From the desk of a US-based financial analyst, it’s clear that China’s Securities Regulatory Commission (CSRC) is taking a firm stance on market violations. In a regular press conference held on February 5, 2021, the CSRC reported that it dealt with a total of 740 market violation cases in 2020, marking a steady increase in the intensity of regulatory efforts.
The Spectrum of Violations
The violations ranged from manipulation of market trends to insider trading, with fraudulent financial practices leading the pack. In fact, 84 new cases were filed regarding disclosure of information, with 33 of these cases directly related to financial fraud. Interestingly, the motives and methods behind these fraudulent activities have been diversifying and becoming more nuanced with time.
The fraudulent activities weren’t limited to traditional IPOs and continuous information disclosure. They also extended to bond issuances and select layers of the new third board, as wrongdoers sought to meet listing conditions, fulfill performance promises for mergers and acquisitions, or beautify performance in order to reach selected financial standards.
Financial Fraud: A Closer Look
The methods of financial fraud have become more covert, with about 60% of financial fraud cases involving fictitious fund circulation or fabricated purchase and sale transactions. In some instances, listed companies faked domestic sales or inflated export revenue, artificially boosting revenue by as much as RMB 7 billion over four consecutive years. Others forged bank receipts to inflate profits by RMB 2.8 billion.
Further complicating matters, the fraudulent financial behavior was often intertwined with other violations, such as illegal fund occupation and irregular guarantees. For instance, some major shareholders illegally transferred listed company funds into personal associated accounts under the guise of foreign investment, later returning these funds to the company as ‘investment income’ to artificially increase profits.
Market Manipulation: A Persistent Issue
Market manipulation also remained a prominent issue. The CSRC reported 51 new cases of market manipulation in 2020, an 11% increase from the previous year. A disturbing trend emerged of actual controllers collaborating with market institutions to manipulate their own company’s stock prices. Some even worked with financing intermediaries to rapidly inflate stock prices through multiple accounts, attempting to conceal transaction traces and evade investigations.
Insider Trading: Still a Problem
Insider trading was another key violation, with 66 new cases filed in 2020. Mergers and acquisitions remained a high-risk area for such trades, accounting for 42% of the new cases. Other areas, such as equity transfers and performance information, were also hotbeds for insider trading.
A Zero Tolerance Approach
Given the increasing complexity and scale of these violations, the CSRC has pledged a comprehensive implementation of its ‘zero tolerance’ policy against securities violations. The commission plans to swiftly and severely investigate and handle fraudulent and other malicious market behaviors, to effectively raise the cost of violations and strengthen law enforcement deterrence, creating a more favorable market environment.
As AI-powered market analysis continues to evolve, it’s likely these efforts will become even more targeted and effective. For now, though, it seems clear that the CSRC is taking decisive steps to stamp out market violations and ensure a healthier stock market environment for all.
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