China IPOs and Stock Smack-Down, Global Macro Says

brokerdealer china ipo rareviewmacro jun29 blog update profiling the boom bust of China IPO activity and the latest China stocks ‘smack down’ is courtesy of 29 June 2015 extracted observations from global macro strategy think tank “Rareview Macro LLC”, the publisher of global macro trading investment newsletter “Sight Beyond Sight” and authored by Neil Azous..

We have stated many times in these pages that China’s stock market is driven mainly by liquidity and much less by corporate operating performance. Therefore, in order to better understand what is driving prices at the moment we wanted to provide this brief background and our view on the stock market correction.

The China Securities Regulatory Commission (“CSRC”) is in ultimate charge of regulating the issuance, listing, trading, registration, depository and clearance of securities, and ensures that the operation of the stock market is in compliance with laws and regulations.

As way of background, China A-share IPO subscriptions need to be 100% pre-funded by cash (no margin loan) and allocations are done on a pro-rata basis via a lottery system (i.e. brokers have no discretion). Once you apply, your funds are put in escrow. Collectively, a large pool of money is out of the monetary system for short periods of time. provides the only global directory of leading broker-dealers, including those located in Hong Kong.

The 1-day average performance of an IPO in this latest uptrend has been over 40% and it is not uncommon for an issue to be 1000 times over-subscribed. Even if you have to lock up funds for a short period of time, and only receive a portion of your order, that setup is akin to a lottery ticket if you are allocated any shares at all.

To put the degree of the math in place consider this: In the week starting June 14, the CSRC approved 24 IPOs to raise ~$6.5 billion. In turn, this effectively, even if only temporarily, locked up ~$1.1 trillion during the escrow period. The main IPO culprit was Guotai Junan Securities Co which listed on Friday. The capital raise for this brokerage equated to $4.9 billion and was the largest in China since 2010. The final numbers are not available but it is fair to say that hundreds of billions of dollars was locked up in escrow as part of their lottery system.

In an effort to clear a large backlog of IPOs created during an over-year long freeze in 2013, the CSRC doubled the pace of IPO approvals to ~20 per month in January, then doubled it again to more than 40 per month since April. This is the main problem that is impacting liquidity, not margin trading, in our opinion.

The pace of secondary issuance is even greater. In the first half of 2015, proceed from capital raises totaled over $70 billion, double the amount raised in all of 2014. (Source: Reuters, Business Insider)

Attached is the Bloomberg China IPO Index (BCIPO), a capitalization-weighted index which measures the performance of Chinese stocks during their first publicly traded year.

As you can see, following a ~32% correction off the highs, the head of the dragon has now been cut off. Not surprisingly, all 10 of this month’s worst-performing stocks in the broader Shanghai Stock Exchange Composite Index (SHCOMP) are IPOs from the class of 2015.

We highlight this because as much as sentiment has turned negative, even at the local level, the risk is that the correction triggers one of two outcomes: a suspension of IPOs or an acceleration of a restructuring of the lottery system. Both of which would be constructive and portend to higher equity market prices going forward.

Now before dismissing this rationale as overly optimistic, we would note that the CSRC has suspended IPOs eight times in the history of the yuan-denominated A-share market, five of which were imposed since 2000 (Source: Xinhua News Agency, Bloomberg). The last moratorium was enforced in late 2012 and not lifted until December 2013.

For the avoidance of doubt, while we are mindful that the local equity markets on Monday rejected the large monetary stimulus provided over the weekend, we are not in the camp that believes the “bubble has burst”. We simply believe it is a function of liquidity and timing of IPO’s. For example, the CSRC approved another 28 IPOs on Friday to hit the market in the next two weeks and the liquidity required to be placed in escrow and absorb the issuance is larger than the monetary stimulus provided over the weekend.

To be fair, in order to restore confidence, ideally we would like to a see a similar situation that occurred at Central Huijin Investment Ltd at the beginning of the month. As a reminder, one of the top three catalysts for the start of the correction, alongside an increase in bank margin requirements and large IPO issuance, was the news that Huijin, the domestic investment arm of China Investment Corp (CIC), sold some of its holdings in Industrial and Commercial Bank of China and China Construction Bank.

Following a sizeable sell-off in A-shares Huijin said the next day in a short statement that President Xie Zhichun has stepped down with the board’s approval. Huijin didn’t explain the personnel change nor name a successor. The Beijing News cited a source as saying…… Xie will go to Shenzhen University to teach, denying that his departure had anything to do with last week’s crash. (MNI)

We have no edge in whether there was any truth to the “teach in Shenzhen” story, or whether that is just a Chinese code word for “he will work in a prison camp until he dies”. For his sake, we hope it is the former – although we suspect it may be the latter.

To continue reading the full commentary from Rareview Macro LLC, please click here



JOBS Act Curtain Call: Main Street Growth Act


This post was written by Pete Hoegler, Washington DC-based Social Media intern for The JLC Group. 

Three years after the JOBS Act was passed, it seems that Washington is back for more–a curtain call if you will–making it easier for small ventures to raise capital.

The House Financial Services Committee in early June floated a draft bill that would allow the creation of “venture exchanges” tailored to the needs of small companies looking to raise money. In many ways, the success of the JOBS Act hinges upon the creation of such markets. A healthy secondary market created liquidity that is critical to building investor confidence and creating a robust alternative to the global markets that today are dominated by enormous corporations.

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The new proposed venture exchange laws are aimed at increasing access to liquidity for early stage investors in private startups and small businesses (some of which could be JOBS Act enabled investors), as a lack of liquidity was a concern voiced by some surrounding the new laws for equity crowdfunding with non-accredited investors. 

Investors in technology startups, for example, are likely to have to hold their position in any one investment for an average of 7 years. Creating opportunities for selling private stock in a startup investment sooner through venture exchanges has the potential to reduce some of the early stage investment risks.

These new venture exchanges could create markets that allow early investors who invested via equity crowdfunding to trade shares far before any kind of liquidity event like a public offering (IPO) might take place, spelling an opportunity for liquidity for those early investors. 

The number of IPOs has gone from an average of 311 from 1980-2000 down to an average of 99 IPOs each year from 2001-2011 so opening up other alternatives for liquidity will de-risk the growing number of startup investments happening online.

This is yet another step towards reforming our capital markets. The first step was to enable access, and was addressed by Titles II, III & IV of the JOBS Act. So regardless of your opinion on this matter, the summer is shaping up to be an interesting time for equity crowdfunding investors, accredited and non-accredited alike.

SEC Busts Boca Raton For Unregistered Broker-Dealer Activity


The Securities and Exchange Commission said Tuesday that it has charged two firms with illegally brokering more than $79 million of investments from foreigners seeking U.S. residency through the government’s EB-5 Immigrant Investor Program.

The charges, the first against brokers handling investments in the EB-5 program, follow earlier SEC actions against fraudulent EB-5 offerings.

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Ireeco LLC, originally of Boca Raton, Florida, and its successor Ireeco Ltd., a Hong Kong-based company operating in the U.S., were charged with acting as unregistered brokers for 158 EB-5 investors. The EB-5 program, administered by the U.S. Citizenship and Immigration Services (USCIS), provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries, the SEC states. According to the SEC’s order, Ireeco LLC and Ireeco Ltd. used their website to solicit EB-5 investors, some of whom were already in the U.S. on a temporary visa.

The two companies offered to help potential EB-5 applicants choose the right regional centers. The centers paid the companies commissions of about $35,000 per investor once U.S. Citizenship and Immigration Services approved the green card petition, according to the SEC.

To read the full article by the South Florida Business Journal, click here. 

Rules on Foreign Finders Incorportated In Recent SEC Approval

China US Audits

The longstanding rules on foreign finders – when a brokerage firm can pay transaction-based compensation to a non-registered foreign finder – will be incorporated into new FINRA Rule 2040, effective August 24, 2015.

Rule 2040(c) replaces NASD Rule 1060(b) and NYSE Interpretation 345(a)(i)/03, and provides that a member firm and persons associated with a member firm may pay transaction related compensation to non-registered foreign finders where the finders’ sole involvement is the initial referral to the member firm of non-U.S. customers, and the member firm complies with all the conditions set forth in the rule.

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Based solely on its activities in compliance with Rule 2040(c), a foreign finder would not be considered an associated person of the member firm. However, unless otherwise permitted by the federal securities laws or FINRA rules, a person who receives commissions or other transaction-based compensation in connection with securities transactions generally has to be a registered broker-dealer or an appropriately registered associated person of a broker-dealer who is supervised by a broker-dealer. Member firms that engage foreign finders would be required to have reasonable procedures that appropriately address the limited scope of activities permissible under such arrangements.

Where an arrangement with a foreign individual goes beyond initial referrals, the member firm may register that individual as a foreign associate under NASD Rule 1100. Foreign associates must conduct all of their activities outside the US and cannot engage in any securities activities with US persons. Although deemed an associated person for whom a Form U4 must be filed, a foreign associate is not required to pass a qualifying examination. For arrangements with foreign groups whose activities for foreign customers go beyond the initial referral to the member, registration of a foreign branch may be an alternative. To the extent a foreign finder solicits or negotiates with US persons, entering into a 15a-6 agreement may be a viable alternative.

To read the full article, click here.


Morgan Stanley, Scottrade Settle Insufficient Supervisory Charges


The Financial Industry Regulatory Authority said Monday that it fined Morgan Stanley Smith Barney LLC and Scottrade Inc. a combined $950,000 for insufficient supervisory systems to monitor the transmittal of customer funds to third-party accounts.

Morgan Stanley was fined $650,000 after Finra found that, from October 2008 to June 2013, three registered representatives in two different branch offices converted a total of about $500,000 from 13 customers by creating fraudulent wire transfer orders and branch checks from the customers’ accounts to third-party accounts. Supervisory failures allowed the conversions to go undetected, Finra said.

Scottrade, which was fined $300,000, didn’t obtain customer confirmations for third-party wire transfers of between $200,000 and $500,000 from October 2011 to October 2013, according to Finra. The agency alleged Scottrade processed transfers totaling about $880 million during that period.

Morgan Stanley, which has around 16,000 brokers and advisers, and Scottrade, which has around 2,000 registered brokers, agreed to the sanctions without admitting or denying the charges.

A spokesman for Scottrade, Whitney Ellis, said in a statement that the firm has resolved the issue after updating its procedures in 2013 and improving the notification process for third-party transfers.

A representative for Scottrade said clients now receive multiple notifications of pending wire transfers, and the appropriate supervisory procedures are in place.