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Monday 29 December 2008
China Watchdog Tightens Guard on Rat Traders
Until now, many investors still consider turnover as the most important factor guiding investment decisions, as a stock’s swelling trading volume suggests that powerful institutions are the force behind and hence a safe bet.
CSRC turns attention to listed companies and big funds in ferreting out illegal accounts
Daniel Ren 29 December 2008
In a stock market long likened to a casino, price rigging has perversely pillared the rapid development of the mainland securities industry.
The seedier practice of insider trading, which mainland retail equity investors commonly scorn and attribute to the greed of market manipulators, has also reared its head because of the inadequate regulatory and legal framework. It is likely to plague the market for a while to come.
For most of the year and in the months to come, the China Securities Regulatory Commission has tried and will attempt to hone its image as a responsible watchdog determined to safeguard retail investors’ interests amid a downward spiral in the Shanghai and Shenzhen stock markets.
However, officials are unlikely to weed out the irregularities because deeply entrenched insider trading, especially the “rat trade” accounts, will continue to play havoc on the embattled stock exchanges. Nor does it help that the mainland’s monitoring system focuses on institutions but unwittingly allows small-time manipulators to slip through the cracks.
According to two fund managers, “rat accounts” - brokerage accounts that are opened by persons affiliated with a fund manager - are rampant and a black hole that remains beyond the regulator’s reach.
Beijing has reiterated it will continue next year to clamp down on insider trading, which has haunted the stock markets for nearly two decades.
The CSRC has built up a complete monitoring system to keep a close watch on trading details of institutions such as brokerages and fund houses. The exchanges are required to file daily trading data with the regulator, a practice that has mainly targeted institutional investors as only large, suspicious deals would be spotted.
The regulator wants to avoid a repeat of the downfall earlier this decade of China Southern Securities, which collapsed after embezzling clients’ deposits to bet on the volatile stock market.
“Supervision of the big funds has proved successful,” said a source close to the CSRC. “But the regulator has yet to improve its skills in uncovering rat trade accounts.”
The CSRC was now emphasising the importance of reining in listed companies in addition to the brokerages and fund houses, said deputy chairman Zhuang Xinyi, who added that the watchdog would continue to deal harshly with irregularities.
If the comments are any indication, they imply the regulator believes that the listed firms and the big funds are the only roots of the problem.
But analysts warn that the fund managers have displayed a voracious appetite for profits and rat accounts could be more threatening than regulators might have anticipated. To date, only two fund managers have been found to have committed insider trading through rat accounts.
“That is a far cry from reality,” said a Beijing-based fund manager. “Asset managers are now more cautious of rat accounts, but many still do it anyway.”
The CSRC said at the beginning of the year it would team up with the country’s law-enforcement ministries to clean up the market, heightening hopes among analysts and investors for a heavy blow on illegal practices.
Sources said the regulator had planned to disclose dozens of insider trading cases and impose severe punishments on those who left small investors burned.
Unfortunately, only a few cases have been unearthed amid the lack of an efficient supervisory and regulatory mechanism.
Top securities officials have reiterated the importance of tightened supervision to divert investors’ attention from the slumping indices, but with little success.
Investors attribute the bearish mood to the government’s inertia in stabilising the market despite a series of interventions including cutting stamp duty and streamlining buyback procedures.
Yet, ironically, battered by fears of the deepening global recession and eager to cash out, the same investors expect Beijing to implement a plan to introduce a huge bailout fund to bolster the market.
Beijing has been reluctant to take such a significant step because of what sources said was a shortage of capital to replenish the mammoth fund.
At this point, the regulator hoped to restore investor confidence by taking a makeshift approach and the dictum of regulation as a savvy move to ensure the market’s long-term healthy development.
CSRC chairman Shang Fulin insisted the regulator was committed to building a comprehensive regulatory framework and ensuring transparency, and to reinforce it, the watchdog punished a host of law-bending investors and corporate executives this year.
Zhai Xiang, a deputy director at Shenzhen Tellus Holding, was fined 30,000 yuan (HK$33,951) early this month for insider dealing, although he lost money in the transaction. His penalty was seen as a sign the CSRC would hit unethical investors hard, but analysts said it was not enough warning to market manipulators.
“The cunning market manipulators are actually not easy to beat,” said Haitong Securities analyst Zhang Qi. “They have a bag of tricks to make good money, taking advantage of legal loopholes.”
Besides, the CSRC is in a dilemma because of the poor market conditions, wary of exacerbating sentiment.
The regulators have yet to unveil the secrecy surrounding the mysterious individual investor Liu Fang. But investors have conveniently concluded the most successful retail investor had connections with embattled Gome chief Wong Kwong-yu, who was alleged to have manipulated the share prices of several stocks.
Liu’s success story was the talk of the town last year, when the public learned that he had earned more than 100 million yuan from stock trading. Later revealed by China Central Television to be a taxi driver, Liu was always ahead of the curve, buying shares at bargain prices and cashing out later when the companies announced revamps to improve earnings.
In one example, he bought millions of shares of loss-making Shandong Jintai Group at 4 yuan each early last year. The shares soared to more than 26 yuan in July.
Mr. Wong, accused by the CSRC of having manipulated the prices of A-share firms Centergate and San Lian Commerce through Beijing Pengrun Investment, was also reported by the mainland press to be involved in rigging Jintai’s share price.
Over the years, dozens of notorious insider trading scandals have rocked the market, but investors still doubted the regulator’s clean-up efforts.
In 2000, Caijing magazine dealt investors a wake-up call in a revealing article based on a Shanghai Stock Exchange report detailing mutual funds’ price-rigging behaviour. A raft of scandals was exposed, leading to a market collapse as investors realised that one way or another they were victims of insider trading.
“The government should mobilise the masses of retail investors to help spot suspicious trades,” said Liu Chunquan, a lawyer at Guangsheng & Partners law firm.
“No transparency and fairness can be achieved in the market without granting the millions of small investors the right to seek compensation for their losses.”
In China, regulators have a penchant for loose regulation in a bear market to attract more capital inflows, given investors’ perception of the exchanges as a legal gambling venue where fortunes can be made overnight.
Powerful institutional and corporate investors normally pre-empt small players from buying stocks at relatively low prices. Under government directives, they spearhead the move to bid up stock prices, and retail investors follow suit.
Retail investors also view the big funds as zhuang - the powerful gambler holding the upper hand. Despite such awareness, retail investors still follow the lead and commonly fall into the big gamblers’ trap.
Excessive speculation dominated the market last year as millions of unseasoned individual investors flocked to the exchanges, snapping up shares regardless of their sky-high valuations.
Mindful of the devastating impact, the Shanghai and Shenzhen bourses suspended the trading of a few warrants several times last year, warning buyers of severe losses as they blindly bid up prices of the derivatives whose value was almost zero.
But old habits die hard.
Mainland investors are by and large inclined to chase short-term gains, betting on the market trend and individual stocks while ignoring the valuation of their purchases. Their preference bodes well for a batch of funds that take advantage of insider information to get investors short-changed.
Until now, many investors still consider turnover as the most important factor guiding investment decisions, as a stock’s swelling trading volume suggests that powerful institutions are the force behind and hence a safe bet.
Combined daily turnover a year ago could reach 200 billion yuan as funds swamped the market. Trading value has since dwindled dramatically, with daily turnover this year reduced to as little as 20 billion yuan.
Retail investors stuck with paper losses are now resigned to waiting for the next strong rally, “though it will be another three or five years before the next blowout shapes up”.
“In China, it’s quite unlikely that you can change the mindset of investors because they still believe that insider trading can provide them a chance to make money,” said West China Securities trader Wei Wei. “In this market, liquidity is often tied to profiteering. In many cases, speculative money flows in amid expectations for quick money.”
1 comment:
China Watchdog Tightens Guard on Rat Traders
CSRC turns attention to listed companies and big funds in ferreting out illegal accounts
Daniel Ren
29 December 2008
In a stock market long likened to a casino, price rigging has perversely pillared the rapid development of the mainland securities industry.
The seedier practice of insider trading, which mainland retail equity investors commonly scorn and attribute to the greed of market manipulators, has also reared its head because of the inadequate regulatory and legal framework. It is likely to plague the market for a while to come.
For most of the year and in the months to come, the China Securities Regulatory Commission has tried and will attempt to hone its image as a responsible watchdog determined to safeguard retail investors’ interests amid a downward spiral in the Shanghai and Shenzhen stock markets.
However, officials are unlikely to weed out the irregularities because deeply entrenched insider trading, especially the “rat trade” accounts, will continue to play havoc on the embattled stock exchanges. Nor does it help that the mainland’s monitoring system focuses on institutions but unwittingly allows small-time manipulators to slip through the cracks.
According to two fund managers, “rat accounts” - brokerage accounts that are opened by persons affiliated with a fund manager - are rampant and a black hole that remains beyond the regulator’s reach.
Beijing has reiterated it will continue next year to clamp down on insider trading, which has haunted the stock markets for nearly two decades.
The CSRC has built up a complete monitoring system to keep a close watch on trading details of institutions such as brokerages and fund houses. The exchanges are required to file daily trading data with the regulator, a practice that has mainly targeted institutional investors as only large, suspicious deals would be spotted.
The regulator wants to avoid a repeat of the downfall earlier this decade of China Southern Securities, which collapsed after embezzling clients’ deposits to bet on the volatile stock market.
“Supervision of the big funds has proved successful,” said a source close to the CSRC. “But the regulator has yet to improve its skills in uncovering rat trade accounts.”
The CSRC was now emphasising the importance of reining in listed companies in addition to the brokerages and fund houses, said deputy chairman Zhuang Xinyi, who added that the watchdog would continue to deal harshly with irregularities.
If the comments are any indication, they imply the regulator believes that the listed firms and the big funds are the only roots of the problem.
But analysts warn that the fund managers have displayed a voracious appetite for profits and rat accounts could be more threatening than regulators might have anticipated. To date, only two fund managers have been found to have committed insider trading through rat accounts.
“That is a far cry from reality,” said a Beijing-based fund manager. “Asset managers are now more cautious of rat accounts, but many still do it anyway.”
The CSRC said at the beginning of the year it would team up with the country’s law-enforcement ministries to clean up the market, heightening hopes among analysts and investors for a heavy blow on illegal practices.
Sources said the regulator had planned to disclose dozens of insider trading cases and impose severe punishments on those who left small investors burned.
Unfortunately, only a few cases have been unearthed amid the lack of an efficient supervisory and regulatory mechanism.
Top securities officials have reiterated the importance of tightened supervision to divert investors’ attention from the slumping indices, but with little success.
Investors attribute the bearish mood to the government’s inertia in stabilising the market despite a series of interventions including cutting stamp duty and streamlining buyback procedures.
Yet, ironically, battered by fears of the deepening global recession and eager to cash out, the same investors expect Beijing to implement a plan to introduce a huge bailout fund to bolster the market.
Beijing has been reluctant to take such a significant step because of what sources said was a shortage of capital to replenish the mammoth fund.
At this point, the regulator hoped to restore investor confidence by taking a makeshift approach and the dictum of regulation as a savvy move to ensure the market’s long-term healthy development.
CSRC chairman Shang Fulin insisted the regulator was committed to building a comprehensive regulatory framework and ensuring transparency, and to reinforce it, the watchdog punished a host of law-bending investors and corporate executives this year.
Zhai Xiang, a deputy director at Shenzhen Tellus Holding, was fined 30,000 yuan (HK$33,951) early this month for insider dealing, although he lost money in the transaction. His penalty was seen as a sign the CSRC would hit unethical investors hard, but analysts said it was not enough warning to market manipulators.
“The cunning market manipulators are actually not easy to beat,” said Haitong Securities analyst Zhang Qi. “They have a bag of tricks to make good money, taking advantage of legal loopholes.”
Besides, the CSRC is in a dilemma because of the poor market conditions, wary of exacerbating sentiment.
The regulators have yet to unveil the secrecy surrounding the mysterious individual investor Liu Fang. But investors have conveniently concluded the most successful retail investor had connections with embattled Gome chief Wong Kwong-yu, who was alleged to have manipulated the share prices of several stocks.
Liu’s success story was the talk of the town last year, when the public learned that he had earned more than 100 million yuan from stock trading. Later revealed by China Central Television to be a taxi driver, Liu was always ahead of the curve, buying shares at bargain prices and cashing out later when the companies announced revamps to improve earnings.
In one example, he bought millions of shares of loss-making Shandong Jintai Group at 4 yuan each early last year. The shares soared to more than 26 yuan in July.
Mr. Wong, accused by the CSRC of having manipulated the prices of A-share firms Centergate and San Lian Commerce through Beijing Pengrun Investment, was also reported by the mainland press to be involved in rigging Jintai’s share price.
Over the years, dozens of notorious insider trading scandals have rocked the market, but investors still doubted the regulator’s clean-up efforts.
In 2000, Caijing magazine dealt investors a wake-up call in a revealing article based on a Shanghai Stock Exchange report detailing mutual funds’ price-rigging behaviour. A raft of scandals was exposed, leading to a market collapse as investors realised that one way or another they were victims of insider trading.
“The government should mobilise the masses of retail investors to help spot suspicious trades,” said Liu Chunquan, a lawyer at Guangsheng & Partners law firm.
“No transparency and fairness can be achieved in the market without granting the millions of small investors the right to seek compensation for their losses.”
In China, regulators have a penchant for loose regulation in a bear market to attract more capital inflows, given investors’ perception of the exchanges as a legal gambling venue where fortunes can be made overnight.
Powerful institutional and corporate investors normally pre-empt small players from buying stocks at relatively low prices. Under government directives, they spearhead the move to bid up stock prices, and retail investors follow suit.
Retail investors also view the big funds as zhuang - the powerful gambler holding the upper hand. Despite such awareness, retail investors still follow the lead and commonly fall into the big gamblers’ trap.
Excessive speculation dominated the market last year as millions of unseasoned individual investors flocked to the exchanges, snapping up shares regardless of their sky-high valuations.
Mindful of the devastating impact, the Shanghai and Shenzhen bourses suspended the trading of a few warrants several times last year, warning buyers of severe losses as they blindly bid up prices of the derivatives whose value was almost zero.
But old habits die hard.
Mainland investors are by and large inclined to chase short-term gains, betting on the market trend and individual stocks while ignoring the valuation of their purchases. Their preference bodes well for a batch of funds that take advantage of insider information to get investors short-changed.
Until now, many investors still consider turnover as the most important factor guiding investment decisions, as a stock’s swelling trading volume suggests that powerful institutions are the force behind and hence a safe bet.
Combined daily turnover a year ago could reach 200 billion yuan as funds swamped the market. Trading value has since dwindled dramatically, with daily turnover this year reduced to as little as 20 billion yuan.
Retail investors stuck with paper losses are now resigned to waiting for the next strong rally, “though it will be another three or five years before the next blowout shapes up”.
“In China, it’s quite unlikely that you can change the mindset of investors because they still believe that insider trading can provide them a chance to make money,” said West China Securities trader Wei Wei. “In this market, liquidity is often tied to profiteering. In many cases, speculative money flows in amid expectations for quick money.”
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