China stock market seen as
insiders' playground By Zhou
Jiangong
SHANGHAI - China's ultra-bullish
stock market crossed a landmark last Friday
against the backdrop of the international
financial market turmoil triggered by the
subprime-mortgage crisis in the United States. But
the market is not short of irregularities that
could eventually undermine its healthy
development.
The Shanghai Composite Index
(SCI), gauging the performance of the A-share
market, closed at 5,107.67 points on Friday, after
two state-owned banks, the Industrial and
Commercial Bank of China
Ltd
and Bank of China, reported a year-on-year
increase in first-half profit after tax of more
than 50%.
Share prices kept rising on
Monday, with the SCI up 0.83% or 42.45 points to
close at a record 5,150. On Tuesday, the market
rose for the seventh straight trading day, with
the SCI gaining 45 points to edge toward 5,200.
The bull run has enabled the index to
surge more than 80% this year in the wake of
jumping about 130% in 2006. After the slump
triggered by the sudden tripling of the stamp tax
on the trading of stock on May 30, the new market
run-up was largely driven by the mid-year
financial report of listed companies.
Corresponding to the 40% profit margin of
enterprises released by the National Statistic
Bureau in July, a big army of listed companies,
especially big blue chips, have announced
extremely strong growth, easily over 50% or even
200% in the case of Air China, the country's
leading airline. But the market is not short of
false disclosures, insider trading and market
manipulation that could undermine the health of
the stock market.
Shanghai-listed Datang
Telecom Technology, a telecom-equipment maker
based in Beijing, announced on August 21 that it
had been fined 300,000 yuan (about US$39,500) by
the China Securities Regulatory Commission (CSRC),
China's stock-market watchdog, for including false
statistics in its 2004 annual report.
The
CSRC found 37.19 million yuan added to the
company's total profits in its 2004 annual report.
The false statistics helped Datang Telecom's
report profits of 62.4 million yuan for 2004. In
addition, the company's 2004 report did not
disclose how it calculated the value of its
inventory.
Before that, insider-trading
crimes surfaced. The former chief executive of
Guangdong Development Security Co (GDSC), one of
China's top 10 brokerages, based in Guangdong
province, was arrested for his brother's illegal
investment return of hundreds of thousands of yuan
made from alleged inside information provided by
the then-CEO.
GDSC planned to acquire
Yanbian Highway Construction Co, a Shenzhen-listed
firm based in Jilin province, northeastern China.
The acquisition caused Yanbian Highway's price to
soar 280% last October.
The CSRC has filed
nearly 200 cases annually for the past two years.
The number of informal investigations may be two
or three times this number. But the watchdog's
punishments are largely symbolic, levying fines
that are just a tiny portion of the amount made by
illegal trading.
Millions of individual
investors simply have no way to protect themselves
from false disclosure and insider trading as more
money floods into the Shanghai and Shenzhen stock
markets. The China Securities Depository and
Clearing Corp said more than 150,000 people opened
security accounts every day last month.
One thing that makes punishment difficult
is the fact that small shareholders cannot sue
those suspected of insider trading or of making
false reports, and even the CSRC often just sits
on its hands in terms of taking legal action
against some offenders.
China's regulatory
agency is different from the US Securities and
Exchange Commission (SEC). It is basically a
civil-law system depending on regulators instead
of courts, which is different from the US
common-law system.
The CSRC can do no more
than levy a maximum administrative fine of 400,000
yuan (about $50,000). Such low fines bear no
relation to the huge fortunes to be made in a
bullish market.
A recent case is Hangxiao
Steel Structure, a company listed in Shanghai that
is notorious for allegedly cutting a 31.34 billion
yuan construction deal with Angola. Hangxiao
Steel's stock price soared 30% in the three days
before the news was disclosed and jumped about
400% in the following 21 days.
Although
the authenticity of the contract is still under
investigation, some senior executives of the
company were fined by the CSRC for suspected
stock-price manipulation and insider trading. The
fine was merely 400,000 yuan, but some suspects
are believed to have made millions.
Compared with the CSRC, the SEC is much
more severe and effective. There are two main
types of fines in the United States. One type
comes from civil proceedings, where the maximum
penalty cannot exceed three times the amount of
the illegal profit. The other type is the SEC's
administrative fines, which are divided into three
levels. The most severe level has a maximum fine
of $100,000 for a person and $500,000 for a legal
entity.
In US cases, the parties involved
often reach a settlement with the SEC where
restitution and fines are paid to avoid lengthy
litigation. Certain entities need to make
restitution for illegal profits as well as make
civil compensation when their misconduct involves
many investors. The two amounts combined can be
enormous. In 2002, 10 Wall Street investment banks
handed over $1.4 billion.
"A case [in
China] may involve numerous unlawful acts, while
administrative enforcement of the Securities Act
considers only one aspect," Chen Shun, director of
inspections for the CSRC, told Caijing, a finance
magazine published in Beijing.
While the
CSRC can do nothing more than levy fines, the
Shanghai Stock Exchange has set new rules to
monitor insider trading. From September, stocks
jumping more than 100% or slumping 50% on the
first day of flotation will be stopped from
trading for a maximum period of 30 minutes.
Zhou Jiangong is a
Shanghai-based analyst on China's economic,
political and foreign affairs.
(Copyright 2007 Asia Times Online Ltd.
All rights reserved. Please contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
