# The stockmarket: Hunting crocodiles

## China is battling against market manipulators

### Murky politics is involved, too

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Feb 18th 2017 | SHANGHAI

THE Chinese stockmarket is not for the faint of heart. Over the past decade punters have endured two big bubbles and two big crashes—the latest in 2015. But those still smarting from their losses can at least be thankful that they did not suffer a worse fate: making too much money. Last week the government declared that it would be remorseless in going after investors who manipulate the market for profit. We will catch these “giant crocodiles”, said Liu Shiyu, the chief securities regulator. They will not be allowed to “flay the skin and suck the blood” of retail investors, he added, belying his earlier reputation as a mild-mannered bureaucrat.

Normally it would be prudent to take such statements with a pinch of salt. China has often vowed to tackle insider trading, to little effect. But the tough talk about discipline this time seems to have more political weight. Looking at Xi Jinping’s first five years as president, the stockmarket crash in the summer of 2015 ranks as one of the biggest blots on his record. It was a transparent display of shoddy governance. Investors who got burned still nurse grievances against regulators. So Mr Xi, hardly a fan of markets at the best of times, has an extra incentive to go after miscreants.

A couple of big cases show he means business. One of the first major players arrested was Xu Xiang, a so-called “kamikaze” investor who reputedly pumped up stocks, lured in unsuspecting punters and then cashed out. On January 23rd he was found guilty of market manipulation. He was sentenced to five-and-a-half years in jail and fined 11bn yuan ($1.6bn), a record in China for economic crimes.

There are also indications that the disappearance of an even bigger tycoon, Xiao Jianhua, is partly related to the stockmarket crash. Mr Xiao, the head of a sprawling investment company called Tomorrow Group, is one of China’s wealthiest men, worth at least $6bn. At the end of January he was abducted from his hotel in Hong Kong. Chinese agents reportedly removed him in a wheelchair with a sheet over his head and escorted him on a boat across the border into mainland China.

Mr Xiao’s case is widely thought to involve murky politics: he made his fortune through ties to Chinese leaders. But Caixin, a Chinese magazine, reported on February 11th that Mr Xiao had controlled Securities Daily, a state-backed newspaper, and used it to influence coverage of his listed companies. If Mr Xi does want to neutralise Mr Xiao for political reasons (he may know too much about the financial dealings of the elite), linking him to stockmarket shenanigans is a safe way to bring him down. And it has the added benefit of spooking other would-be manipulators.

Nevertheless, the details of Mr Xiao’s case, riveting though they are, are unlikely to have much impact on the market. The rarefied air of elite politics does not figure in the strategy of most investors. What does matter is whether the clean-up of the market affects traders at brokers and hedge funds around the country.

There are tentative signs that this is indeed happening. In 2016 the securities regulator levied 4.3bn yuan in fines and barred 38 individuals from the market, both record highs. “They are getting rid of the bad guys,” says one fund manager.

For the time being this seems to be helping the market. Companies with solid fundamentals have outperformed speculative stocks since late 2015. Chen Jiahe, chief strategist with Cinda Securities, a broker, says it is nothing short of spectacular to see this kind of trend—which is common in more mature countries—last so long in China. But it will take longer than that to drain such a swampy market. As the government itself says, crocodiles still lurk.
