Editorial, Cover

Issue No. 547, Dec 5, 2011

Translated by Zhu Na

Original article: [Chinese] 

China’s stock market watchdog at the end of November issued a warning letter to Ping An Securities Co Ltd. focusing on the initial public offering that the insurer underwrote on behalf of Hunan Shengjingshanhe Bio Technology.

The China Securities Regulatory Commission, or CSRC, revoked the licenses of two [individuals, legally licensed as] sponsors of the offering who had provided incomplete information on Hunan Shengjingshanhe’s clients and related parties. The CSRC also warned the accountancy and law firms handling the offering and punished the auditors.

The case ended with a punishment that is considered by the stock market to be “the most severe so far.” That reflects the will of the people, but we believe that it’s better to see the market’s assessment as an expectation of stricter supervision, rather than surprise at the severity of this particular sanction.

According to regulations on securities issuance and sponsors, the most severe punishment would have been to permanently ban the sponsors, revoke the underwriters’ licenses, and, if they had committed a crime, to punish them under criminal law. So far though, no underwriter or sponsor has ever received that punishment.

The regulator’s website shows that prior to this month’s incident ten sponsors had had their licenses suspended, with the longest punishment lasting 12 months.

In the case of Shengjingshanhe, the company failed to give details of related parties and clients in the IPO prospectus - a serious omission for which the lightest punishment is “suspending the underwriting institution’s license for three months.” Ping An Securities only got a warning letter, however. There is, therefore, a touch of irony in the description of the Shengjingshanhe punishment as “the most severe.” China’s securities market has been operating for 21 years, and the IPO sponsor system was established seven years ago, but most of the time its laws and regulations seem merely ornamental.

There has never been a shortage of laws or regulations in the securities industry. The problems have been with implementation. Since Guo Shuqing (郭树清) took over at the CSRC, the securities markets have been wondering whether he would be able to bring a new approach. We could say that the markets' “most severe so far” verdict was based on investors’ encouragement and hopes.

Discussing insider trading on Dec. 1, Guo said that some people use special positions and contacts to seek illegitimate gains and that some people don’t appreciate that this is a crime on a par with corruption, theft and fraud.

Guo even drew a comparison with a thief at a market who steals a head of Chinese cabbage; people will react with outrage at the cabbage thief, but when someone steals from thousands of shareholders’ wallets, it doesn’t attract people’s attention. This is the nature of insider trading and the root of problems with prevention and crackdowns.

However, Guo has still insisted that the CSRC will show “zero tolerance” towards insider trading and crimes in the securities and futures industries. We believe this statement should be seen as Guo’s response to the market and investors.

In the same week as the Shengjingshanhe case, the CSRC also announced six others, including the insider trading case against Li Xuli (李旭利), a former director at Bank of Communications Schroder Fund Management

A storm of regulation seems on the way. Loosening control and reinforcing supervision is fundamental for regulation. In the past, China’s securities market has often overlooked this principle. On one hand, failure to punish illegal activities destroyed the market order and damaged investors’ rights. On the other hand, refusal to loosen controls has bureaucratized many sectors that ought to have been left to market forces. We expect that “the most severe punishment so far” might be a chance for the stock market regulator to reconsider its principles.

This translation was edited by Will Bland.