China’s largest brokerage, CITIC Securities, makes $166 billion error by overestimating its derivatives business. Do Chinese investors really care?

Chinese state regulatory authority the Securities Association of China has accused CITIC Securities, the country’s largest derivatives brokeage, of overestimating the amount of its equity swap transactions in a commercial report which was submitted to the authorities in October this year. Should this be proved to be correct and the outcome of the regulator’s investigations […]

Chinese state regulatory authority the Securities Association of China has accused CITIC Securities, the country’s largest derivatives brokeage, of overestimating the amount of its equity swap transactions in a commercial report which was submitted to the authorities in October this year.

Should this be proved to be correct and the outcome of the regulator’s investigations find that CITIC had indeed inaccurately reported the value of its transactions, a question mark may appear over the true strength of the state-owned brokerage, which recently hit the news within the FX industry for its purchase of a 59% stake in Hong Kong-focused FX brokerage KVB Kunlun Financial Group Ltd (HKG:8077).

Following the purchase of a controlling stake, CITIC Securities sought to purchase the remaining stake by buying out the public shareholders, which did not proceed, resulting in a further collapse in share prices for KVB Kunlun, a firm which had experienced a tough year during 2014 and early 2015.

CITIC Securities has been the subject of a regulatory clampdown by Chinese authorities with regard to irregular stock trading in the aftermath of China’s domestic stock markets having crashed in June this year.

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Chinese investors want liquid assets in free markets, hence the large IB firms here in Guangdong. Photography: Andrew Saks-McLeod

According to CITIC Securities, the overstatement of revenues was an error and did not have an effect on the month-end net size of CITIC’s overall business, however CITIC Securities did state to Reuters that it had amended the figures at the beginning of November to reflect the size of its swaps business at $6.2 billion.

Investigations into investor behavior in mainland China by FinanceFeeds has concluded that a vast majority of cash-rich, investment-savvy Chinese entrepreneurs (of which there are several million) are not interested in investing in Chinese stocks, for two reasons. The first being that the government, which is interested in maintaining complete social stability and is opposed to risk-happy open markets, controls all of the stock markets and owns a minimum of 50% in each firm listed, therefore it cannot be considered a real market and the interference from within causes stock prices to be regulated and controlled centrally, meaning that returns are steady and safe, rather than fast.

The other reason is that Chinese investors with massive buying power want to use software, indicators and their own strategies to trade liquid markets in free market nations so that they can buy stock in the firms and then trade hard to influnce the price of the stock, whilst making a fast profit on their actual trading accounts.

Mention ‘IPO with an initial pre-IPO private fixed price purchase opportunity’ to a Chinese audience, and everyone will get their wallet out pronto.

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