Hundsun Technologies, the Chinese financial-services software provider controlled by Alibaba founder Jack Ma, is scaling back its popular Homs trading platform amid a crackdown on the previously unregulated grey market for margin finance.
Hundsun said early Thursday that it will stop the opening of new accounts, ban capital increases on existing accounts, and close accounts with zero balances, prompting its shares to sink by the daily maximum of 10%.
In a Shanghai stock exchange filing the company said the moves were in response to the China Securities Regulatory Commission’s clampdown on illicit margin trading.
“We’ve paid high attention to [the CSRC’s directive] and will respond positively to the call,” it said.
In addition, Hundsun warned investors that the decision will “significantly affect” the earnings of Homs developer Hangzhou Hundsun Networks Technology Services, in which Hundsun holds a 60% stake.
Hundsun Networks posted a loss of Rmb15 million ($2.45 million) in the first half of 2014.
Launched in 2012, the Homs trading system was originally designed for small- and medium-sized asset management companies. But many grey market margin lenders flocked to the system as China’s stock markets boomed, making it the dominant platform for trading with off-market margin finance, according to market participants.
The platform has been criticised on Chinese social media for amplifying the recent sharp reversal in Chinese shares, in which the market tumbled by around 30% in just three weeks.
Claims and counterclaims
On the popular messaging platform Wechat, a widely circulated post titled “The 2015 stock market crisis originated from Hangzhou” at the weekend blamed the Homs system for the market crash. Both Hundsun and Alibaba are based in Hangzhou, the capital of Zhejiang province, which is just south of Shanghai.
Jack Ma wrote on his weibo microblogging account on Monday that he was “shocked to know that Hangzhou has become the origin of the market crash and [that] Jack Ma broke down China’s stock market.”
In a separate filing on Monday, Hundsun said it was “not objective or rational” to blame Homs as the major force behind the market meltdown. It said the stock sell-offs through Homs over the past four weeks stood at Rmb30.1 billion, only accounting for 0.1% of the total transactions during that period on the Shanghai and Shenzhen bourses.
However, official data from the Securities Association of China shows grey markets have funnelled about Rmb500 billion of margin finance via three brokerage access systems – Homs, Shanghai Mecrt and Hithink Flush Information Network. Homs accounts for about 90% of the total.
And in spite of Hundson’s defence, the CSRC has opened a probe into the company. The agency said late Monday that its officials had gone to Hundsun’s offices to “check the relevant evidence” and to guide the company to “strictly abide by the CSRC regulations.”
Tall and Hundsun
Established in 1995, Hundsun was purchased last year by Zhejiang Finance Credit Network Technology, a company owned by Jack Ma, in a move aimed at beefing up Alibaba’s presence in finance. Ma holds a controlling 20.6% stake in Hundsun.
According to equity research analyst Paul Schulte, Hundsun is far more than a purveyor of electronic equities trading systems. It is at the heart of Chinese finance as “the mother of all information lodes”, he told FinanceAsia.
In his forthcoming book, The Next Revolution In Our Credit-Driven Economy, Schulte put it thus: “Imagine a company that is like IBM and Cisco and that has built the infrastructure for Pimco, Fidelity, JP Morgan, Prudential and Bank of America Merrill Lynch.”
Some market insiders say the company’s extraordinary size may as well put it under the regulators’ magnifying glass.
“[Hundsun’s] Homs has been targeted [by the regulators] mainly because of its dominance [in off-market margin trading],” one Hong Kong-based portfolio manager at a large Chinese asset management told FinanceAsia.
“A tall tree catches the wind,” she said.
