China takes a cue from the U.S. on insider trading

Posted By Blake Hounshell Monday, May 14, 2007 - 12:27 PM Share

LIU JIN/AFP

Bloomberg reported on Friday that the U.S. Securities and Exchange Commission and federal prosecutors are cracking down on insider trading, and making their efforts very public (pour encourager les autres). The reason? A growing trend of mergers and acquisitions is providing ample opportunity for unscrupulous individuals—or, in some cases, married couples—to use information advantages for illegal gains. Just last Tuesday, the SEC took legal action against a Hong Kong couple who had used privileged information to buy $8.2 million in Dow Jones stock before Rupert Murdoch's takeover bid became public. (The couple, accustomed to Hong Kong's "anything goes" attitude toward insider trading, must have been shocked by the lawsuit.)

If the SEC's intention was to send a message, the Chinese government appears to be one of its recipients. China's stock market—which is dominated by state-owned companies—is booming, with the Shanghai Composite Index blasting past the 4,000 benchmark on Friday. But China's top securities regulator expressed concern on Saturday about rampant insider trading, promising to "strengthen supervision" of stock transactions by parties with special knowledge. China's major state newspapers duly blared the warning on their front pages.

Why the big push? Any system in which power is so concentrated is inevitably going to suffer from massive corruption, but the Chinese government nonetheless periodically feels pressure to make fruitless noises about stamping it out for good. In this case, the Chinese government is also greatly concerned that the stock market is overheating, and has been trying to talk it down. Thus, banging the drums—and even making the occasional example—about insider trading is not only good politics, but it's good economics as well.

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