Murder and mafia hog headlines in a stock market hobbled by misconduct

Analysts flag risks related to senior executives, with MSCI set to increase weighting of A shares in benchmark indices from May

Top watchdog CSRC issued fines and confiscation orders worth 10.6 billion yuan last year, an increase of 42.3 per cent over 2017

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Shanghai’s financial district. Foreign investors should be alert about the incredible speed and scale at which information circulates in the Chinese market, according to one expert. Photo: Bloomberg

Published: 5:15pm, 12 Apr 2019Updated: 7:36pm, 12 Apr 2019

An increasing number of crimes linked to controlling shareholders of listed mainland Chinese companies highlight the unexpected risks linked with the world’s second-largest stock market, as it opens up further to foreign investors.

“The controlling shareholder is the most powerful person in a listed company. To some extent, the value of a listed company is largely related to the value of this shareholder. Thus any accident happening to the person will directly affect share prices,” said Jason Kang, a China-focused litigator who focuses on cross-border shareholder and joint-venture disputes at Hong Kong-based firm Kobre & Kim.

“Foreign investors should, in particular, stay alert” because the speed and scale at which information circulates in the Chinese market – still dominated by retail investors – is incredible, he said.

As far as misconduct is concerned, the China Securities Regulatory Commission, the country’s top watchdog, issued fines and confiscation orders worth 10.6 billion yuan (US$1.6 billion) last year, an increase of 42.3 per cent over 2017, according to official sources.

On Thursday, shares in Suzhou China Create Special Material, a Shenzhen-listed new materials producer, tumbled by 8.7 per cent after the city’s public security authority announced it had arrested the company’s controlling shareholder.

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Zhang Wei, a soldier-turned-entrepreneur, controls 32 per cent of the listed company through China Create Capital, a holding group he founded in 2004. Zhang was charged for leading a “mafia-style gang” involved in illegal fundraising, harassment, blackmail, illegal detention of people and the possession of firearms, the Shenzhen police said in a notice.