Chinese insider-trading scandal stalls LSE sale

The giant Chinese brokerage that was front-runner to buy the London Stock Exchange’s Russell asset management company is engulfed in scandal, giving investors yet more reasons to fear the state of the world’s second-biggest economy.

Reports said a preliminary investigation into Citic Securities – China’s biggest broker – found evidence it engaged in insider trading during the Beijing government’s interventions to rescue its nosediving stock market over the summer.

According to Bloomberg reports, government investigators suspect Citic used advance knowledge of the government’s plan to buy shares in order to execute trades that benefited the company. Citic was one of the brokerages drafted in to help the government make the trades.

News of the allegations made it ever less likely that the LSE would succeed imminently in selling Russell’s fund management business. The Stock Exchange inherited the fund management operation with last year’s $2.7bn (£1.8bn) takeover of Russell Investments, primarily a compiler of investment indices, and put it up for sale for about $1.5bn in February.

The latest Chinese investment scandal emerged just a day after one of the country’s star fund managers, Ye Fei, was fined about $3m for what the authorities called stock market manipulation.

China has reacted to the crash in the market since June with wide-ranging inquiries into alleged corrupt practices, particularly targeting short-sellers who have profited from the slide. Meanwhile, signs that China’s economic growth is falling towards levels more normal for advanced economies continue to appear. The turn was the Markit Economics’ September tally of China’s manufacturing output, which fell to its lowest level in six and a half years

Speaking on his state visit to the US, Chinese President Xi Jinping said his country’s economy would “stay on a steady course with fairly fast growth.”

He defended the state intervention into the stock market and said it had now reached “a phase of self-recovery”.