China's stock markets are on their way to maturity - marked by less insider manipulation - with a new regulation controlling stock sales by senior company executives and majority shareholders.
The new rule is especially significant now that China has completed its share-merger reform, floating previously non-tradable shares of State-owned enterprises.
Since the reform, the interests of high-ranking company executives have been linked more closely with that of their companies and their stock prices.
There have been signs recently that they have tried various means to increase the stock prices of their companies, such as by injecting high-quality assets into the companies.
The new regulations will promote sound operation of the companies. It will help prevent insider sales from jeopardizing the interests of individual investors.
Previous laws stipulated that only those who sell more than 5 percent of the overall corporate stock need to disclose the transaction.
This provided room for insiders to gain from manipulative stock sales based on their privileged information.
Senior executives and majority shareholders of listed companies have lately been selling their holdings. In January alone, 19 listed companies saw their high-ranking executives and majority shareholders sell off part of their holdings, according to information released by the Shanghai Stock Exchange. The sales involved many irregularities.
If regulators fail to rein in such irregularities through legal means, senior managers and majority shareholders will continue to take advantage of their positions to profit.
The individual investors will suffer, as will the long-term health of China's stock market.
The new rule more strictly regulates the timing, amount of shares sold and the reporting of stock sales by senior executives and majority shareholders of listed companies.
It standardizes their trading requirements.
For example, the regulation stipulates that the stocks sold by senior company executives and majority shareholders cannot exceed 25 percent of all shares they hold in one year.
By placing a cap on the amount of stock that can be sold by these shareholders, market regulation is more practicable.
It will also align the interests of those shareholders with that of the listed companies. The senior executives and majority shareholders will only maximize their wealth by improving their companies' performance.
The rule also stipulates that within two days after the stock sale by these shareholders, the sale must be reported to the listed companies, which must in turn publicize it on the website of the stock exchange.
The regulation lays out the timing, method of sale, definition of what is being sold, and the entities responsible for the disclosure. This will help standardize information disclosure and regulate stock sales by senior executives and majority shareholders.
The press, meanwhile, should follow the implementation of the rule.
No law is perfect. Although the new rule strengthens regulation of stock sales by high-ranking executives and majority shareholders, they may still discover ways to circumvent the rule.
The power of the media, therefore, should be used to follow the rule's implementation.
Since the release of corporate information may have a major impact on stock prices, senior executives and majority shareholders may wield their influence to postpone the release of information and take advantage of the time to profit.
The press can play a role in bringing such irregularities to light.
It can closely watch stock sales by these executives and shareholders and relate it to corporate stock price movements to see if there are irregularities.
The media can follow senior executives and shareholders' selling of large amounts of stock to monitor their investment behavior.
If the press can play an effective role in this respect, dishonest senior executives and majority shareholders will be condemned by public opinion as well as the law.
The new regulation shows that the regulators are serious in protecting the healthy growth of the market by guarding against market-damaging irregularities.
The authors are researchers with the Research Institute of Law and Economics, China University of Political Science and Law
(China Daily April 20, 2007)