China Cracks Down on Insider Trading

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China is joining the list of countries cracking down on insider trading.  The Supreme People’s Court (SPC), the highest court in the People’s Republic of China, and Supreme People’s Procuratorate (SPP), the highest agency responsible for prosecution and investigation, issued guidelines for the prosecution and sentencing of insider trading which went into effect this month.

The China Securities Regulatory Commission (CSRC), the primary securities market regulator of People’s Republic of China, has also been issuing insider trading regulations, including draft regulation allowing it to halt any pending mergers where there is evidence of insider trading.

The CSRC has become more aggressive since its new chairman, Guo Shuqing, took office last October.  Guo was a former vice governor of the central bank and most recently chairman of China Construction Bank Corp.  Not long after his appointment, Guo said that attacking insider trading was a priority.

The CSRC’s draft regulation gives it the ability to suspend the approval process for pending mergers if there is evidence of possible insider trading.   The agency also implemented new rules requiring listed companies to keep records of anyone who has access to price-sensitive information.

The new prosecution guidelines for insider trading released by the SPC and SPP allow prosecutors to pursue cases based on abnormal trading patterns.  They also created sentencing guidelines based on the size of the trades involved and the frequency of the trading.

Despite the new regulations and guidelines, the task ahead of China’s regulators is daunting.  “Insider trading and accounting fraud are the two biggest problems in the market, polluting almost every aspect of the system, from listed companies, fund managers, company CEOs to governmental regulatory bodies,” according to Liu Shengjun, a deputy director of the Lujiazui International Finance Research Center at the China Europe International Business School.

The SPC finalized 22 insider trading cases in 2011, among which four were filed in 2009, five happened in 2010 and 11 were prosecuted in 2011, showing a growing trend.   However, it is not clear that prosecutions have yet reached a level to create meaningful deterrence.

“At present, the cost of insider trading is too low as only a few of the offenders were punished, and their sentences were light compared to the damage they caused,” Liu said.

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