Zexi ban “just the start” of new China funds crackdown

Mainland hedge fund Zexi Investment and its head, Xu Xiang, have been blacklisted – and sources say more big cases are about to break.
Zexi ban “just the start” of new China funds crackdown

The blacklisting of well-known Chinese hedge fund firm Zexi Investment, announced late on Wednesday, is just the start of a raft of sanctions for mainland private securities managers, a senior fund executive told AsianInvestor.

In fact, the Shanghai-based source said another high-profile case is set to break soon, as industry watchdogs flex their muscles under a recently implemented framework.

The Asset Management Association of China (Amac), a self-regulatory body under the auspices of the China Securities Regulatory Commission (CSRC), said on its website it had revoked the registration of Shanghai-based Zexi.

Amac has banned the firm from the funds industry, along with general manager Xu Xiang, his mother Zheng Suzhen and Xu Jun, assistant to the general manager and compliance head. The association said Xu Xiang and "other relevant people" had committed the crime of securities market manipulation.

Xu, seen as a star manager for his outsized returns, had been arrested on charges of insider trading and stock price manipulation in November 2015, the first such case involving a private securities firm in China. He was sentenced to five-and-a-half years in prison in January this year.

More to come

The unnamed PE executive said he expected to see more penalties handed out soon for activities conducted by the so-called 'Wenzhou gang', a group of investors from Wenzhou in Zhejiang province who are believed to have manipulated the A-share market. 

In a statement on April 14, CSRC said it had noticed a swift rise in prices in many newly listed stocks and abnormal changes in their trading volumes, prompting it to keep a close watch for market manipulation. The regulator said the accounts that appeared to be manipulating stock prices mostly originated from the same group of individuals and geographic area.

On the same day, the Shanghai Stock Exchange said in a statement that the accounts conducting abnormal trading activities were mostly from Wenzhou in Zhejiang province and were spreading to other regions.

Clear framework

Regulation of private securities funds is clearly intensifying, largely thanks to the clearer regulation framework that has been implemented in the past few years, a senior executive at a Beijing-based private fund firm told AsianInvestor.  

The amended Securities Investment Fund Law, effective from June 2013, and other rules released subsequently state that CSRC and Amac are the sole regulators for private funds investing in secondary securities market. Hence they supervise both private equity and hedge fund managers in China. 

Previously the National Development and Reform Commission had also been involved in regulating venture capital and PE firms, a China PE industry analyst told AsianInvestor.

Moreover, Amac further clarified the rules for private securities managers in February last year, the Beijing-based fund executive said.With clearer regulatory accountability, Amac is better able to crack down on malpractice, such as insider trading, he said. 

However, the speed with which Beijing switched from a relatively laissez faire approach to the private funds industry to far stricter regulation has raised hackles among industry participants. 

Broader crackdown

Meanwhile, the Zexi case is part of Beijing’s broader capital market crackdown, a Shanghai-based consultant said. 

He noted that Shen Deyong, executive vice-president of the Supreme People's Court (SPC), had urged in an official meeting in Beijing on June 1 the drafting of a judicial interpretation of insider trading in the financial markets, according to a statement posted on June 3 on the SPC website.

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