China Southern Securities Seized By CSRC
In a move to clean up one of Shenzhen's major brokerages,
China Southern Securities was placed under the administrative
control of the China Securities Regulatory Commission
(CSRC), the government's securities regulatory arm. The
company, which is the fifth largest brokerage in China,
was officially placed under government control because
of "corruption and mismanagement".
According to a government notice, the firm was "doing
illegal business and violating relevant regulations and
its management was disorderly, and the government was
taking action to protect the legal rights of investors
and creditors." The CSRC announced that "any
illegal and irregular activities will be punished."
It is unlikely that the company will be declared insolvent
because of the general weakness of the Chinese domestic
securities market, and in the past, failed Chinese brokerages
have been acquired by their competitors or bailed out
by the central bank. Stock prices have fallen by 32 percent
since mid-2001. The combined losses of the country's 131
securities firms have totaled US$495 million in the first
nine months of 2003, according to official figures.
The Shenzhen city government brought in Kan Zhidong as
president of China Southern Securities early last year
to clean up the company. Kan, who has since left the company,
said in a local newspaper interview late last year that
the situation of China Southern was no worse than that
of many other securities companies.
He said that internal board disputes had kept them from
meeting for more than a year, and that the company had
a "state-owned enterprise syndrome of investing in
too many non-core businesses, such as real estate."
Even though Chinese securities regulations have prohibited
real estate investments by securities firms, most are
believed to have invested in Shanghai, Guangzhou, Shenzhen
and Shenyang property. In an effort to lure unsophisticated
new investors, many have also promised fix rates of return
on their investments.
The move to take control of China Southern Securities
has shown the first move by Premier Wen Jiabao to clean
up the securities industry. Through all of 2003, Wen spent
his efforts on cleaning up China's four leading state-owned
banks, and preparing them for overseas listings. At the
time, many speculated that the problem for China's securities
industry were so big that Wen avoided dealing with them.
In a move to attract foreign investment to China's domestic
securities market, and investment in A shares, the government
has announced strict QFII regulations for funds wishing
to invest. But, before the domestic situation is sorted
out, few players have shown a willingness to jump in.
When the news of the move broke on the weekend, Hong
Kong investors expected a run on the Shanghai and Shenzhen
markets. But, in fact, the Shanghai Composite Index, which
tracks A and B shares closed up 3.4 percent, while the
Shenzhen composite gained 1.6 percent on Monday trading.
Most observers believe that the move against China Southern
Securities was a test, and believe that if the markets
react favorably, the government will move against other
mismanaged securities firms as well.
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