to save the market no matter what it takes."
The dearth of information is breeding rumours, complicating matters for big players like Citic Securities.
In recent days, Chinese social media, including the Twitter-like Weibo microblog as well as the WeChat messaging app, swirled with speculation about a Shanghai private equity company called Zexi Investment, run by Xu Xiang, and who is called "China's Carl Icahn" by financial news media. Two of Zexi's funds, both partnerships with state-owned companies, have risen more than 300 per cent this year through September 11, defying the broader stock market slump.
Market chatter centered on a Shanghai-based clothing retailer, which reached a four-year high in August even though it was unprofitable in the first half of 2015. Zexi publicly denied allegations that it had told Citic Securities to buy a retailer so that its share price would rise, saying in a statement that it had sold its stake this year, well before the government's market intervention. It called the speculation "fabrications from nowhere and malicious attacks."
Officials at Zexi, the retailer and Citic Securities were not available to comment on the matter.
It is an uncomfortable new spotlight for Citic Securities.
The brokerage firm's parent, the Citic Group, is one of the most prominent companies in China. Founded in 1979, the Citic Group originally served as China's investment arm when the country was just starting to open its economy to the outside world. The sons and daughters of many of the Communist Party's senior officials in the 1980s, the so-called eight immortals, served as top executives at the conglomerate.
Citic Securities, started in 1995, has been the top equity underwriter in China for years. In the last five years, the brokerage firm has raised more than $30 billion for companies in China, including for marquee players like the state-owned nuclear power company, according to data from Bloomberg.
Global asset management companies have flocked to Citic Securities as the go-to broker for Chinese securities, a particularly complex market to navigate. The company is also expanding outside China, acquiring the CLSA Group in 2013.
Citic Securities is also the biggest shareholder in the Citic Private Equity Fund Management Company, one of the biggest private equity firms in China, whose chairman is Liu, the son of the propaganda chief. The company has made early investments in big businesses that later had successful initial public offerings, like the New China Life Insurance Company in 2011.
The chairman of Citic Securities, Wang, has been cited in the Chinese news media as saying he wants his company to become known as the Goldman Sachs of China.
But the official inquiry into Citic Securities shows that there are limits to political connections in China, especially as industries such as finance become more professional and competitive, said Liu of the Lujiazui Institute.
He points to the declining market share of the China International Capital Corporation, the country's first investment bank, which until October was headed by the son of a former premier. Its dominance in underwriting shares was supplanted by Citic Securities in recent years.
©2015 New York Times News Service