The China Security Regulatory Commission (CSRC) has, again, announced it will act harshly in the case of insider trading. Rightfully so, writes financial analyst Sara Hsu in the Diplomat. But it is not enough.
Still, insider trading remains a problem. While shareholder trading is banned one month before the announcement of a financial report, those who trade before the announcement may make a profit of 2.83 times that of uninformed trades, according to Zhu and Wang (2015). Insider trading is more of a problem among large shareholders in private as opposed to state-owned firms, as the former have higher levels of involvement in business operations and a stronger profit motive.
One major reason why insider trading continues to pose such a problem is that penalties are relatively light and the crime is difficult to prove. According to the law, those found guilty of engaging in insider trading can be fined up to five times the illegal gains and be imprisoned for up to ten years. The courts have generally baulked at handing down the maximum penalties, although it has been argued that simply publishing the names of insider traders has done greater damage by way of blemishing reputations. Regulators lack the resources to properly investigate the crimes, which are difficult to detect.
Moreover, legal language surrounding insider trading, written in the Securities Law of 2005 and the Regulation on the Administration of Futures Trading, is unclear, and the judicial interpretation written in the Insider Trading Interpretation is insufficient to clarify the language. For example, it is unclear who exactly is considered an insider and which bodies are to regulate insider trading, which undermines the basic understanding of the crime.
If China is to effectively combat insider trading, then, not only is it important to devote more resources to investigating and prosecuting insider trading cases, it is also essential to ensure that the legal language is clarified going forward. The CSRC’s renewed campaign against insider trading may help to attract fresh attention to this issue.
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