China cracks down on over $11 billion of stock market fraud

10 July 2017. By Toh Han Shih.

Chinese authorities recently introduced new laws to beef up scrutiny of the country's stock markets and corporate governance, and have announced crackdowns on more than 80 billion yuan ($11.8 billion) of stock market fraud.

A slew of enforcement and regulatory announcements is part of an effort by the Chinese government to reassure international investors amid the recent inclusion of Chinese shares in the MSCI and the launch of China's Bond Connect, according to a hedge fund manager.

Since June, MSCI Inc, a provider of global equity indexes, has included Chinese A-shares in the MSCI Emerging Markets Index and the MSCI ACWI Index, which is expected to bring billions of dollars of foreign funds into China's stock markets, as MLex has reported.

Bond Connect is the Chinese government's bond-trading scheme operating between Hong Kong and mainland China. On July 3, the "northbound" part of Bond Connect began operations, with international investors in Hong Kong trading mainland Chinese bonds.

In recent days, an executive at ICBC Credit Suisse Asset Management surnamed Hu, was charged for conducting illegal transactions using non-public information, according to a Ministry of Public Security announcement. ICBC Credit Suisse Asset Management is a joint venture between ICBC, one of China's Big Four state-owned banks, and Credit Suisse, a leading Swiss lender. Investigations of Hu by a Beijing branch of the public security ministry that is equivalent to the police have been completed, the ministry added. At the same time, the ministry is investigating several executives at asset management companies, securities firms, insurers and other financial institutions over suspected similar crimes, the ministry said.

The Chinese nickname for illegal transactions using non-public information is "rat trading." Since 2014, the Chinese authorities have extradited several overseas fugitives suspected of rat trading, and brought to justice 83 cases of rat trading involving a total of 80 billion yuan, according to the China Securities Regulatory Commission and Ministry of Public Security.

The CSRC has said it will maintain the intensity of its crackdown on illegal securities activities during the second half of this year.

In the first half of 2017, investigations of 35 cases of market manipulation in China were launched, including crimes involving syndicates, the CSRC said on its website. Each case involved 3 billion yuan on average, while the biggest case involved 11.5 billion yuan and the largest illegal profits hit 200 million yuan, the CSRC said. Some of the market manipulation cases were cross-border and involved overseas parties, it said.

The first half of the year saw 17 new cases of illegal stock trading, representing a year-on-year increase of 112 percent, according to the CSRC. There were 40 new cases of fake information disclosures, including some listed companies that had falsified their accounts for many years, the CSRC said.

The CSRC also recently announced amendments to its regulations on the approval of share issuance, including initial public offerings. It said there was a need for improvements in the approval of share issuance for the sake of investor protection. The amendments aim to create an effective mechanism whereby market players "cannot be corrupt, dare not be corrupt and won't think of being corrupt", the CSRC added.

The amendments include strengthening scrutiny of share issuance and tougher restrictions on the ability of officials who approve share issuances to trade shares. Under the amendments, approvals for share issuance on the main board and the other boards of mainland Chinese stock exchanges, including boards for small companies and start-ups, will be combined. There will be harsher public censure of officials who violate regulations in share issuance approvals processes.

The CSRC recently announced other amendments to China's securities regulations, including improvements to market scrutiny and case investigations. Those amendments also include improving appraisals of companies' risk management and guiding securities firms to boost their capital strength. The amendments seek to eliminate speculative investments in areas outside investors' core businesses.

	Eliot Gao