May 24, 2021 04:41 PM

Editorial: The Market Value Management Business Must Be Broken and Remade

The market value management business, which had previously garnered little attention, has suddenly come under the spotlight. Ye Fei — a Weibo influencer in the private securities world — recently used his platform to accuse several listed companies, publicly offered funds, securities traders and asset management companies of colluding to trade a large percentage of certain stocks and engage in other shady deals to manipulate the stock market in the name of “market value management.” The regulator responded immediately, stating that it would seriously investigate and penalize insider trading and market manipulation with a “zero tolerance” attitude. It added that any cases of suspected illegal activities will be turned over to the police. Meanwhile, the Shanghai Stock Exchange and the agencies of the China Securities Regulatory Commission also took prompt action to get to the bottom of the matter.

Market value management has its place in China. For a long time, China’s securities market was hampered by the absence of a link between stock prices and the interests of major shareholders. The concept of market value management began to emerge in the capital market following the non-tradeable shares reform. The State Council issued a relevant document in May 2014, which stated that “listed companies are encouraged to establish a market value management system.” Market value management has been gaining ground ever since; it now has a relatively complete system of practice and theoretical framework. “Market value management” is a product of enterprise value management and is intended to promote the stable growth of listed companies’ market values. It requires enterprises to maximize their value by improving corporate governance in terms of financial systems, internal control, incentive mechanisms and so on.

In practice, however, market value management quickly deviated from its original purpose. For many intermediaries, market value management is simply a guise for market manipulation. This is one of the capital market’s longstanding open secrets. Regardless of how truthful Ye’s specific accusations turn out to be, the matter should not be treated as an anomaly, considering that much more shocking phenomena have long troubled the business of market value management. Regulators should take this opportunity to overhaul the sector as seriously and comprehensively as they did the trust, fund, asset management and shadow banking businesses. They can “eliminate the false and retain the true” by focusing on those intermediaries that use market value management as a disguise for market manipulation while providing safeguards and support for those intermediaries genuinely in pursuit of actual market value management.

The reason we call for a complete overhaul is that, for such a small-scale business, pseudo market value management — i.e. market manipulation — causes a great deal of harm. It has built a complete dark industrial chain from delivery to reception to brokerage, covering listed companies, funds, brokers and more in a highly sophisticated game. This is the key difference between a series of isolated incidents and what we now see happening in market value management. Once there is a complete industrial chain, there are stable expectations and operational templates to follow. Each party involved has clear roles to follow aligning with their respective interests; deliverers can easily find receivers and brokers; brokers find it easy to continuously expand their businesses; thus the dark network is self-reinforcing. In this sense, market manipulation disguised as market value management erodes capital markets far more substantially than those manipulators who merely make waves in secondary markets.

Undoubtedly, the overhaul should start with the investigation and discipline of market manipulation behavior, which should be carried out according to the substance of the acts, not how they appear on the surface or what terms are used to label them. In recent years, strict investigation of market manipulation has become a focus of the authorities. Moving ahead, they can shift the focus of their efforts to cracking down on pseudo market value management and restoring the order of the securities market. According to the Securities Law, those who manipulate the market and cause losses to investors are liable to make compensation in addition to their administrative and criminal responsibilities. The law must be strictly observed and enforced.

Admittedly, such an overhaul will not be easy. Indeed, market manipulation techniques are becoming more subtle and varied specifically to evade supervision. Besides, considering the temporally extended, systematic and multifaceted nature of pseudo market value management, it is quite challenging to actually identify manipulation and obtain evidence regarding the activity and scale involved in each link of the chain or on exactly how listed companies engaged in internal or external collusion or the selective disclosure of information to achieve manipulation. Regulators may therefore wish to rely more on more intelligent means of supervision on top of existing means to improve the overall inspection mechanism.

The overhaul must cover the whole chain, not only the business area. There are hidden rules on the involvement of publicly offered funds, for instance, that ultimately boil down to collusion between the listing side and the publicly offered funds side in order to drive up stock prices. As the entire purpose of publicly offered funds is to manage finances on behalf of investors, professionalism and credibility are the very foundations of their existence. If anyone within such an institution risks investments to manipulate the market for personal gain, then it will lead the industry into a crisis of investor trust. When listed companies — whether they be funds or securities traders — can unscrupulously participate in market manipulation, it’s a sign that internal control over various subjects has been lost, indicating an accumulation of risks in the financial system.

The overhaul needs not only to “break,” but also to “make.” It needs to establish detailed, feasible norms that can bring market value management back in line with existing laws and regulations. There should also be specific norms corresponding to the subjects, laws and regulations, regulatory mechanisms and dispute resolution methods responsible for market capitalization management so as to truly encourage listed companies involved in market value management to comply with the State Council document.

Even more importantly, more attention is due to ordinary investors, who have been played by the process without any awareness, as pseudo market value management is highly likely to destroy their confidence in China’s capital market. If the popular expression from 20 years ago equating the stock market to a “gambling house” implies a lingering expectation that things will be set right someday, then the recent expression “being picked like leeks” hints at people’s numbness and despair toward the state of the market. To turn things around, we can start by eradicating the chain of pseudo market value management.

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