China bourse investigates brokerages for foreigner investor trades-report

Reuters

SHANGHAI, Dec 30 (Reuters) - The Shanghai Stock Exchange has criticized four Chinese securities brokerages for late trades on behalf of foreign investors that caused a sudden tumble in several blue-chip stocks two weeks ago, state media reported on Monday.

The large-cap stocks, including China Construction Bank , CITIC Bank and Great Wall Motor , suffered big falls in the closing two minutes of trade on Dec. 20 after orders from the investors were executed. The share prices quickly recovered the next trading day.

The brokerages involved are UBS Securities Ltd, Guotai Junan Securities Co Ltd, Orient Securities Co Ltd and China International Capital Corp Ltd (CICC), the official China Securities News reported on Monday, citing unnamed exchange authorities. UBS Securities is a local joint venture in which the Swiss investment bank owns a 20 percent stake.

In a statement posted to its official Twitter-like Weibo microblog two days later after the drop, the Shanghai Stock Exchange said the unusual movements were due to adjustments in an influential stock index tracked by foreign investors, which caused these investors to adjust their holdings.

The exchange said in the statement on Weibo it would further investigate the movements.

That investigation revealed that four foreign firms had placed large orders with local brokerages to adjust their portfolios in line with changes to the FTSE Xinhua China A50 Index, which tracks the 50 largest A-share companies listed in Shanghai and Shenzhen, the paper reported.

The brokerages waited until the final two minutes before market close to execute them, causing steep falls in the prices of shares whose index weightings had been adjusted downwards, the exchange found.

Guotai Junan, Orient Securities, and CICC did not answer calls seeking comment. UBS Securities declined to comment in reply to an email seeking a response.

The foreign investors involved were UBS AG ; The Hong Kong and Shanghai Banking Corporation Ltd, a unit of HSBC ; Citigroup Global Markets Ltd, a unit of Citigroup Inc ; and Martin Currie Investment Management Ltd, a UK-based fund manager, the paper reported.

These firms are accredited under the Qualified Foreign Institutional Investor (QFII) program, the main channel through which foreign investors can access China's capital markets.

While the QFII investors were not accused of any wrongdoing, the exchange criticized the securities companies the QFIIs hired to conduct their trades, China Securities News reported.

Brokerages have a responsibility to consider the impact on the broader market when they receive and execute client orders, the exchange said, according to the paper.

In deciding to execute a large volume of client orders within a short period, these brokerages negatively influenced "market order" and violated rules governing exchange members, the exchange found, according to the paper.

The exchange plans to take "corresponding self-disciplinary actions" and to coordinate with government regulators on further investigation, the paper reported, without elaborating.

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