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China cleans up stock market
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Yang Yunfei
WHEN China's experiment with stock markets began some 10 years ago, the first 10 firms listed on the exchanges in Shenzhen and Shanghai included none of the country's core industrial firms, partly out of concern the economy would be hit should the experiment fail.
Early investors had to use telescopes to read tiny handwritten stock prices on billboards at a handful of brokerage outlets.
After a decade of ups and downs, China's fledgling markets have served as a critical lifeline for the national economy, raising billions of yuan for listed companies and making a fortune for many investors.
By the end of last year, China had a total of 58 million stock account holders, second only to the United States.
Driven by a reform-led rally that helped the country's shares outperform the world's bourses, Shanghai's B shares, earmarked for foreign investors, finished last year up 136.21 per cent while Shenzhen shot up 62.64 per cent. The larger A shares for Chinese investors in both cities surged more than 50 per cent.
The surges pushed China's markets to a combined capitalization of about 4.81 trillion yuan (US$580.80 billion) from 1,086 listed companies, closing fast on rival Hong Kong for the number two market in Asia.
It is widely understood that a buoyant stock market is essential to China's long-term economic development. Efficient capital markets are expected to provide desperately needed finance for state firms and fledgling private companies and to construct a self-funding social security system.
But the authorities realize that an important step towards these goals will be the reform of the stock market itself. Part of the efforts should go to the cleanup of the decade-old, scandal-embroiled markets, whose image has been badly tarnished by rampant fraud, price manipulation and insider trading.
Arch-manipulator
Manipulation is widely believed to be endemic in China's rapidly expanding stock markets, a major reason for the high levels of volatility in many stocks.
According to China's first Securities Law enacted in 1999, stock price manipulation will be severely punished and manipulators can face a possible five-year term in jail if convicted.
The most blatant instigators of share price manipulation, called Zhuangjia in Chinese or arch-manipulators, push up stock prices of listed companies beyond any rational relationship to the company's performance before leaving retail investors holding dud shares.
A report from the Shanghai Stock Exchange last month found that many corporate restructuring of listed companies involved stock price manipulation and false accounting.
The stock prices of many companies rose sharply before the announcement of restructuring plans and then fell after retail investors began buying the shares, the report said.
During an investigation from December 1999 to April last year, the exchange also found evidence that the prices of 140 stocks had been manipulated through insider dealing.
The rampant manipulation has greatly damaged the interests of the country's retail investors, who dominate the markets, and dampened their confidence in the markets.
"I am not going to invest any more," groaned a middle-aged businessman surnamed Wang, who put most of his spare cash in the shares of the Shenzhen-listed China Venture Capital Co last year, only to watch his money evaporate as the company's shares fell by 10 per cent downside limit for nine consecutive sessions.
Price manipulation, together with other market malpractices, has stymied the growth of China's markets.
"Manipulation is too serious to be ignored by the regulators," said Tang Wanming at China Eagle Securities. "Only if investors, instead of speculators, dominate the market can the market develop in a healthy way."
Maintaining investors' confidence is crucial to China's ambitious plan to use stock listings to improve the efficiency and management of State firms.
There have been growing calls for greater protection of investor rights, stemming from several high-profile cases of troubled listed companies. They included heavily indebted retailer Zhengzhou Baiwen, which used fraud to get listed in Shanghai but is on the brink of becoming China's first publicly traded company to be delisted.
Investors also call for better regulation and increased transparency so that they can make reasonable decisions about their investment.
Crackdown
The problem of rampant market manipulation has been pushed centre stage since December 2000 when the China Securities Regulatory Commission (CSRC), the country's securities market watchdog, began probing alleged stock market manipulation.
The investigation, believed to be the most public effort of recent years to clean up the stock markets, has been centred on two Shenzhen-listed high-tech firms, China Venture Capital and Yorkpoint Science & Technology.
The cases have been in the limelight over the past weeks and the results of the investigation are not expected to come out soon.
The probe signals regulators' renewed efforts to build up a healthy stock market and bring it up to international standards.
The CSRC has investigated 236 cases of stock manipulation and other shady stock market activities since July 1999, the securities watchdog said in a report in December last year. About 100 of the investigations have been concluded and 88 institutions and 142 individuals have been punished, the report said.
The investigation has spread to include securities firms, banks and other major investors.
Industry sources said that more than 100 securities trading branches involving more than 20 brokerages have been under investigation.
Reuters reported on Monday that two managers at Shenyin & Wanguo Securities, one of China's top brokerages, were questioned by police in relation to China Venture Capital and the Shanghai-based brokerage has submitted plans to the CSRC to replace its president.
The CSRC said that it has been poring over the stock trading accounts of those investors who traded heavily in shares of the two targeted firms.
Probe has also widened into banks to see if funds have been illegally channelled into the stock markets.
China's banks are not allowed to invest in stocks, nor are they allowed to lend to people to invest in stocks.
In January, Premier Zhu Rongji weighed in, vowing severe punishment for financial institutions which violate corporate laws.
Companies "that should be closed must be closed resolutely and those that should be delisted must be delisted, without any mercy", Zhu was quoted as saying in a call for stronger supervision of the financial sector in a meeting of bank, securities and insurance officials in Beijing.
Market regulators said that they would strengthen supervision of the securities markets in line with Zhu's instructions on cleaning up the financial industry by introducing a so-called talk and reminder system for senior managers of brokerages.
Under the system, managers, suspected of violating either State laws or rules and regulations governing the securities markets, will be called to meet CSRC representatives under "any circumstances that the CSRC considers necessary to maintain market order".
The official crackdown on price rigging, however, sent a shudder through the markets and triggered a sell-off of high-priced stocks as jittery investors feared that some institutional investors, who had large holdings of these shares, might come under investigation.
The markets have witnessed a downward spiral since the CSRC launched the probe in December. China shares, closed lower for four consecutive trading sessions last week, have endured an abrupt reversal and now rank among the world's worst performers this year.
Brokers said that jitters over the official crackdown on price rigging hurt investor sentiment. Many investors have kept to the sidelines, waiting for outcome of the investigation and more policy hints.
"The recent slide in the stock markets is the price for standardizing the markets," said analyst Pei Jiwei at Shenzhen Newland Securities Investment Co. "Cleaning up rampant speculation is good for the markets in the long term."
As domestic punters worry a prolonged investigation will send traders packing, many foreign funds and securities firms eyeing long-term gains welcome China's campaign to clean up its markets.
"We see China moving in the right direction. Before further opening financial markets, it had better clean them up," fund manager Norman Ho at Value Partners, which has a US$125 million China fund and a US$12 million B-share fund, was quoted as saying in a Reuters report on Sunday.
Anthony Neoh, chief adviser to the CSRC, said on Monday that regulatory reforms would continue as China forges ahead to improve the health of its capital markets.
Debates
The probe has also coincided with heated debates on China's speculative markets.
Renowned economist Wu Jinglian, who has repeatedly blasted the market malpractices, described the problem-ridden markets as "worse than a casino" in an interview on State television last month.
"Even casinos have rules and you cannot look at other people's cards. But in our stock markets, some people can look at other's card, cheat and lie. Manipulation, "stir-frying" (in Chinese means speculating) and rigging prices is paramount," Wu said.
Wu's critical comments sparked heated debates on the evaluation of the country's stock markets and their genuine function.
Five leading economists issued a joint statement on Sunday to defend China's unruly markets, acknowledging flaws but stressing their role as a critical lifeline for the national economy.
"All countries have similar problems in the infancy stage of the stock market and they should not be exaggerated," said Li Yining, one of the five scholars who called a press conference in Beijing to rebut Wu's comments.
Xiao Zhuoji, another leading economist, said that the stock markets should be viewed objectively.
"It's true that there are some flaws such as insider trading that have darkened the image of institutional investors, but mainstream business within the brokerages and among fund managers is positive," said Xiao.
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