Markets: China Investigates Possible Stock-Price Manipulation
Move Follows Recent Surge in Chinese Share Market
By
Lingling Wei, Wall Street Journal
Updated Dec. 22, 2014 4:10 a.m. ET
BEIJING—China is investigating possible stock-price manipulation amid the recent run-up in the country’s equity market, according to officials with direct knowledge of the matter, a move that serves as a stark reminder of the problems that have long haunted Chinese stocks.
The probe launched by the China Securities Regulatory Commission comes as stocks traded in mainland China rallied to their highest level in three years on Monday despite the country’s weakening economic growth. Much of the surge, analysts and officials say, has been triggered by short-term speculators betting on looser monetary conditions as opposed to investors with long-term belief in China’s economy.
The securities commission is focusing its investigation on a practice that involves groups of investors pumping up prices of certain targeted stocks. Such practices were common during the early and mid-2000s when China’s stock market boomed along with the country’s breathtaking economic growth. The market peaked in 2007 and started to plummet a year later as the global financial crisis weighed on China’s growth.
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The practice, which is illegal under Chinese law, “is making a comeback,” said one of the officials.
The Securities agency said on Friday that it had launched investigations into 18 stocks, but didn’t explain the reasons for the probe at the time. Most of the stocks targeted are those of small-cap companies, such as a maker of automobile tires in eastern China’s Shandong province and a government-controlled hydroelectric power company in central China’s Hunan province. Shares in larger companies are harder to manipulate because the volumes are bigger.
The probes mainly focus on the “individuals and institutions” who recently bought into the stocks, and the companies themselves aren't the target, the officials said.
Chinese stocks have been on a tear in recent months, making China one of the world’s best-performing markets. As of Monday, the benchmark Shanghai Composite Index was up nearly 48% year-to-date amid a surge in trading volumes. The index tacked on 0.6% on Monday.
Still, the market is making up for lost ground. Trading volume is still a fraction of what it was three years ago. The index remains at roughly half its 2007 high of nearly 6000 points.
Chinese officials have been pushing to improve stock-market conditions over the past two years as part of broader financial reform, giving companies a more reliable way to raise money and investors an alternative to putting their money in property. China’s policy makers also have given foreign investors greater access to mainland Chinese stocks, hoping that big foreign fund managers could bring much-needed discipline to China’s markets that have long been plagued by allegations of insider trading and other irregularities.
Amid the recent bull run in the equity market, officials at the securities commission have repeatedly warned investors against taking on too much risk. Regulators are especially concerned that a lot of investors are borrowing money to buy stocks, a move that could magnify their gains but could also exacerbate their losses in the event of plunging stock prices. Chinese stocks purchased with borrowed money more than doubled to reach 881 billion yuan ($142 billion) in early December from a year ago, according to official data.
“Investors, especially those new to the market, should invest rationally and bear in mind the risks associated with the stock market,” the agency said in a statement posted on its website earlier this month.
Write to Lingling Wei at lingling.wei@wsj.com
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