China cracks down on cunning tactics of insider trading but retail investors remain wary

Xue Rongnian is a renowned investment banker in mainland China who was caught by police in November for insider trading and market manipulation.

A former chief executive of Ping-An Securities, details of his arrest showed the China Securities Regulatory Commission (CSRC) was sending a message to the often-arcane A-share market that it was stepping up in its crackdown on unscrupulous traders in an apparent effort to restore investor confidence in the country’s volatile markets.

The detention of Xue, 50, came after a series of scandals in the market which retail investors holding the bag.

Xinhua said Xue, who is well-connected to senior regulators and powerful securities industry officials, used a raft of tactics to dodge investigations, including lobbying the investigators to halt probes, coercing investigators to give up by sending short messages, and colluding with people involved in the cases to lie to investigators.

Pointing to CSRC officials, Xinhua said Xue made a combined 500 million yuan in illegal profits from inside trading between 2013 and 2014 by using “meticulously planned and covert tactics.”

“The cases involving Xue were extremely serious,” Xinhua cited an unidentified CSRC official as saying. “Given the crime’s severity, the regulator thought they were important cases which are rarely seen in the market.”

The cases have been transferred to mainland police for further investigations.

Xue was at the helm of Ping An Securities between 2008 and 2011 when the company underwrote an initial public offering (IPO) by Wanfu Biotechnology (Hunan) Agricultural Development.

Wanfu was found to have falsified earnings in 2008-2010 to secure an IPO approval. In 2013, Xue was banned from the stock market by the CSRC because he was held responsible for the fraudulent fundraising exercise by Wanfu.

Xue was found to have used accounts from other brokerages to manipulate share prices of several listed companies including Anhui Chaodong Cement, Dongyuan Electrical Group and Jiangsu Yuyue Medical Equipment and Supply.

Xue took advantage of inside information related to the companies’ restructuring or fundraising to buy and sell shares, Xinhua said.

Analysts said the regulator was touting the efforts to uncover Xue’s wrongdoings as a successful example of its monitoring system.

Since the mainland created the stock market in 1990, insider trading has been the bogeyman behind the roller-coaster ride of the markets, with millions of small investors getting shortchanged by powerful and unethical fund managers.

A market rout since mid-June of last year wiped out as much as US$5 trillion in market capitalisation despite strenuous efforts by the authorities to halt the sell-off.

Beijing blamed insider trading and malicious short-selling as two senior regulators – CSRC vice chairman Yao Gang and assistant CSRC chairman  Zhang Yujun – were apprehended by the Communist Party’s anti-graft body for investigation into serious disciplinary violations.

The CSRC and its chairman Xiao Gang found themselves in hot water after a newly launched circuit-breaker caused the suspension of trading in two of the first four days of business last month, triggering panic selling and roiling global financial markets.

Xiao reportedly offered to resign but the mainland leadership didn’t accept it.

Since 2014, the CSRC has been using the technology of big data – the collection of large and complex data sets – to help it spot insider trading.

As the regulator touted their determined efforts to clean up the market, retail investors remain unconvinced for the most part.

“We need our money back,” said Shanghai-based individual investor Zhu Tingting. “The remarks on protecting our interests can’t be just empty promises.”