Moves by China’s State Council to crack down on the cancerous spread of insider trading in the domestic stock market have been welcomed as a long-overdue step forward.
It is widely acknowledged, even within official circles, that insider trading has become commonplace in China, with the practice blamed for causing sharp spikes in volatility that have hurt millions of retail investors.
The market has witnessed sharp price gains among small-cap stocks recently, with Li Xunlei, chief economist from Guotai Junan Securities, suggesting that manipulation cannot be ruled out.
One Guangzhou-based fund manager, who preferred to remain anonymous, claims private funds regularly collaborate with securities brokers and listed companies to manipulate prices. He points to greed as a root cause, cultivated by poor corporate governance and insufficient regulation.
“Sometimes there won’t be an immediate improvement in a company’s performance,” he says. “But they create stories and release market-driving news, which cause the stock price to surge.”
The punishments for insider trading are largely symbolic at present, with the China Securities & Regulatory Commission (CSRC) levying fines that are a fraction of the sums assumed to be generated by insider traders.
At a press conference on November 18, a CSRC official admitted that the long chain of decision-makers with access to confidential information, combined with poor management and a flawed regulatory system, had contributed to an increase in the illegal practice.
“The effort to crack down on insider trading in the country’s capital markets is fraught with difficulty as it has become more hidden and complex,” translates a statement on the State Council’s website.
But last week the council, the highest executive organ of China’s state power, pledged to introduce new measures to crack down on this recent ramp-up in illegal trading activity.
The council is seeking to tighten and formalise the rules governing confidentiality of information on listed companies, increasing scrutiny of government officials with access to such information.
It says it is also reviewing the scope of, and procedures for handling, non-public information and is looking to overhaul the mechanism for accountability.
As a result, the council has called for new regulations to be introduced as a priority, requiring firms to specify personnel responsible for handling insider information, while those with access to this information will be asked to register with a regulatory body. No time schedule has officially been given.
These new measures will require the collaboration of multiple government agencies: the CSRC, the Ministry of Public Security, the Ministry of Supervision and the State-owned Assets Supervision and Administration Commission.
The Guangzhou-based fund manager welcomes these latest moves as long overdue but good for the market’s future health. “For retail investors, they will learn that paying too much attention to information flow but neglecting company fundamentals will not work in the long run,” he says.
“For fund managers, it is a good reminder that managing the assets of retail and institutional investors in a fair and transparent manner is their fiduciary duty.”
Li Daxiao, head of research at Yingda Securities, notes that while crackdowns have been pledged in the past, the involvement of various government agencies this time around should ensure the process has a broader impact.
He believes the new measures are a step in the right direction towards the goal of building a fair and healthy market environment, although he expects changes to be introduced gradually.
The CSRC has investigated 295 cases of insider trading since 2008, accounting for 45% of all investigations over the period. In the 10 months to the end of October this year there have been 100 informal investigations (74 insider trading cases) and 88 formally filed cases (42).