Chinese stocks fall following investigations into top brokerages

China has clamped down further on malpractices in its securities industry after it emerged that three of its biggest brokerages are under investigation for alleged rule violations (1).

Citic Securities Co, Guosen Securities Co and Haitong Securities Co are all being investigated, and China’s main stock index suffered its worst day in three months as a result, with the Shanghai Composite index falling by 5.5% (2).

Shares in both Citic and Guosen fell by 10%, the maximum allowed in one day.

Chen Xingyu, an analyst at Phillip Securities, told the AFP news agency: “The biggest reason for such a sudden drop today is because of the regulator’s investigation of the top brokers. It has triggered a broader sell-off.” (3)

“People are concerned about whether more brokerages will be investigated,” said Wong Chi Man, an analyst at China Galaxy Securities Co in Hong Kong. “There’s room for improvement in terms of the regulator’s communication and the level of transparency,” said Wong, adding that it wasn’t clear what Citic Securities, Guosen and Haitong were supposed to have done wrong (1).

The first goal is to instill fear, according to Fu Kui, then the director of international cooperation for the Central Commission for Discipline Inspection. The next goals are to improve the legal framework and to drive a shift in culture, Fu said in May (1).

Market sentiment was already wavering ahead of a new batch of initial public offerings set to make their debut next week. The fifth consecutive decline in profits earned by Chinese industrial companies added more fuel to concerns over a slowdown in the world’s second-largest economy (3).