Probes of securities firms drag down market

Investors look at an electronic trading screen at a brokerage in Hangzhou, Zhejiang province. [Asianewsphoto by Long Wei]

Announcements that major Chinese securities firms are under investigation for alleged rule violations triggered a market sell-off on Friday amid investors' concerns about the firms' business prospects.

The benchmark Shanghai Composite Index tumbled by 5.48 percent on Friday, the largest single-day decline since the market rout in August.

Friday's decline, mainly led by the brokerages, came after the country's leading brokerages, CITIC Securities, Guosen Securities and Haitong Securities, said in statements to the Shanghai Stock Exchange late on Thursday and late on Friday that they were under investigation by the China Securities Regulatory Commission.

China's scandal-hit securities firms have been in the spotlight since the securities watchdog widened its effort to root out market malpractice after the summer rout wiped out $5 trillion of market value.

Some analysts said the latest investigation might be related to the role of the big securities firms in the stock rout, since they were the so-called national team to stem the unprecedented market plunge between June and August.

CITIC Securities, China's largest brokerage, was at the center of the scandal storm, with at least seven of its senior executives, including President Cheng Boming, being investigated for reportedly using inside information of the government market rescue plan to trade to the firm's advantage.

The firm has also been accused of conducting illegal margin trading business for its clients and evading regulations through equity swaps, an over-the-counter derivative business.

The investigation of Guosen Securities came a month after the company said its president, Chen Hongqiao, died at the age of 49, without mentioning the cause of his death.

The heightened government probe into the securities firms weightd heavily on investors' sentiment on Friday. Share prices of CITIC and Guosen Securities tumbled by the 10 percent trading limit. Haitong Securities suspended the trading of its shares in Shanghai and Hong Kong.

Global rating agency Moody's Investors Service said in a research note that the outlook of CITIC Securities remained stable, but the challenging operating environment and uncertain outcome of the pending investigation and regulatory actions have led to a weakening of the stand-alone credit profile of the firm.

Moody's said it could downgrade the firm's credit rating if the investigation leads to a weaker financial position and if possible large financial fines or restrictions hurt its business.

However, an executive of CITIC Securities told China Daily that the firm's business remains largely unaffected by the recent management change and investigation, although some clients had inquired about the matter.