News Commentary: Can China really have “zero tolerance” for insider trading?

News Commentary: Can China really have “zero tolerance” for insider trading? (New York Times Chinese website financial commentator Wang Qiang) China National Offshore Oil Corporation (hereinafter referred to as CNOOC) 1...

(New York Times Chinese website financial commentator Wang Qiang)

China National Offshore Oil Corporation (hereinafter referred to as CNOOC)’s US$15.1 billion acquisition of Canada’s Nexen Company is very likely to be affected by an insider trading case. If so, this will be a major blow to CNOOC, which has always hoped to internationalize.

It was the U.S. Securities and Exchange Commission (S.E.C) that exposed the scandal. On July 23 this year, CNOOC (Hong Kong Stock Exchange code: 0883) announced the launch of an acquisition plan for Nexen Corporation (New York Stock Exchange code: NXY) listed in the United States. The alert S.E.C discovered that Nexen's stock had experienced abnormal fluctuations before, and subsequently launched an investigation.

Four days later, the S.E.C issued an investigation report, revealing that Zhang Zhirong, the founder and major shareholder of Rongsheng Heavy Industries (Hong Kong Stock Exchange Code: 1101), which had close business dealings with CNOOC, was suspected of using inside information to conduct insider trading. Zhang Zhirong was alleged to have made more than US$7 million in profits through inside information, and the S.E.C immediately froze US$38 million in assets in his account.

> After the S.E.C report was released, some analysts believed that Zhang Zhirong, the founder and chairman of the board of directors of Rongsheng Heavy Industry, China's largest private shipbuilding company, would not risk his life because of the US$7 million because of his close relationship with CNOOC. It cannot be ruled out that CNOOC insiders wanted to profit from this transaction and asked Zhang Zhirong to do it for him.

This speculation is being confirmed to some extent. At the request of the S.E.C., CNOOC and all parties involved in the transaction have begun self-examination on this insider trading case. According to China Business News, CNOOC’s preliminary investigation results showed that hundreds of people were involved in this transaction, including dozens of people in CNOOC alone.

As far as the specific case is concerned, it is obviously far from time to draw a conclusion. In addition to caring about the details of insider trading, people are more concerned about who is manipulating insider trading? In this transaction, who is involved in China's central enterprise CNOOC, and what role did they play?

At present, CNOOC is only conducting a self-examination at the request of the S.E.C. Although CNOOC may cooperate with the investigation due to its international image and the fact that it will still need U.S. approval for future cross-border acquisitions, after all, the U.S. S.E.C. has no direct legal constraints on China’s central enterprises. If important figures are involved, can CNOOC extinguish relatives in a righteous manner?

Regardless of whether the United States is suspected of setting up obstacles to CNOOC's overseas acquisitions by cracking down on insider trading, the efficiency and procedures of the United States' crackdown on insider trading are worth learning from China.

In China, the restructuring and merger and acquisition process of listed companies is also a period of frequent insider trading. Just as the United States is investigating Zhang Zhirong for alleged insider trading, Zhang Zhirong may face another insider trading investigation in China. In April last year, Rongsheng Heavy Industry announced a tender offer for Quanchai Power (Shanghai Stock Exchange Code: 600218). However, on August 22 this year, Rongsheng Heavy Industry broke the contract and stated that it would not restart the acquisition of Quanchai Power within one year. The move caused dissatisfaction among investors, who questioned the existence of insider trading in the acquisition process.

"Securities Times" reported that some small shareholders have reported to the Ministry of Public Security and the China Securities Regulatory Commission, requesting relevant departments to thoroughly investigate the possibility of insider trading. "China Business News" also disclosed that as early as April 2010, news about potential acquirers of Quanchai Power's restructuring had been spread to a small extent. Some investors also reported to the local Anhui Securities Regulatory Bureau about illegal stock buying and selling by relatives of specific participants in the acquisition. The media investigation said, "Rongsheng Heavy Industry is trying to withdraw from Quanchai Power. The reason is not only that the stock price has halved, the main shipbuilding business has shrunk, and the capital chain is tight. Insider trading may be the 'fire' that it wants to contain."

In fact, the scandal of illegal gains obtained through insider trading has existed since the establishment of China's securities market. The "fund shady" storm that swept through the Shanghai and Shenzhen stock markets from the late 1990s to the beginning of this century, and the subsequent emergence of a large number of rat positions in the "golden decade" of the Chinese stock market, seriously shook the foundation of the Chinese stock market.

China is not unaware of the seriousness of the problem. In the past few years, China has also tried to restrict the occurrence of insider trading by amending its criminal law, strengthening external supervision and strengthening the information disclosure system, but the results have been poor.

At the end of October 2011, after Guo Shuqing, the former party secretary and chairman of China Construction Bank Co., Ltd., took office as chairman of the China Securities Regulatory Commission, he even made a high-profile statement adhering to "zero tolerance" for insider trading, emphasizing that he would never be soft on insider trading. Starting in July this year, the China Securities Regulatory Commission dispatched 200 people to investigate insider trading across the country. At the market level, it is believed that an extremely severe regulatory storm is unfolding, echoing the crackdown on fund shady practices and the chaos among brokerage firms. This may be the largest regulatory storm in the history of Chinese securities.

Guo Shuqing's determination has indeed begun to arouse reactions at all levels. Some big-name fund managers in the past have begun to shrink or even withdraw from the market due to changes in the external ecology. A number of insider trading cases are also under investigation and trial. A large number of institutions and listed companies involved in the case have begun to surface. On the surface, there is indeed a battle to the end.

However, both the outside world and Guo Shuqing know how deep the gap is between determination and reality. The so-called "zero tolerance" is just a policy ideal, and it is not easy to realize it. Not to mention that powerful groups such as central enterprises do not dare to touch easily. Even when dealing with some ordinary listed companies involved in the case, it is not clear how strong the punishment will be.

For example, the outside world noticed that in the case of Ningxia Xinri Hengli, the company’s chairman Xiao Jiashou leaked restructuring information to his wife, and his wife bought and sold Ningxia Hengli shares (Shanghai Stock Exchange Code: 600165) and made a profit of 130,000 yuan. The result was only a fine of 150,000 yuan, not 650,000 yuan, which was 5 times the upper limit. How can it act as a deterrent when the cost of breaking the law is so low?

What's more, Guo Shuqing's opponents are by no means just "petty thieves". In today's China, there are many interest groups that are above or outside of regulation. Those power holders or thieves and bankers hiding behind power can easily manipulate insider trading without fear of legal repercussions.

It cannot be said that Guo Shuqing is incompetent. Like Zhou Xiaochuan, who once served as chairman of the China Securities Regulatory Commission, they are both scholarly officials and have lofty ideals to clarify China's securities market. However, Zhou Xiaochuan's market-oriented reforms were ultimately considered to have ended sadly. Whether the high-profile Guo Shuqing can go further, the market's expectations do not seem to be high.

At least for now, Guo Shuqing is by no means a lucky person. Not long after he took office, China's stock market hit rock bottom and complaints continued. There have been many voices suggesting that Guo Shuqing resigns. Whether these voices come from injured investors or from vested interest groups that resist Guo Shuqing's administration, they all indicate that Guo Shuqing's future is full of obstacles.