China’s Complicated Compliance

Shanghai Stock Exchange

China has many of the same compliance rules in its stock market exchanges as the major exchanges around the world. But as with many other things in China, there is an unavoidable twist.

The recent drops in the market at the Shanghai Stock Exchange has uncovered some of the nastiness that had been hidden. A recent report came out stating that state-owned Citic Securities has found price manipulation going on by its employees. This seems like a simple case since it is the work of a group of employees. Fire and prosecute those employees.

But is it that simple?

The police investigators have uncovered a government-promoted vicious cycle. If the employees were doing what they were supposed to, then they were supposed to help the state manipulate the price of stocks higher.

Here’s how it works. The government promotes to Chinese citizens to invest in the market, which Citic Securities, along with others, sell shares. Citic and their counterparts are supposed to, then, drive the price of the stock up so that the investors are richer. Citic, of course, receives a portion of the rise in the market. And, as long as Citic continues its role as price drivers, the China Securities Regulatory Commission has no problem with it.

Since providing false information is important for the Chinese government, sending the true information might get you in trouble. While it is unknown about what happened at Citic specifically, but the Chinese news agency The People’s Daily Online is taking a hit. Its Editor in Chief has been arrested. A little too much truth slipped through the censorship, one might guess. The charge, one would assume, would be spreading false information, although “false” would have to be qualified in this case.

So, now it is up to the CSRC to prosecute this case. CSRC has the difficult job of seeking actions taken by these employees that show the Chinese people that the Citic employees were not doing what Citic wanted them to do and the means of which they were doing their illegal activity was for their own benefit. Both need to be satisfied because simply not doing what they were supposed to be doing isn’t likely to be a prosecutable regulatory offense but a company issue. And, if the activities were for the benefit of the Chinese market, then it is an excusable action.

For the director who was involved, this might be easier to find. The lower level employees are a little more difficult. Director has the power to help decide what is good for Citic, its clients and for the market. But the employees have no power to do the same, making them executors of the director’s decisions.

Riding a fine line to prove this will be important because without it, what the Communist Party will have on its hands is a way for investors to file suit on the government for encouraging the creation of a bubble, requiring it to compensate the investors for their losses.

If you’ve been following the news on the Chinese stock market, you may have heard that China has begun to sell US Treasuries. This is to pay back some of the investors on their losses. Currently, there seems to be some sort of strict criteria to cashing out and then getting compensated, but with this case, the CCP will be faced with a choice of intervening in the market on the side of the investors/citizens or taking down large sections of the securities trading operators.


You probably do not have access to the Shanghai Stock Exchange, but have you bought into Chinese funds?


Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is a member of ACAMS and ACFE. 

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