FEATURE: Regulator pledges crackdown on stock manipulators
.c Kyodo News Service
BEIJING, Jan. 20 (Kyodo) - By: Geoffrey Murray China's securities regulators have finally declared war on stock market tampering, which threatens to damage investor confidence.
Officials now admit that the stock markets, which outperformed the rest of Asia's bourses in 2000, are seriously undermined by speculation, insider trading and price manipulation.
Zhou Xiaochuan, chairman of the China Securities Regulatory Commission (CSRC), pledged at a national conference the authority would crack down on all irregularities ''to build up a healthy stock market and pave the way for more economic reforms.''
Zhou said a new supervisory framework to monitor operations of securities houses has been established to allow oversight of trading, brokering and management of accounts within firms.
The new controls are also thought to include electronic tracking and surveillance systems to reduce currency fraud and insider trading.
Security house executives will face ''tougher treatment'' for involvement in market manipulation, although no specifics have been revealed. To prevent fraud in asset restructuring, the commission is drafting a temporary regulation on takeovers of listed firms.
Speaking at the same national seminar on the future of the banking, securities and insurance industries, Premier Zhu Rongji launched a broadside at mismanagement and corruption lurking just beneath the surface of China's growing financial markets.
He said serious violations should lead to closure of financial institutions and confiscation of their licenses.
The CSRC disclosed recently that in the past two years it had uncovered 40 cases of illegal activity involving securities institutions, while in the past year more than 1,000 people had lodged complaints against brokers.
Zhu cautioned officials at the CSRC, the People's Bank of China, and the China Insurance Regulatory Commission that dereliction of duty would not be tolerated and officials could lose their jobs.
Financial and monetary stability are crucial to reform of the country's lumbering state economy. Much is riding on the continued ability of the government to turn to the country's stock markets to help transform its own debt-ridden enterprises into shareholding companies to overcome their capital shortages.
How serious is the problem?
The Shanghai Securities News has reported more than a dozen listed companies whose stock prices shot up to abnormally high levels due to alleged manipulation had nose-dived as fears of the crackdown emerged and shareholders scuttled to get rid of the evidence.
There have been growing calls for greater protection of investor rights, stemming from several high-profile cases of troubled listed companies that were under investigation for possible illegal activities linked to their listing and financial disclosure.
They included heavily indebted retailer Zhengzhou Baiwen -- bailed out by the central government, but on the brink of being the first publicly traded company to be delisted from a Chinese bourse.
Two years ago, Shanghai-listed telephone component firm Chengdu Hongguang Industrial supplied false information to gain listing.
Two of the most high profile cases involve Yian Technology and Zhongke Chuangye. The prices of shares in the two companies both headed for the stratosphere towards the end of 1999, but, last year, when CSRC investigators began to sniff around, the prices collapse in panic selling that threatened the very survival of the markets.
Many people were shocked by the fall; none more than government officials who realized that had the irregularities at Zhongke and Yian not surfaced, the market could have faced genuine catastrophe.
Investigations suggest the speculation in Yian involved a major securities brokerage in Shanghai that used its own funds, while speculators in Zhongke had allegedly obtained funds illegally, putting up stock as collateral.
According to a leaked report from the Shanghai Stock Exchange, much of China's recent bull market may very well have been faked.
Contents of the report appeared in the Caijing Zazhi (Finance Magazine), a well-respected monthly financial journal with ties to the Stock Exchange Executive Council, a state-backed think tank.
The report cited widespread examples of collusion on prices, volume and timing of sales, all-cash payments to eliminate paper trails, old-fashioned insider trading -- even secret meetings in bathhouses to ensure no one was wearing a wire -- and various other means of deceiving investors and bending prices up and down.
One of the most common practices was said to be buying and selling of holdings, known as churning on Wall Street, and creating the illusion of high volume where little or no real volume exists.
Any institution discovered churning its own holdings to create fake volume as bait to attract buyers can already be charged with market manipulation under existing Chinese securities law. Penalties can include five years behind bars and a very stiff fine.
The report documented several periods in which unscrupulous activities were carefully monitored. During the 80 trading days from Aug. 9 to Dec. 3, 1999, investigators discovered one fund-management company had manipulated 76 separate stocks through various funds.
During the same period, a fund was caught buying and selling seven of its own stocks. Two different funds operated by the same management company were discovered buying and selling 11 different stocks in each other's holdings.
The country's 10 leading fund managers quickly issued a strong denial, saying their trading was transparent and protected investors.
The timing of the report is sensitive, however, as the government is preparing to give the fund management industry a more influential role in China's stock markets.
It recently issued guidelines on the operation of open-ended funds, a new financial instrument in China.
China's estimated 52 million individual investors dominate the domestic markets. The 10 fund management companies occupy only 11%.
AP-NY-01-19-01 2129EST |
