Investigations by the Chinese authorities against two of the largest brokerage firms in the country for alleged malpractices in the sale of shares has caused the collapse of the major equity markets in the country on Friday 27th. Shanghai closed with a drop of 5.5% and Shenzhen 6.3%, immediately after both confirmed they are being scrutinized by regulators. It is the biggest one-day drop in the last three months.
Citic Securities, the largest Chinese company in the sector, and Guosen Securities have been affected. Both recorded a 10% drop in the value of their degrees, the maximum allowed per day. Other brokerages also viewed as investors have started to get rid of their titles for fear that may be splashed. Haitong Securities, another industry giant, has suspended trading of its shares due to a pending announcement about “insider information.”
Last summer during the whole market storm, Chinese authorities announced a campaign to allay allegations of manipulation in stock prices, bad practices of short sales and insider information that, in his opinion, would have contributed to the collapse of the major markets in the country. The authorities say they want to “clean up” the sector, and in this particular raid runners are the main target.
Although official announcements have occurred between then and now, the investigations against these companies and against the financial sector in general carry controversy for months. Citic Several senior executives have been arrested and interrogated. Some CEO’s, according to official Chinese media, have admitted to have taken advantage of inside information. Guosen president was hanged in October, shortly after officially announced that he was being investigated for “serious discipline violations”, a euphemism that the Communist Party uses to refer to corruption. Other senior state banks or securities regulatory body have been removed from their posts before the suspicion of having engaged in illegal practices.
After a year of continuous increases that revalued indices in Shanghai and Shenzhen more than 150%, the equity markets, already very volatile, has lost more than half of its value in a few weeks, volatilizing billions of dollars. The situation in China was contagious to other parks in the world, fearful that the bursting of the bubble may affect the World economy and rebound the weak global growth economy.
Beijing responded to this indent with a display of unprecedented measures, from the injection of hundreds of millions of euros to support the listing of the most stable until the intervention of the Ministry of Public Security takes place to crack down speculators. The measures assumed the intervention of the stock, and many of them still remain. After touching lows in August, Chinese stock exchange have seen a quarter of relative stability: up to now, Shanghai had recovered a 24% and Shenzhen a 35%.