STAFF NEWS & ANALYSIS
China Regulator Makes Prosecution Priority of Insider Trading
By Staff News & Analysis - December 02, 2011

New CSRC chairman signals crackdown of the China Securities Regulatory Commission in Beijing. The new chairman of the commission, Guo Shuqing, said on Thursday that supervision of the country's securities market will focus on cracking down on insider trading. In his first public speech since being named as China's top securities regulator, Guo Shuqing said on Thursday that supervision of the country's securities market will focus on cracking down on insider trading. The comment by the new chairman of the China Securities Regulatory Commission (CSRC) was interpreted by industry experts as having set the tone for the watchdog's enforcement efforts. "Here we make a solemn declaration: the CSRC has zero tolerance for insider trading and crimes in the securities and futures markets," said Guo at the 9th Forum on Financing for Small and Medium-sized Enterprises in Shenzhen. – China Daily

Dominant Social Theme: Insider trading is bad and the Chinese know it, too.

Free-Market Analysis: Thank goodness the Chinese have decided that insider trading is a crime. This sub dominant social theme – that investment information is dangerous and hurtful to other people – is a growing promotion within the ranks of securities professionals.

But what's the real reason? We have to return to our concept of the power elite to find that out. The Anglosphere power elite is a funny beast, in a way. In the past they have drawn a line between free speech and money. One could express one's self and deny the validity of much that was being done. But ACTING on those beliefs, or making money through them, was far less allowable.

This is because, in our estimation, the elites believe that money is power. They don't mind talk, but they don't like cash – not in anybody else's hands anyway. When one follows this through reasonably, a lot of things fall into place.

First, we begin to understand why the powers-that-be don't like gold. Anybody can dig it up and become wealthy. This is anathema to a small group that is trying to run the world. In fact, right now, lifestyles between the West and East are being "leveled" so that global integration becomes easier.

If people can dig gold and silver up out of the ground, this sort of social manipulation becomes a lot harder. It is only via fiat money (paper money) that a maximum amount of manipulation can take place. Paper money allows inflation and deflation, and generally assures the elites that they will be able to do what they want with people's wealth. Gold and silver stand in the way.

Another way that people can make money is through financial markets, especially stock markets. This is another avenue that has to be choked off, apparently. For various reasons the elites want stock markets to exist, at least for the time being. But they surely do not want people getting rich off of them, or so it seems.

Unfortunately, there are many ways of getting rich via stocks and the elites over the past 50 years have been busily making more and more of them illegal. What governments cannot confiscate in taxes shall be leeched away via inflation and regulatory brutality.

One way the elites make stock markets confiscatory is by ensuring via regulation that major investors in the market are only able to do one or two things at a time. For instance, there is no reason why futures, options, Treasuries and stocks cannot be traded all at the same time on one screen.

In fact, professionals basically DO trade all markets at once. But for various reasons the facilities available to the average investor DON'T include this sort of cross-instrument approach.

By ensuring, say, that mutual funds can only use certain strategies (by making others "illegal" under one pretext or another) the investor is surely doomed to losses at a certain point. That's because by preventing a richness of strategy, regulators are ensuring a "stampede" toward the door all at once.

Regulations that restrict strategic flexibility are one way that people at the very top ensure that those in the middle and the bottom don't get too rich too fast – and, in fact, lose much of their investments at certain times throughout the business cycle.

But regulations that make certain kinds of investing – and certain market manipulations – a crime are another way of ensuring that the stock markets remain a place where elite insiders dump private companies on the market for major profits. The idea is to use the stock market as a "cash out." But it's not supposed to empower individuals!

Insider information is just one more way that the elites are trying to diminish the possibility that people can make large amounts of money in the stock market. Stock markets RUN on insider information, as we've pointed out in the past. Even 30 years ago, insider trading was not a crime ANYWHERE on the planet, so far as we now. Now even the Chinese consider it a heinous crime. Here's some more from the article:

Liu Guanwu, an IPO analyst with the Beijing-based consultancy Analysys International, said Guo's speech marked a change in the regulatory focus of the CSRC. "If the main mission of the former CSRC chairman was to give the securities market more tiers and functions, the new chairman has set a goal of ensuring that it will function more efficiently and smoothly," said Liu.

Many investors and observers consider investor protection a crucial issue for China. They believe that regulators must address the issue to allow the country's capital market to flourish. Last month, the CSRC asked public companies to formulate more complete and stable profit-sharing plans to pay dividends to investors. Li Mingliang, an analyst with Haitong Securities Co Ltd, said insider trading has hurt the interests of retail investors for decades.

In 2007, Chen Rongsheng, the former chairman of Shanghai Prosolar Resources Development Co Ltd, raked in more than 19 billion yuan ($3 billion) through insider trading of his company's stocks. He was later sentenced to two years in jail. "If the issue continues to exist we will see fewer and fewer people wanting to participate in the securities market." said Li."We will see tougher regulations targeting this issue in the future."

Guo encouraged investors to provide the commission with leads and testimony about wrongdoing to improve law enforcement. "The legal system is generally sound in China, the problem lies in the level of enforcement," said Wang Jianhui, chief economist with Southwest Securities Co Ltd. "Many of the scandals we have seen in the past were the result of poor law enforcement,"he said.

All of this is so much nonsense. Stock markets functioned just fine in the Roaring Twenties, for instance, in terms of participation. EVERYONE sought out insider information (at that time) and no one believed that anyone was "stealing" from anyone else.

In fact, the idea that China is going to "crack down" on insider trading is especially ludicrous given that most participants in the Chinese stock markets understand that the issuances that have success are intimately linked to the government itself.

It is the government and its insiders that take the lion's share of the initial private offerings. It is the government and insiders that insure the success of the company before a public issuance. In terms of market manipulation, insider trading is surely a minor irritant, were it to be considered an irritant at all.

After Thoughts

The Chinese have entirely adopted the Western system of finance at this point – everything from central banking to securities regulation. Surely, the elites hope to consolidate markets into one big securities trading facility at some point in the future. This sort of facility will offer undreamt of leverage for those who can manipulate it at the top. For the average investor such an international casino shall merely offer more ways to get fleeced. "It's a club – and you ain't in it!"

Posted in STAFF NEWS & ANALYSIS
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