The Economist - USA (2021-02-06)

60 Finance & economics The EconomistFebruary 6th 2021

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W

henmatthewearlfirstcalledthe

whistleblowerhotlineofBaFin,Ger-

many’sfinancialregulator,toreportsuspi-

ciousbusinesspracticesatWirecard,the

personwhopickedupthephonesaidhe

couldnotunderstandEnglishwellenough.

The London-basedshort-seller, who co-

wrotea reportin 2016 allegingfraudatthe

payment-processingcompanyandbetona

fallinitsshareprice,rangagain.Hisre-

spondentsimplyhungup.“ThatiswhenI

gaveup,”MrEarltolda parliamentaryin-

quiryintotheregulatoryfailingsthatal-

lowedtheWirecarddisastertohappen.

BaFinhasbeenthetargetofcriticism

eversincethespectacularcollapseofWire-

cardinJune2020,whichfollowedtheBa-

variancompany’s admission that€1.9bn

($2.1bn)offunds,nearlya quarterofitsbal-

ance-sheet,“probably donotexist”. Olaf

Scholz,thefinanceminister,ditheredover

holding the bosses of the regulator ac-

countable,aswellasovertheannounce-

mentofchangestoGermany’spiecemeal

systemoffinancialregulation.Theemer-

genceofallegationsofinsidertradingin

Wirecardsharesbya BaFinemployeewas

thelaststraw.OnJanuary29thMrScholz

firedFelixHufeld,thebossofBaFin,and

Elisabeth Roegele, Mr Hufeld’s deputy.

Fourdayslaterhepresentedhisplansfora

regulator“withmorebite”that,hesays,

canbeasgoodasthebestintheworld.

Mr Scholz’s seven-point roadmap,

which Roland Berger, a consultancy,

helpedtodraft,containssnazzyAnglo-Sax-

onjargon,suchas “data-intelligenceunit”.

BERLIN

...Germany’sfinanceministerplansto

overhaulitsdiscreditedwatchdog

Wirecard

After monthsof

dithering...

Scholz reflects on Wirecard

T

he55-kilometreHong Kong-Zhuhai-

Macau bridge is a quick drive but a tech-

nical challenge. The trip requires motorists

to buy insurance in three jurisdictions.

Those making the jaunt from Hong Kong to

Macau must still buy a Chinese policy, be-

cause the waters below the bridge belong to

the mainland. Traffic is low.

Such are the barriers to movement in

and out of China. For most people, attempt-

ing to shift money between China and the

territories can be even more frustrating.

For many years insurance products sold in

Hong Kong created a bustling business

whereby rich customers from the main-

land bought policies worth hundreds of

thousandsofdollarsusingChinesecredit

cards,onlytolatercashthemoutinHong

Kongdollars.In Macau,plastic watches

oncesoldfor$10,000.Uponswipingtheir

Chinesecards,buyersreceivedthetawdry

timepiecealongwitha stackofdollars.

China’sregulatorshavesoughttocrush

theseschemes,waryofoutflowsofcapital

fromthecountry.Yettheyhavealsoac-

knowledgedtheveryrealdemandforover-

seasinvestments.Aseriesofreformshave

beenlaunchedoverthepasttwodecadesto

constructa closelymonitoredregimefor

cross-borderinvestments,mostlycatering

toinstitutionalinvestors.StockConnect,

whichsince 2014 hasallowedChinesein-

vestorstobuysharesinHongKong,helped

make theterritory theworld’s best-per-

forming major stockmarket in January.

Money from the mainland poured into

stockssuchas smic and ChinaMobile,

whichhavebeen,orfacebeing,delisted

fromtheNewYorkStockExchange,and

havebeenremovedfromsomemsciindi-

ces. Buytrades fromShanghai to Hong

KonghitHK$423bn($55bn)inJanuary,up

by155%fromDecember.China’sretailin-

vestorsplayeda significantroleintherally.

In comingweeks regulators inHong

KongandChinawilltakeanotherstepto-

wards opening up, with an investment

channelcalledWealthManagementCon-

nect.Thiswillallowrichindividualstobuy

unlisted investment products in Hong

Kong,openinganewworldof assetsto

thosewhoqualify.Butratherlikecrossing

thebridgebetweenthejurisdictions,the

technicaldetailsoftheplanareonerous.

Fora start,theschemewillbeopenonly

topeoplelivingintheGreaterBayArea,a

regionofabout72mpeopleinHongKong,

Macauand muchof China’sGuangdong

province. To use the channel,investors

mustopenanaccountata bankinChina

andthentraveltoHongKongtoopena sep-

arateaccountinperson—adifficulttask

duringthecovid-19pandemic.Theinvest-

mentsize,at1myuan($155,000)a year,will

beratherlimitedforChina’swealthypunt-

ers. The overall programme is to be restrict-

ed to 150bn yuan ($23bn) a year, a drop in

the ocean next to China’s $3.2trn in for-

eign-exchange reserves.

The design of Wealth Management Con-

nect underlines Beijing’s desire for unwa-

vering control over its capital account even

as it ever so gradually opens up. Much like

Stock Connect, the new scheme will oper-

ate in a closed loop that does not allow con-

vertibility beyond the target investments.

Cashing out can be done in yuan only. Pro-

ceeds must be sent back to the mainland.

“Regulators are still very cautious on capi-

tal outflows,” says a partner at a large ac-

counting firm. Whether such limited expo-

sure to offshore assets replaces the

demand for pricey plastic watches in Ma-

cau remains to be seen. 7

HONG KONG

Mainland investors’ access to foreign

assets expands—a bit

China’scapitaloutflows

Bordercrossings

changes, matching trades in microsec-

onds. Though they take orders from all

sorts of institutions, including hedge

funds and pension funds, they typically

only pay for orders from retail brokers.

That in itself is not necessarily suspi-

cious: marketmakers regard retail order

flow as “friendly”. Institutions might “run

over” a marketmaker by placing orders in

several places simultaneously, or place an

“iceberg” order, one much larger than it

first appears. Both strategies make it hard

for the marketmaker to profit on trades. Re-

tail orders carry no such risk.

Much of the scrutiny, though, is likely

to rest on Robinhood. The online broker

earns a lot more from marketmakers than

its peers do. This is because it charges

more: for every 100 shares Robinhood’s us-

ers traded in companies listed in the s&p

500 in the fourth quarter of 2020, it collect-

ed an average of 41.8 cents from market-

makers. Charles Schwab, by contrast, col-

lected just 11.7 cents.

Robinhood has been in trouble with

regulators before. In December the Securi-

ties and Exchange Commission told it off

for not telling users it made money from

pfof. The commission also found the bro-

ker failed in its duty to execute users’ trades

at the best possible price. Robinhood paid

$65m to settle the charges. (It has said the

fine relates to historical practices.)

Mr Tenev is due to testify in front of the

House Financial Services Committee on

February 18th. The subject of pfof will in-

evitably come up. As its share price tum-

bles, GameStop’s time in the spotlight may

soon be over. For Robinhood and pfof,

though, this is perhaps just the start. 7

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