FUND RAISING: Equity Whale Snagged, Jin Jiang Cleans House

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Bottom line: The arrest of a leading private equity executive for insider trading and Jin Jiang’s new fund-raising represent the latest efforts to clean up China’s unruly stock markets and make them more attractive to international investors.

Private equity giant detained for insider trading

I don’t normally write too much about China’s domestic stock markets due to their chaotic nature, but a couple of news items are shining a spotlight on the ongoing major task of cleaning up these unruly venues as they try to become more international. The larger of the 2 stories is making big waves here in China, where the one of the nation’s best-known private equity chiefs has been detained for insider trading. The second item has recently acquisitive hotel operator Jin Jiang (HKEx: 2006; Shanghai: 600574) preparing for a major new fund raising, as it tries to clean up its own financial house in a bid to become China’s first global hotel operator.

Each of these items is quite different, though both are focused on different aspects of cleaning up a domestic stock market that often seems more like the Wild West than a place for serious investors. Share price manipulation is common practice in the market, which is reflected in the insider trading story. The Jin Jiang story reflects the murky relationships that often exist between listed companies and government entities, making it nearly impossible for serious investors to clearly understand a company’s financial health.

Among those 2 issues, the surprise detention of Xu Xiang, head of private equity giant Zexi Investment, was aimed at the huge group of people who routinely engage in share price manipulation. Reports on Xu’s arrest come from the official Xinhua news agency, often considered the mouthpiece of Beijing, and say he was detained on suspicion of insider trading. (Chinese article) They also feature a photo of Xu being led away in handcuffs, an image that will send a strong message to the many people who now engage in similar practices.

Xu’s detention is an offshoot of a much larger anti-corruption campaign being waged by China President Xi Jinping, aimed at stamping out the rampant bribery and other abuses that regularly occur in government and big state-run companies. Xi has previously said his campaign is aimed at both the “tigers” and “flies” that are undermining China’s government and business establishments.

Xu’s arrest represents a new high point in a war being waged by China’s securities regulator, the China Securities Regulatory Commission (CSRC), against insider trading over the last year. This particular move was designed to gain maximum publicity, since it involved such a famous name and was announced very late on Sunday, making sure it would dominate the headlines in the Monday news cycle. I have to broadly commend the CSRC for the move, though it still has lots of work to do before international investors will start to take China’s stock markets seriously.

Jin Jiang Shuffles Debtors

Next there’s the Jin Jiang news, which has the Shanghai-based hotel operator reportedly getting set to raise a hefty 4.5 billion yuan ($700 milllion) as part of a broader plan to clean up its capital structure. (Chinese article) The exercise will see Jin Jiang issue new China-traded A-shares to a number of major domestic investors, including Hony Capital, a unit of Lenovo parent Legend Holdings (HKEx: 3396). The reports say Jin Jiang will use the funds to repay debt to unspecified creditors.

Jin Jiang has recently embarked on a buying spree over the last year, spending billions of dollars on hotel assets both at home and in Europe. Most recently the company was also reportedly weighing a multibillion-dollar bid for US giant Starwood (NYSE: HOT), operator of the Sheraton and Westin brands. (previous post)

It’s a bit unclear where such a small company was suddenly finding so much cash to make all these bids, and I suspect much of it was coming from sources connected to the government and big state-run entities in its hometown of Shanghai. Accordingly, this new fund-raising exercise is probably designed to pay back some of that money and replace the debtors with more serious private equity investors. Such a move would make Jin Jiang look more like a real private company as it embarks on its global buying spree, helping it to eventually attract some more serious international investors.

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