China’s securities markets have blossomed like cherry trees in a Washington springtime, or like kudzu along interstates – depending on your viewpoint.  The growth in publicly traded securities in China since the early 1980’s has been an enormous achievement of the great transition since the times of Mao.  With success come fraudsters, tipsters and the other miscreants that Wall Street has encountered since its creation.

            Recent examples from Chinese regulators show that the Chinese markets are indeed increasingly policed.  On October 9, 2011, Xu Chunmao was give a 3-year suspended sentence and fined over US$300,000 for insider trading violations.  He was accused of providing friends tips about stocks to buy while serving as investment director with a Shenzhen investment house.  The China Securities Regulatory Commission (CSRC) pursued the case through Chinese courts as part of a crackdown on front-running and insider trading, or to use translated Chinese parlance – “rat trading.” 

            This and similar cases followed a November 2010 edict of the State Council that urged a crackdown on improper trading.  The anti-rat trading regulations that became effective in 2010 include mandatory recording of landline phone calls in fund management companies, no use of mobile funds by fund managers during stated trading hours, and surveillance cameras in offices where trading occurs.  The Supreme People’s Court issued guidance in July 2011 about evidence that can be used in administrative insider trading disputes.  To the envy of the US SEC, these evidentiary rules put the burden on alleged “rats” to prove their innocence under certain obviously suspicious circumstances.

            Another example is a January 2011 conviction of a Great Wall Securities manager who was sent to prison for a year and fined almost US$50,000 for front running.   The manager gave illicit tips to family members who made US$4.2 million of trades.

            Credit to BNA’s Securities Regulation & Law Report (Vol. 43, No. 42) for information reported here.  Helpful links to Chinese securities regulatory materials include:

www.csrc.gov.cn/pub/newsite/bgt/xwdd/201109/t20110929_200266.htm (China’s Securities Regulatory Commission site – click for English version at upper right)

www.csrc.gov.cn/pub/csrc_en/laws/rfdm/statelaws/200904/t20090429_102757.htm (English version of China’s Securities Law)