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Suspicions of securities scandals stand out in Chinese market

Foreign investors on the rise but face potential risk amid insufficient oversight

Suspicions of insider trading surfaced in the stock market over the sale of Huawei's low-priced smartphone brand.   © Reuters

SHANGHAI -- In October 2020, a lawyer in Shanghai was tipped off to Huawei Technologies' plan to sell budget-brand smartphone unit Honor to handset distributor Digital China Group. The 40-something lawyer says a senior Digital China executive put a word or two into his ear about the plan.

Digital China Chairman and CEO Guo Wei was embroiled in an insider trading case when he divulged information about another acquisition to a friend in 2019. Guo was a high-ranking Communist Party member. Some people on the Internet suspected that Huawei's plan also might be leaked before it was announced.

While Huawei eventually sold the unit to a consortium of more than 30 companies, Digital China's stock soared in November, apparently creating a big windfall for certain investors.

China's stock market has been hit by a string of cases of trading irregularities involving members of the party and state elite.

One recent share trading scheme that has drawn a storm of criticism on the Internet involves Chinese miner Tianqi Lithium and Chengdu Tianqi Industry Group, an investment vehicle for Tianqi Lithium Chairman Jiang Weiping, the mining group's substantial shareholder.

On Jan. 6, Chengdu Tianqi Industry announced it would sell its stake in Tianqi Lithium. Then, on Jan. 15, Tianqi Lithium announced a plan to sell up to $2.45 billion in new shares to Chengdu Tianqi, its controlling shareholder, in a private placement deal.

Jiang, a "people's representative" to the National People's Congress, is suspected to have tried to buy back Tianqi Lithium shares at prices sharply lower than those at which the stock was changing hands through private placement after selling them on the market.

After the Shenzhen Stock Exchange queried the move in a letter sent to Tianqi Lithium, however, the lithium producer canceled the private placement plan on Jan. 17.

There has also been a plethora of stock trading scandals involving state-owed enterprises.

State-owned Gree Real Estate has faced insider trading allegations against its chairman. In December, Lu Junsi received a notice from the China Securities Regulatory Commission that he was being probed on suspicion of insider trading related to the acquisition of a company for which Lu also serves as chairman, according to the company.

Lu is suspected to have bought shares in the company before the acquisition was announced, in a common insider trading scheme.

These cases are signs of the proliferation of attempts by elite party members and top executives of state-owned enterprises to capitalize on their status to make a fortune.

China's stock market is still dominated by domestic investors. In the past several years, however, there has been a growing influx of foreign money into the market after it became possible in 2014 for overseas investors to invest in major stocks listed on the Shanghai Stock Exchange via Hong Kong.

China has been taking steps to raise the international stature of its currency, the yuan, and open its capital market to overseas investors.

Now both individual and institutional investors outside China are allowed to invest, via Hong Kong, in stocks not only in the Shanghai exchange but also in the Shenzhen market.

The financial market reforms in China have prompted overseas investors to pour nearly 1.3 trillion yuan ($200 billion) into Chinese stocks so far.

Chinese stocks have been incorporated into major global stock indexes. This has also contributed to pushing up Chinese stock prices.

But China's stock market regulators are not showing a strong commitment to cracking down on illegal trading.

China's securities market regulation authority handled more than 740 cases of unfair trading and window dressing in 2020, one young official said in an indifferent tone.

These cases clearly represent the tip of the iceberg. The number of stock trading violations is likely to continue rising as long as the party and the government control businesses and monopolize information. The steady stream of news about trading irregularities involving politically well-connected people should be seen as a warning to foreign investors snapping up Chinese stocks.

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