China Regulator Issues Warning on Stock Market Manipulation, Crackdown on Bitcoin
27th May 2021 | Hong Kong
The Chairman of China’s financial market regulator China Securities Regulatory Commission (CSRC) Yi Human has issued an official statement, warning of “zero tolerance” against market manipulation of stock prices, including artificially supporting or inflating stock prices. Market manipulation practices includes “pump-and-dump” schemes, where syndicates work with companies to push up their stock prices, attracting retail investors and thereafter dumping the shares, leading to sharp decline, swings in share prices and losses for retail investors.
China authorities also begin a crackdown on cryptocurrencies including Bitcoin and banning digital tokens in financial transactions. In Hong Kong, regulators are seeking to ban cryptocurrencies for retail investors and allowing only professional investors to invest.
“China Regulator Issue Warning on Stock Market Manipulation, Crackdown on Bitcoin”
Evidence of Stock Price Manipulation on China’s Social Media, Weibo
In China, a former private equity professional had posted on China’s social media platform Weibo, providing evidence of stock price manipulation of listed companies, involving several brokerages in China – Shenwan Hongyuan Securities, Minsheng Securities, TF Securities, and Hengtai Securities.
China has more than 180 million retail investors, which is more than half the population of United States (328 million people) and a fraction of its huge population of 1.4 billion.
China Regulator: Zero Tolerance towards Violations
In March 2021, China Securities Regulatory Commission (CSRC) Chairman Yi Huiman had warned of “zero tolerance” to misconduct to build a capital market that is well-regulated, transparent, open, vigorous, and resilient, in a keynote speech at the CSRC Roundtable of China Development Forum 2021.
The ceiling fine for information disclosure related violations has been raised from RMB 600,000 to RMB 10 million ($94,000 to $1.56 million) and the maximum sentence for fraudulent issuance has been increased from 5 years to 15 years.
View full keynote speech: Chairman Yi Huiman of CSRC
Keynote Speech by Chairman Yi Huiman at the CSRC Roundtable of China Development Forum 2021:
China Securities Regulatory Commission (CSRC) Chairman Yi Huiman:
“One was the revision of the Securities Law, which provides fundamental basis for the registration-based securities issuance reform, significant increases in the ceiling fines imposed on violations, and enhanced investor protection. The other one was the introduction of the Amendment XI to the Criminal Law, in which fraudulent issuance, misrepresentations, fake documents falsified by intermediaries, and market manipulation will face much heavier penalties.
One important aspect is strengthening the deterrence of a “zero-tolerance” stance and making wrong doers pay heavily for their behaviors. We have been sparing no efforts in improving the enforcement and judicial frameworks for securities misconducts, and in building a multi-dimensional accountability system of regulatory enforcement, civil reclamation, and criminal punishment.
For example, the ceiling fine for information disclosure related violations has been lifted from RMB 600,000 to RMB 10 million; the maximum sentence for fraudulent issuance has been increased from 5 years to 15 years.”
Hong Kong Tackles IPO Misconduct, Inflated IPO Prices to Meet Listing Requirements
Hong Kong Securities and Futures Commission (SFC) and Hong Kong Stock Exchange (HKEX) have also announced plans to tackle IPO misconduct, in view of problematic issues in recent IPOs. The problematic issues include new IPOs barely meeting market capitalization listing requirement, very high P/E ratio relative to peers, high underwriting commission averaging 12% compared to average of 4% in 2017, high listing expenses and high concentration of shareholders.
In some IPOs, the initial listing requirements may be only satisfied by artificial means, such as allocating shares to controlled shareholders at an inflated IPO price to satisfy the minimum market capitalization requirement.
For listing on Hong Kong Stock Exchange, the mainboard listing requires a market capitalization of HKD 500 million ($64 million) and GEM listing requires a market capitalization of $150 million ($19 million). (GEM ~ Growth Enterprise Market)
The IPO misconduct also includes questionable arrangements that enabled market manipulation of the shares such as through the “Ramp and Dump Scheme.”
Through individuals or syndicates, they may use channels such as social media to promote the shares, attracting investors to buy the shares, and driving up the share price. The original or early shareholders of the shares, will be able to sell the shares, causing the price to collapse especially when trading volume decrease, and with no real fundamentals and genuine investor interests in the share.
China, Hong Kong Crackdown on Cryptocurrencies, Bitcoin
China has also issued a crackdown on cryptocurrencies including Bitcoin, banning digital tokens in financial transactions.
In Hong Kong, regulators are seeking to ban cryptocurrencies for retail investors, requiring all virtual asset exchanges to be licensed and to provide only to professional investors.
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- Keynote Speech by Chairman Yi Huiman at the CSRC Roundtable of China Development Forum 2021
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