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Tycoons on High Alert Amid Chinese Corruption Crackdown

Following the disappearance (and subsequent reappearance) of a tycoon in Hong Kong, leaders of publically-listed Chinese companies are on high alert amid a crackdown on corruption.

  • Allen T. Cheng

Chinese tycoons who run publicly listed companies have gone on high alert, as regulators — including China Securities Regulatory Commission chair Liu Shiyu — have made it plenty clear that the next phase of the nation’s anticorruption campaign has a singular target: them.

Xiao Jianhua, who runs Beijing-based Tomorrow Holding — a group that controls four listed companies — is the first apparent victim to come under scrutiny in this latest chapter in President Xi Jinping’s efforts to rid the Chinese government and capital markets of corrupt activities.

Xiao disappeared January 28 from Hong Kong’s Four Seasons Hotel, his home for more than a year. Allegedly taken by mainland security agents, Xiao is now cooperating with authorities who are investigating stock market manipulation by large investors that occurred during the market crash of 2015.

Xiao, 46, is known to be business partners with the sons of several retired Chinese leaders — among them former vice president Zeng Qinghong — and seemingly had plentiful access to inside information in both government and business circles.

Worth an estimated $6 billion, Xiao controls a business empire that operates a number of listed companies engaged in foodstuffs, finance, mining, and real estate; names as diverse as edible-sugar producer Baotou Huazi Industry Co. and cement maker Xishui Strong Year Co. Inner Mongolia populate his portfolio.

Both companies have become collateral damage of Xiao’s alleged abduction: Share prices of the two mainland-listed companies have fallen by more than 10 percent since his disappearance. Although the shorting of shares of listed companies is extremely expensive in China, Xiao’s arrest suggests potential opportunities for global hedge fund managers who invest in Hong Kong, where shorting equities is common and legal — and where there are more than 1,000 mainland-listed companies controlled by hundreds of Chinese tycoons who, like Xiao, may soon fall under the scrutiny of authorities.

Victor Shih, an associate professor at the University of California, San Diego, advises fund managers to look closely at the Hong Kong markets in the months ahead as President Xi’s anticorruption initiative proceeds.

“Given accurate information on the ties between large shareholders of listed Chinese companies and individual leaders in China, one can profit both on the short side and on the long side,” says Shih, who previously worked at the Carlyle Group and teaches at UC San Diego’s School of Global Policy and Strategy. He has focused much of his work on studies of the elite networks of China.

Xiao — who acquired Canadian citizenship several years ago and is known to be a major investor in the Chinese stock markets, owning stakes in major financial firms such as Hong Kong–listed Ping An Insurance — may soon be more than an anomaly. China will “capture big crocodiles” and bring them back to the mainland to face justice, securities regulator Liu told a working group on February 10, according to online financial news outlet Caixin.

Liu’s announcement is an indication that authorities are deepening their investigation into the market crash that occurred between July and October 2015 and forced authorities to spend up to $300 billion to shore up plunging stock prices and issue a wide range of new rules, among them regulations making the shorting of securities so expensive as to essentially ban the activity in China.

The market “won’t allow big crocodiles to create winds and rains,” Liu said to the internal working group at China Securities Regulatory Commission.

It also, apparently, won’t allow them sanctuary in the Four Seasons.