Tech-focused investment bank China Renaissance Holdings (HK:1911) has provided an update on the whereabouts of its missing CEO and top shareholder, financier Bao Fan, confirming that he is "cooperating in an investigation" -- but doing little to reassure investors about the Chinese tech sector, as China's stock rally loses its legs.
Beijing-based China Renaissance issued a statement late on Sunday that the company's board has been trying to locate Bao, and has "become aware" that he is "currently cooperating in an investigation being carried out by certain authorities in the People's Republic of China."
Bao is a top dealmaker in the tech sector. The company says it will "duly cooperate and assist with any lawful request from the relevant PRC authorities, if and when made." That raises the prospect that the investigation involves companies that it has helped fund or go public. China Renaissance gave no further details, with the company saying it is "continuing to operate its business as normal."
The statement confirms what we had suspected after China Renaissance first reported Bao missing late on February 16. As I explained at the time, listed Chinese companies that say they have been "unable to contact" their top executives normally mean that they've been detained for questioning.
It does not necessarily mean that they are the subject of the investigation. Financier Xiao Jianhua was not seen for more than five years after he was detained in 2017 by Chinese secret police at the Four Seasons hotel in Hong Kong, only reappearing across the border at his trial and graft conviction last August. But top executives at the conglomerate Fosun International (HK:0656) (FOSUY) as well as the investment bank and brokerage Guotai Junan Securities (HK:2611) (GJJSY) vanished before returning to their duties, with both companies confirming they'd taken part in an investigation.
Reuters reports that the authorities took Bao away to help in the investigation into Cong Lin, the former president of China Renaissance. It cites sources with "knowledge of the matter" who cannot be identified due to the topic's sensitivity.
China Renaissance has underwritten stock offerings for the likes of e-commerce market champions JD.com (JD) (HK:9618) and Pinduoduo (PDD) . It portrays itself as "empowering China's smart economy." The company has its fingers in all the finance pies, as a private-equity investor, securities brokerage, wealth manager and investment bank.
Bao founded the company in 2005 with Xie Yi-jing, both having worked for Credit Suisse (CS) . Bao's background in helping Chinese tech companies raise capital saw him advise on mergers such as the deals that led to the formation of what's now the ride-hailing market leader Didi Global (DIDIY) , and the grocery-delivery app Meituan (HK:3690) (MPNGY) .
Bao controls 49.4% of China Renaissance shares. The stock fell as much as 50% to a record low after the company first reported him missing, but rose 2.1% Monday after last night's statement, on a day that Chinese markets lost ground.
"At least we have some idea what's going on," seems to be today's reaction from traders. However, the fact that the top dog at China Renaissance has been called in for questioning rings an alarm bell, given the investment bank's prominence in helping Chinese tech companies list abroad.
Following the cancellation of Ant Group's listing in November 2020, all of China's Big Tech players came under attack from the Chinese Communist Party and President Xi Jinping, suffering a series of regulatory penalties and fines. The message was clear, just in case the power that major Chinese tech companies can wield was going to the heads of their billionaire founders: "Don't forget who's really in charge."
But it seemed that period of correction was over. With China's economy struggling, the Chinese Communist Party had eased off, and appeared once again to be courting the private sector.
However, we can expect all the tech deals currently under way at China Renaissance to hit pause, given the unknown nature of the investigation. That could disrupt international listings. Financiers say it would complicate matters if past deals that it has worked on are called into question, while state-owned banks are reportedly cross-checking their lending exposure to the investment bank.
Geopolitical tensions, meanwhile, have disrupted the rapid rally in Chinese stocks, while the economic recovery is proving patchy. Recent data show the services sector has bounced back quickly, and manufacturers have resumed the slow process of cranking up production after the Lunar New Year. But car sales and home purchases remain very slow, demonstrating weak long-term consumer confidence. Softening overseas demand likely caused exports to contract 10.0% year-on-year for the January-February period, according to Nomura, slightly worse than the 9.9% reading for December, hurting prospects for big goods producers.
The Chinese equity markets bottomed in October. That fed into a furious rally as shares that had been depressed by the country's disruptive zero-Covid policy suddenly started responding as "opening-up" plays. China suddenly scrapped its Covid restrictions in early December, causing traders to purchase beaten-down stocks. Having overrun the pace of recovery, they appear to have now paused that buying spree.
"We expect the deceleration in the U.S. and Europe to exceed the acceleration in China," the Standard & Poor's economics team write in their 2023 Asia-Pacific outlook. The China rebound cannot offset the slowdown in the West, they conclude.
Hong Kong's Hang Seng Index, the easiest China-focused market for international investors to access, rallied 54.4% in the two months through January 27. For mainland markets, which are off-limits to international players except via strict quotas, the CSI 300 Index of the largest listings in Shanghai and Shenzhen ran up 19.7% through its peak on January 30.
That rally has now lost its way. The Hang Seng is down 12.1% since that January 27 peak, and the CSI 300 mainland index is off 3.7%.
Macro trends will drive the indexes. But investors into China, normally favoring tech purchases, would do well to watch the outcome of the Bao investigation. It would spell trouble ahead, and a potential resumption of the Big Tech crackdown, if authorities are scrutinizing tech dealmaking rather than a personal issue.
