Simon Rabinovitch is the FT's Beijing correspondent
China has exposed its biggest-ever case of stock market manipulation in a show of strength by the new securities regulator, who has vowed to crack down on rampant illegal trading.
An investment company was accused by regulators of orchestrating “pump-and-dump” schemes related to 552 different stocks for a profit of 426 million yuan ($67-million).
The company, identified by the China Securities Regulatory Commission as Guangdong Zhonghengxin, was a small player in the industry, but the prominence of the reports about the case in the country’s leading financial newspapers on Monday suggests authorities wanted the announcement to have a big impact.
Although Chinese stock markets have matured in recent years, they are still rife with fraud from insider trading to falsified financial reports. Foreign investors have become much more sensitive to the problems over the past year after accounting scandals at a series of Chinese companies with shares listed abroad.
Guo Shuqing, who took the helm of the CSRC in late October, said in his first public address as chairman this month that he wanted to clean up Chinese markets.
“Here we make a solemn declaration. The CSRC has zero tolerance for insider trading and crimes in the securities and futures markets,” he said. “We will resolutely crack down on every securities crime we discover.”
Mr Guo’s predecessor, Shang Fulin, also targeted insider trading, but was more reluctant to trumpet his actions in the media. The public security ministry said that securities crimes involved more than 200 billion yuan from 2002 to 2010. But while Beijing has tackled numerous small cases of securities violations, it has done little to root out the insider trading analysts say is prevalent among officials and their friends and families.
The investigation into Zhonghengxin began under Mr. Shang’s watch. The case was referred to law enforcement officials in March 2010 and was still continuing, according to the China Securities Journal.
Monday’s report said the company had created television programs recommending certain stocks and spent 44.8 million yuan on advertising slots to broadcast these programmes. It had also built up an extensive network of analysts - 30 in all from 18 different securities and investment companies - to lend credence to its recommendations.
After it succeeded in inflating stock prices, Zhonghengxin sold them for a profit, according to the charges.
Representatives of Zhonghengxin could not be reached and the company did not appear to have a website. In a recruitment advertisement posted online, it said its objective was to provide “timely, fair, objective and effective” financial advice.
Commentators who talk up stocks for illicit profit are known as “black mouths” in China. One such pundit, Wang Jianzhong, was sentenced to seven years in prison in August, China’s first formal conviction for stock market manipulation.