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Heavy fines needed to regulate market

(China Daily)
Updated: 2007-05-15 09:15

The China Securities Regulatory Commission recently punished a publicly traded company to give credence to its latest effort to regulate the market and educate investors on the risks of investment.

At a time when a stock market buying binge grips the country, regulatory action that can help sober up investors is badly needed.

Unfortunately, by imposing a fine of only 400,000 yuan ($52,000) on Hangxiao Steel Structure Co and fines ranging from 100,000 to 200,000 yuan ($13,000 to $26,000) on five executives, the securities watchdog has failed to be taken seriously by companies or investors.

The company, which makes building materials, was fined for failing to disclose contracts received and for making misleading statements.

In February, when Hangxiao announced it had signed a multi-billion-yuan contract with a Hong Kong-based company to supply building materials for projects in Angola, the stock sky rocketed.

Trading was suspended for two weeks until March 13, after Hangxiao became one of the hottest stocks on the Chinese market. The stock has more than quadrupled this year, far outpacing the sensational 50 percent rise in the benchmark Shanghai Composite Index.

In comparison with the astronomical gain in paper wealth for top executives like Hangxiao Chairman Shan Yinmu, who held 37 percent of the company at the end of last year, the fine that the securities regulators imposed seems trivial.

Besides, domestic media have cast strong doubt on the claimed value of the Angola contract. It totals 18 times Hangxiao Steel's revenue for 2006 and five times all of China's 2006 exports to the African nation. But the securities regulators did not question the validity of the contract.

Ironically, after the regulators announced the fines last Friday, on Monday the company's stock rose to the allowed limit.

The fine might have been intended to punish the company and its executives for their misconduct and remind investors of the risks associated with such stocks. But obviously the performance of the stock indicates that the market did not buy the message.

In the face of a looming asset bubble, it is important to regulate the market and educate investors. Right now, the urgent need on the part of the regulators is to get seriously tough with wrongdoers to protect the interests of investors in a relatively young stock market.