Monday, July 09, 2007
Regulator gets a taste of market speculation
South China Morning Post
Jul 09, 2007
On Monday two weeks ago, intense speculation raged on the grapevine of
the mainland's stock markets: Fan Fuchun , a vice-chairman of the China
Securities Regulatory Commission, had been detained for corruption.
Thanks to the power of the internet and text messages, speculation ran
so widely and so fast that many commission officials reportedly
received messages from friends as far as the United States inquiring
about Mr Fan's situation.
The speculation died down over the following days after messages
stated that Mr Fan was spotted in the commission's office building. The
regulator also posted a news release on its website the following
Wednesday, including a summary of Mr Fan's remarks on the previous
Friday and a photo of him.
The irony is that the speculation started and spread like wildfire
simply because Mr Fan was unreachable over the weekend after giving a
speech at a seminar in Shanghai the previous Friday. The intensity and
the speed at which the false speculation spread are thought-provoking.
Although Mr Fan was an innocent victim, the fact that experienced
investment bankers and market players are so ready and, some might say,
so eager to accept the speculation says a lot about the public
perception of commission officials, and their power and influence over
the roller-coaster stock markets.
Amid rampant insider dealing and profiting by powerful interest groups
from initial public offerings, there has been mounting public anger at
the regulator's efforts to micromanage and failure to allow market
forces to play a bigger role.
Compared with its overseas counterparts, the commission wields
considerably more power over every aspect of the mainland's stock
markets, from preparing firms for IPOs, the approval process and IPO
pricing, to the regulation of secondary-market trading.
Critics argue that many commission practices are not in line with
international ones, a situation that can give rise to corrupt practices
such as insider trading. For instance, it has a final say over price-
setting of IPOs instead of allowing the firms and their listing
sponsors to make a decision based on investor demand.
The practice has recently earned a stinging rebuke from the World
Bank, which criticised Beijing - in effect the commission - for
deliberately underpricing domestic stock offerings, saying it had
resulted in billions of dollars in lost revenue to state coffers while
lining the pockets of insiders and feeding the stock-market frenzy.
Critics also say the practice of mandating the companies to go through
a three-year period of preparation for listing has created unnecessary
burdens and inflated the companies' costs.
For example, the Bank of Nanjing, one of the first two city commercial
banks recently given approval to issue shares, had to wait more than
four years, and spent much time and money dealing with commission
inquiries over documentation, making it more costly to list on the
domestic markets than overseas.
Meanwhile, the regulator appears to have done a poor job in cracking
down on insider dealing and other irregularities, a source of major
irritation among investors. The Legal Daily reported that employees
from the securities regulator, stock exchanges, securities firms and
funds have openly flouted the Securities Law by using inside
information to speculate in stocks.
Since 1998, mainland regulators have adopted a mechanism by which
listed companies that have incurred losses two years in a row, or have
had unusual financial problems, must be put under the special treatment
category known as ST stocks.
The intention was to delist the ST stocks if there was no
improvement. In fact few ST companies have been delisted. Instead,
most have been the darlings of speculators, who use rumours of
restructurings and takeovers to move their share prices.