CSRC looks into 'pump-and-dump' charges after serious questions arise

Questions raised by an industry expert regarding market manipulation of public companies with less stellar business performance have affected prices of A-share special treatment or ST companies and small-caps, which over the long run will benefit qualified blue-chips and better promote value investment, said experts.

Share prices of ST companies, which reported losses for at least two years, fell by an average 4.68 percent on Monday while the benchmark Shanghai Component Index gained 0.78 percent. The slump continued on Tuesday as 75 ST companies reported price declines, with 26 seeing their prices fall by 5 percent, while the Shanghai Component Index climbed moderately by 0.32 percent to 3529.01 points.

The share price plunge came after the China Securities Regulatory Commission, the country's top securities watchdog, said on Sunday that it would probe the reported "pump-and-dump" schemes. The potential market rigging was uncovered by private equity tycoon Ye Fei, who wrote on his social network account on May 13 that Hangzhou, Zhejiang province-based Zoy Home had been buying shares from the open market to inflate stock prices.

Ye said he was contacted through an intermediary to participate in the so-called "market value management" of Zoy Home. Other companies suspected of adopting similar practices, according to Ye, include Eastern Pioneer Driving School Co Ltd and equipment maker Eurocane (China) Co Ltd, which saw their prices fall by 10 percent and 7.81 percent, respectively, on Tuesday.

The CSRC said on May 14 that it had urged related companies to start internal investigations. Two days later, the top regulator said it had brought up cases to investigate the market manipulation in Zoy Home and Jiangsu Lettal Electronic Co Ltd.

Having zero tolerance for malicious market manipulation and insider trading, the CSRC plans to tighten its grip to further clean up the market environment.

"Despite their lousy performance for years, some small-cap stocks listed on the A-share market saw their prices rise for no reason. Believing such stocks were profitable, some individual investors purchased them. However, they faced price plunges after buying such stocks at high prices," said Gui Haoming, chief economist of Shenwan Hongyuan Securities.

Such facts have pointed to the likelihood of market manipulation. The recent expose from Ye can help investors realize such facts and reassess certain small-cap stocks. Some investors may worry about related moral hazards, which will affect the prices of small-caps, said Gui.

Hu Bo, a fund manager from Shenzhen Rongzhi Investment Consultant Co, said that as the central regulator carries on investigations into the claimed market manipulation cases, the idea of value investment will be more prevalent in the A-share market. Industry leaders will enjoy more price premium as their liquidity improves.

Sun Jinju, director of the research institute of Kaiyuan Securities, said that as China's capital market reform deepens and the delisting mechanism gains momentum, the disqualified A-share companies will be eliminated more efficiently, which will help investors to invest in truly competitive small and medium-sized companies.

The CSRC has investigated 65 companies since it started cracking down on market manipulation early last year.

Ironically, Ye, who started his own private equity firm in 2010, was fined nearly 20 million yuan ($3.1 million) for market manipulation of five stocks. His firm was disqualified as a private fund manager by the central regulator in 2018.