China: The “Broker Butcher” Returns

The “Broker Butcher” is back at work in China. Will he clean up financial markets, or simply watch them sink?

Wu Qing earned his colorful nickname as head of the China Securities Regulatory Commission (CSRC) in the 2000’s. Back then, he shut down a quarter of the country’s securities dealers.

Xi Jinping brought the 58-year-old Wu back as top market cop on February 8. He lost no time reining in algorithmic short sellers, whom he saw as aggravating the precipitous decline of Chinese stocks.

Days before Wu’s reappointment, Beijing announced a “zero-tolerance” policy for “malicious short-selling.” Wu then widened the focus to include quantitative traders known for buying volatile small-cap stocks and hedging their bets by shorting broader market indices.

His CSRC froze the accounts of one top quant, Ningbo Lingjun, for three days, precipitating a “quant quake” that inflicted heavy losses. “Punishment will be more and more severe,” the regulator’s enforcement chief told a follow-up press conference.

Wu, however, is no anti-market zealot. A Ph.D. economist, he headed the Shanghai Stock Exchange and oversaw the commercial capital’s financial industry in between stints at the CSRC, winning praise from at least some global capitalists.

“Wu Qing’s appointment is great news,” says Jason Hsu, founder of US-based Rayliant Global Advisors. “In Shanghai he was instrumental in my own firm’s license application process.”

Closer scrutiny of quant funds should only make Chinese markets safer and bolster investor confidence; Hsu adds: “The high-frequency traders advertise themselves as scalping profits from naïve retail traders.”

Hong Kong-listed Chinese stocks gained 6% during Wu Qing’s first two weeks back at the CSRC post, momentarily reversing seven months of near freefall. The Butcher’s return was hardly the only factor; China’s “national team” of state-affiliated funds put out the word that it was buying stocks, and the People’s Bank of China cut mortgage lending rates.

Analysts question how much difference any personnel change can make given the scope of problems that have crashed Chinese equities by 60% over the past three years. Wu’s ascent is “just a case of finding a scapegoat for the market’s downturn,” says Logan Wright, who heads China markets research at consultant Rhodium Group.