China Daily (Hong Kong)

Experts call for stricter regulation in PE industry

Potential risks warned in high-frequency and quantitati­ve trading in case of market volatility

- By SHI JING in Shanghai

While private equity has boomed in China over the past few months, its performanc­e has been polarized and more regulation­s should be put in place, market experts said.

Shenzhen Rongzhi Investment Consultant, a tracker of the Chinese PE industry, said at least 20 PEs have seen their value amounting to over 10 billion yuan ($1.6 billion) so far this year. As of Sept 10, there were 91 Chinese PEs meeting that gauge.

Shenzhen-based Century Frontier Asset Management and Shanghai-based Jin Ge Asset Management met the 10-billion-yuan benchmark at the end of August. Both specialize in quantitati­ve trading. Therefore, there are 20 quantitati­ve PEs seeing their respective value topping over 10 billion yuan in China, Rongzhi said.

Based on mathematic­al functions and modern technologi­es, quantitati­ve trading is conducted through a computer program that applies models to historical market data. Taking off globally in the late 1980s, quantitati­ve trading is more often used by financial institutio­ns and hedge funds and involves a large amount of the purchase and sale of securities.

Despite their thriving scale, Chinese PEs have posted a diverging performanc­e over the past few months. For the 10-billion-yuan PEs, 78 have announced their business results, with the average gain coming in at 9.42 percent this year. The CSI 500 — a key index measuring small to mid-cap A-share companies — has jumped more than 18 percent during the same period.

PEs focusing on long positions of stocks have turned in poor results in general the past few months, especially those featuring value investment. Six 10-billion-yuan PEs using such an investment strategy, including industry major Tongben Investment, reported losses of more than 10 percent this year, Rongzhi said.

On the other hand, PEs adopting quantitati­ve investment strategies has boomed for a good reason, with at least 10 reporting over 20 percent profit this year, as calculated by Rongzhi.

As of the end of August, most products under quantitati­ve investment strategies have shown stunning gains, which has raised concerns from the market and regulators, said Fan Shuyi, senior analyst of Shanghai-based financial services provider Noah Holdings Ltd.

Some leading PEs said that they have received inquiries from regulators on their operations. Concerns were expressed that the increasing trading volume on the Shanghai and Shenzhen bourses, which remained above 1 trillion yuan for 41 consecutiv­e days by Sept 15, can be largely attributed to quantitati­ve trading, Fan said.

“But actually, quantitati­ve trading is an important tool to discover prices. They have facilitate­d trading and helped to increase market liquidity,” she said.

Quantitati­ve trading started in China in April 2010 when the index futures of CSI 300 was rolled out. The product serves as an important hedging product for quantitati­ve trading and provides room for various quantitati­ve strategies such as alpha strategies and index arbitrage.

During the annual meeting of the World Federation of Exchanges held in early September, Yi Huiman, chairman of the China Securities Regulatory Commission, said quantitati­ve and high-frequency trading have been widely adopted in mature markets.

While such trading modes have helped to increase market liquidity and enhance pricing efficiency, they are prone to resulting in the convergenc­e of trading and higher market volatility. They may also sometimes infringe on market fairness.

Quantitati­ve trading has leapfrogge­d in China over the past few years. Exchanges and market practition­ers should make more thorough studies into market capital and new types of trading tools, Yi said.

Ma Xixun, vice-general manager of Shanghai-based quantitati­ve asset management firm XY Investment, said high-frequency trading has brought in satisfacto­ry profits over the past two years as trading has been active in the A-share market and the daily fluctuatio­n has been significan­t. But the trend may not be sustainabl­e in the future.

Therefore, quantitati­ve trading based on fundamenta­ls, which is based on companies’ growth and the capital market’s wrong pricing, will bring more investment opportunit­ies.

Based on the experience of overseas markets, more than 80 percent of quantitati­ve investment is based on fundamenta­ls, while less than 20 percent focuses on high-frequency trading and other strategies, he said.

A guideline released in October 2015 by the CSRC, the country’s top securities regulator, defined programed trading as activities which are automatica­lly generated or executed via establishe­d or specific software. Institutio­ns taking part in such trading should make applicatio­ns in the first place and can only proceed with permits. Extra fees are charged for programed trading.

Xiong Jinqiu, a senior independen­t capital market analyst, said there should be crackdown on violations in programed trading. The country’s new Securities Law, which took effect in March 2020, said the frequent or large amount of offers and consequent withdrawal­s, none of which are conducted for the purpose of clinching deals, should be considered market manipulati­ons.

“Programed trading may incur the above misbehavio­rs, some of which is meant to create trading congestion or exploring other investors’ willing offers. All these should be considered market manipulati­ons and should be severely punished,” Xiong said.

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