China state-owned company share gains highlight market risks

[BEIJING] Shares in five Chinese state-owned firms rose by their daily limit last week ahead of the companies filing potentially market-moving news, raising questions over whether Beijing's plans to restructure the state sector are reaching some investors ahead of them being made public.

Securities regulators have struggled for years to restore the reputation of China's stock market as a place for retail investors to safely park their savings. But the multi-tiered bureaucracy and heavy regulation have proved tough to manage. Companies need to cultivate political contacts within the bureaucracy to gain approval to list or restructure, and that chain of communication can be vulnerable to leaks.

Shares in top trainmakers China CNR Corp and CSR Corp both rose by 10 per cent - the maximum allowed per trading day - on March 5, hours before the companies announced that their merger into an entity with combined revenue of around US$32 billion had been approved by the State-owned Assets Supervision and Administration Commission (SASAC).

Similarly, shares in state-controlled Shenyang Machine Tool Co rose by a tenth for two consecutive days ahead of its March 3 trade suspension announcement. And local government-owned Shanghai Bailian Group Incorporated Co and Beijing Shunxin Agricultural Co shares both rose by the daily limit ahead of trade suspension filings.

"Very often domestic stock markets move ahead of formal disclosure," said a market analyst who asked not to be named because of the sensitivity of the matter. "Obviously asymmetric information exists." Beijing Shunxin said there was definitely no leak of information ahead of its public announcement. Shenyang Machine Tool declined to comment. Shanghai Bailian couldn't be reached for comment.

SASAC, the ministry-level body that directly oversees 112 central government industrial and services conglomerates, couldn't be reached for comment in Beijing or Shenyang. In Shanghai, SASAC declined to immediately comment.

Asked if insiders may have traded shares ahead of the rail merger announcement, Zhang Xiaojun, spokesman for the China Securities Regulatory Commission (CSRC), said the regulator is paying close attention to the matter. "The CSRC has always taken a hard-line attitude toward insider trading and widely reported market manipulation," Zhang told reporters late last week.

In January, CNR and CSR denied media allegations of insider trading, saying senior executives who traded shares ahead of the merger announcement had no prior knowledge of the reorganisation.

The CSRC has said it will investigate China's largest brokerages and fund managers, including China Asset Management Co Ltd and HFT Investment Management Co Ltd, for alleged regulatory violations, as part of the regulator's intensifying crackdown on insider trading. "When the government implements top-bottom strategies, the central level, including agencies such as the National Development and Reform Commission, will know first. Then companies will be notified and reach out to securities firms,"said Liu Jingde, a markets analyst at Cinda Securities. "Restructuring plans will be reported to the CSRC, the SASAC and other government bodies. The information should be kept in confidence, but sometimes that can't be controlled." As Beijing rolls out ambitious reforms to its massive state sector, and sells part of those firms to private investors, a key measure will focus on controlling company insiders.

The ruling Communist Party's top graft-buster has targeted executives at state-controlled conglomerates for inspection as part of President Xi Jinping's anti-corruption drive. China's Central Commission for Discipline Inspection sanctioned more than 70 senior officials at state firms last year, the official Xinhua News Agency said last month.

REUTERS