Beijing Creates New Securities “Regulator” To Fight Fraud, Reassure Investors

With China’s bankrupt real-estate behemoth Evergrande finally on the verge of its “Lehman” moment, President Xi and the Politburo’s campaign to realign the Chinese economy with their “common prosperity” values has finally arrived at a reform of Chinese financial markets – which the CCP hopes will soon be booming with more domestic IPOs as foreign offerings have now been effectively banned during the crackdown.

According to Reuters, “China has set up a cross-agency team, led by the country’s securties watchdog, to coordinate crackdown efforts against illegal acticities in capital markets.”

The China Securities Regulatory Commission said on Thursday it recently led its first meeting with representatives from the other agencies as well as people from Beijing’s propaganda department, supreme court, supreme procuratorate, police, ministry of justice and ministry of finance.

The notion of Beijing tightening “oversight” of its financial markets is redolent of the spring and summer of 2015, when the government threatened to arrest short sellers and leaned on major securities firms to help out the official TTP with arresting a selloff in Chinese markets.

But according to Reuters, the focus of the new multi-party regulatory commission will be to ferret out “misbehavior” like securities fraud, book cooking, market-manipulation and insider trading with a “zero tolerance” ‘approach.

However, shortsellers might want to start thinking about the point at which selling Chinese stocks short becomes “manipulation” in the eyes of the authorities, especially as shares of major Chinese developers are getting hammered in Hong Kong and elsewhere.

Additionally, the team will “promote better coodination between the central and local governments,” as well as between varous Chinese regions, to better regulate its domestic capital markets.

Given Beijing’s hopes of building up its domestic capital markets (a policy President Xi has decided to impose by force), it’s not surprising that they’re beefing up “enforcement”, especially given Chinese companies’ reputation for fraud (think Luckin Coffee). Beijing has said it’s trying to channel more household savings into equities and bonds to “fund innovation and economic expansion” (even as the Evergrande debacle is creating mobs of angry home buyers and employees who lent money to Evergrande have been treated to a rude awakening).

In fact, it’s this very reputation for misbehavior by Chinese companies listed in the US that has led Congress and the SEC to deliver an ultimatum: either submit to tighter auditing standards, or be forcibly de-listed.

And looming over all of this is Evergrande, and the dismal prospect of contagion spreading across the Chinese economy and markets.