China’s securities regulators should focus on sound oversight and tough discipline to protect, not merely stabilize, the market.
By Hu Shuli 31 May 2009
(Caijing Magazine) Three cases that came to light during the second week of May drew attention to regulatory efficiency and tight enforcement in the securities market. A former president of China Galaxy Securities, Xiao Shiqing, was arrested May 13. That same day, Sinolink Securities (SSE: 600109) announced that its chairman, Lei Bo, had been placed under investigation. And a day later, Rongtong Fund Management booted fund manager Zhang Ye for suspected involvement in so-called “rat trading.”
On the surface, these cases seem unrelated. Each involves a different context. But deep down, each is connected to how regulatory agencies shoulder their responsibilities. And now, once again, concerns have been raised about regulatory oversight and regulatory capture.
The China Securities Regulatory Commission says that, between early 2008 and the end of March 2008, it conducted 68 informal investigations into possible insider trading and found enough evidence to open 38 cases. The commission also launched 29 informal investigations into possible market manipulation and eventually pursued 15. In addition, the commission transferred to public security agencies a total of 19 suspected criminal cases involving listed companies, insider trading and market manipulation.
Although this data gives some evidence of the commission’s stepped-up effort to fight misconduct, it should be noted that serious violations continue to occur. And the commission has failed to respond quickly. Investigations and exposure of these cases have lagged. As a result, many are dissatisfied and show less confidence in regulatory efficiency.
A Caijing reader who posted a message on our Web site about the arrest of Xiao reflected this dissatisfaction and anger. “Why was Xiao serving as president? He was also a party committee secretary, secretary of the discipline inspection commission, and legal representative (of Galaxy Securities). Corruption is prevalent.”
In fact, Xiao also served as a regulatory commission cadre dispatched to head Galaxy Securities. Before being nailed, an internal decision was made to return him to the commission for a position as deputy director of a division that regulates listed companies.
Similarly, Sinolink’s Lei once served as a deputy director with the regulatory commission. Obviously, Xiao’s assistance was a key factor in Sinolink’s ability to launch the first backdoor listing among Chinese securities firms. Moreover, both Xiao and Lei were trusted favorites of Wang Yi, a former commission vice chairman, and were implicated in the Wang Yi financial scandal that broke last year.
Even though the Xiao and Lei cases are closely related to the securities market, securities regulators have not released public explanations for what happened. Nor have they taken the initiative to announce the progress of relevant events surrounding the cases. At this point, the public has every reason to question the commission. Have regulators reviewed the cases and reflected on what went wrong?
Another focus of concern is the Rongtong case. Zhang was removed from his post just five days after being exposed by the media. But a full month passed before regulatory agencies made an announcement -- and labeled it “an isolated case.”
Zhang’s name was made public after a media campaign pushed for disclosure. But, as is typical, this investigation into accounts of alleged rat trading has been wrapped in a veil of mystery.
Similar cases of misconduct have surfaced as well. But significant cases have been shelved and left unresolved for long periods of time, prompting an increasing number of calls for stronger securities market regulation in China.
In recent years, during bull as well as bear markets, regulatory agencies have been focusing on the stock index and consistently pursued a goal of maintaining market stability. This has been a top priority, and it’s been in the regulators’ major interest. It seems nothing has mattered but a stable market.
As a result, piles of files for major cases that matter to investors gather dust, with resolutions nowhere in sight, all in the name of “maintaining stability.” Meanwhile, critics claim regulators merely “kill flies, not tigers” and are keen to empty threats.
Short-term action to maintain market stability only leads to a lack of long-term market confidence. Everything in the securities market should be based on principles of openness, justice and fairness. Among these three principles, the most important for regulatory activity is openness. Regulatory bodies forced to release public information in bits and pieces lose a degree of credibility. And their status is jeopardized when discipline for misconduct is diminished, as we know from the law of diminishing marginal utility. This will further flame speculations over illegal activities in the market and the power of personnel connections. On the basis of openness, regulatory bodies should treat all market actors -- including regulatory officials -- equally and penalize those who break the rules, showing no lenience.
The global financial crisis that began in the United States is still plaguing the world, prompting many countries to enhance financial market regulation. In China, a debate over whether developing or regulating the market should come first has dragged on for a long time. A main concern is that so called over-regulation would sway the stock index and hamper market development. However, the most fundamental issue now is proper regulation and management of the securities market.
Over-regulation does not exist in China. But under-regulation has indeed hurt the scandal-racked, more than 10-year-old Chinese securities market, just as regulatory holes have damaged more established markets the United States and around the world. The only hope for change in China lies in tightening regulations, exposing misconduct and cleaning up the system.
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Regulate with a Big Stick, Not a Fly Swatter
China’s securities regulators should focus on sound oversight and tough discipline to protect, not merely stabilize, the market.
By Hu Shuli
31 May 2009
(Caijing Magazine) Three cases that came to light during the second week of May drew attention to regulatory efficiency and tight enforcement in the securities market. A former president of China Galaxy Securities, Xiao Shiqing, was arrested May 13. That same day, Sinolink Securities (SSE: 600109) announced that its chairman, Lei Bo, had been placed under investigation. And a day later, Rongtong Fund Management booted fund manager Zhang Ye for suspected involvement in so-called “rat trading.”
On the surface, these cases seem unrelated. Each involves a different context. But deep down, each is connected to how regulatory agencies shoulder their responsibilities. And now, once again, concerns have been raised about regulatory oversight and regulatory capture.
The China Securities Regulatory Commission says that, between early 2008 and the end of March 2008, it conducted 68 informal investigations into possible insider trading and found enough evidence to open 38 cases. The commission also launched 29 informal investigations into possible market manipulation and eventually pursued 15. In addition, the commission transferred to public security agencies a total of 19 suspected criminal cases involving listed companies, insider trading and market manipulation.
Although this data gives some evidence of the commission’s stepped-up effort to fight misconduct, it should be noted that serious violations continue to occur. And the commission has failed to respond quickly. Investigations and exposure of these cases have lagged. As a result, many are dissatisfied and show less confidence in regulatory efficiency.
A Caijing reader who posted a message on our Web site about the arrest of Xiao reflected this dissatisfaction and anger. “Why was Xiao serving as president? He was also a party committee secretary, secretary of the discipline inspection commission, and legal representative (of Galaxy Securities). Corruption is prevalent.”
In fact, Xiao also served as a regulatory commission cadre dispatched to head Galaxy Securities. Before being nailed, an internal decision was made to return him to the commission for a position as deputy director of a division that regulates listed companies.
Similarly, Sinolink’s Lei once served as a deputy director with the regulatory commission. Obviously, Xiao’s assistance was a key factor in Sinolink’s ability to launch the first backdoor listing among Chinese securities firms. Moreover, both Xiao and Lei were trusted favorites of Wang Yi, a former commission vice chairman, and were implicated in the Wang Yi financial scandal that broke last year.
Even though the Xiao and Lei cases are closely related to the securities market, securities regulators have not released public explanations for what happened. Nor have they taken the initiative to announce the progress of relevant events surrounding the cases. At this point, the public has every reason to question the commission. Have regulators reviewed the cases and reflected on what went wrong?
Another focus of concern is the Rongtong case. Zhang was removed from his post just five days after being exposed by the media. But a full month passed before regulatory agencies made an announcement -- and labeled it “an isolated case.”
Zhang’s name was made public after a media campaign pushed for disclosure. But, as is typical, this investigation into accounts of alleged rat trading has been wrapped in a veil of mystery.
Similar cases of misconduct have surfaced as well. But significant cases have been shelved and left unresolved for long periods of time, prompting an increasing number of calls for stronger securities market regulation in China.
In recent years, during bull as well as bear markets, regulatory agencies have been focusing on the stock index and consistently pursued a goal of maintaining market stability. This has been a top priority, and it’s been in the regulators’ major interest. It seems nothing has mattered but a stable market.
As a result, piles of files for major cases that matter to investors gather dust, with resolutions nowhere in sight, all in the name of “maintaining stability.” Meanwhile, critics claim regulators merely “kill flies, not tigers” and are keen to empty threats.
Short-term action to maintain market stability only leads to a lack of long-term market confidence. Everything in the securities market should be based on principles of openness, justice and fairness. Among these three principles, the most important for regulatory activity is openness. Regulatory bodies forced to release public information in bits and pieces lose a degree of credibility. And their status is jeopardized when discipline for misconduct is diminished, as we know from the law of diminishing marginal utility. This will further flame speculations over illegal activities in the market and the power of personnel connections. On the basis of openness, regulatory bodies should treat all market actors -- including regulatory officials -- equally and penalize those who break the rules, showing no lenience.
The global financial crisis that began in the United States is still plaguing the world, prompting many countries to enhance financial market regulation. In China, a debate over whether developing or regulating the market should come first has dragged on for a long time. A main concern is that so called over-regulation would sway the stock index and hamper market development. However, the most fundamental issue now is proper regulation and management of the securities market.
Over-regulation does not exist in China. But under-regulation has indeed hurt the scandal-racked, more than 10-year-old Chinese securities market, just as regulatory holes have damaged more established markets the United States and around the world. The only hope for change in China lies in tightening regulations, exposing misconduct and cleaning up the system.
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