Insider Trading in China Thrives With Selectively Disclosed Economic Data
Every month, traders, investors and money managers like Shi Yu cull rumors about China’s soon-to-be- released economic statistics for what might be the official numbers to try and get an edge in the market.
On Saturday, Feb. 12, Shi read on an Internet chat forum that January inflation would be a lower-than-forecast 4.9 percent. Two friends had heard the same, says Shi, who set a strategy to sell shares into a rally he anticipated as the figure spread.
When the markets opened on Monday, China’s benchmark Shanghai Composite Index rose 2.5 percent, the most in two months, on speculation China wouldn’t need to raise interest rates further to cool rising prices. By the time the country’s statistics bureau matched the number on Tuesday, Feb. 15, Shi had gained 2 percent on his trades, he says.
“In China, it’s better to be prepared than to be surprised,” said Shi, 42, an investment manager with Nanjing 21st Century Investment Group, a property developer in eastern China. “There is a window for speculation.”
Numbers circulated before the publication of economic indicators are right so often that it raises the prospect of selective disclosure or insider trading, according to Yan Yiming, a Shanghai-based securities lawyer.
“More often than not, we see the stock markets move strangely before the release of statistics,” Yan said.
China, the world’s second-largest economy, must curb leaks because they give an unfair advantage to investors who get the information first, says Dariusz Kowalczyk, a senior economist in Hong Kong at Credit Agricole CIB. The country’s rising influence means the data can move markets globally, he said.
Risk of ‘Scandal’
“Those with early access can make money,” said Lu Ting, a Hong Kong-based economist at Bank of America-Merrill Lynch. He urged authorities to stem the leaks. “It’s an enormously important issue to be dealt with. Otherwise, sooner or later, we’ll see a scandal.”
Leaks happen to all key data from the National Bureau of Statistics, Lu said. Economic indicators published by the agency include gross domestic product, released quarterly, as well as monthly industrial production and the producer price index. Figures for March will be released on April 15.
Early disclosure happens because too many government offices see data before they’re made public, according to He Keng, a former deputy head of the department and now a member of its consulting committee. A legal “loophole” means China’s laws don’t count profiting on leaked economic indicators as insider trading, according to lawyer Yan.
The bureau says it’s acting to combat selective disclosure of its data. Any unauthorized release violates the Statistics Law and is punishable by a warning, demotion or firing, according to a rule issued by the government in March 2009.
The department will cut down on how many people see statistics before publication and reduce the window between their calculation and release, its head Ma Jiantang told Reuters last month. The comments were confirmed by the bureau without elaborating. Ma wasn’t made available for an interview.
The statistics bureau a year ago shortened the time span between the production and release of the consumer price index to 48 hours from 72 hours, according to an official at its Beijing headquarters who asked not to be identified because he isn’t authorized to speak on the matter. He wouldn’t disclose who sees the information.
February was the fourth straight month that the consumer price index was accurately circulated in the market and press reports before release. It’s become one of the most sought-after numbers because of China’s battle to curb inflation, which jumped to a 28-month high of 5.1 percent in November. The central bank raised interest rates on April 5 for the fourth time since October.
The data must be shared in advance with at least 10 government departments to “listen to their views and allow everybody to be prepared,” according to He. They include the Ministry of Commerce; the National Development and Reform Commission, China’s top economic planner; and the People’s Bank of China, the nation’s central bank, he said. None of those bodies responded to faxed questions from Bloomberg News.
“The statistics bureau does have problems with other departments announcing them first,” He said. “How are we able to control it?”
People may pay to get access to the data, according to Ye Qing, a deputy head of the provincial statistics bureau in Hubei.
“I’m worried about it,” Ye said in an interview in Beijing. “Securities analysts really want to see the data ahead of time, even if it’s only half a day before.”
Germany and the U.K. have taken steps in recent years to reduce the chance of leaks. Germany’s labor agency last year reduced the number of people involved in compiling monthly unemployment statistics to stop data regularly appearing in newspapers and on agency wires ahead of the official publication time, said Ilona Mirtschin, a spokeswoman.
The window in which the U.K. Office for National Statistics discloses official data to some government officials was narrowed to 24 hours before publication from 40.5 hours in 2008.
Willful disclosure of protected data by unauthorized persons in the U.S. is a felony punishable by as much as 5 years imprisonment and a $250,000 fine. The late former Goldman Sachs Group Inc. (GS) senior economist John Youngdahl was sentenced to 33 months in prison in 2004 for passing on to Goldman traders advance information in October 2001 that the government planned to stop selling 30-year bonds.
U.S. Disclosure Law
The U.S. Securities and Exchange Commission adopted Regulation Fair Disclosure in 2000 to quash the practice of companies providing material information in meetings with selective investors who could then trade on it before its public disclosure.
China’s statistics bureau wouldn’t say whether any official has been reprimanded for unauthorized disclosure.
The securities market regulator doesn’t investigate price movements related to leaked economic indicators, according to a senior official with the China Securities Regulatory Commission who wouldn’t be identified, citing the sensitivity of the matter. Insider trading rules guiding the watchdog relate only to those benefitting from company-specific information, he said. The securities regulator didn’t respond to faxed questions.
“We should make clear in the law that no individual is allowed to leak such statistics,” says Lu Zhengwei, a Shanghai- based senior economist at Industrial Bank Co. “This is no different from insider trading, which will be severely punished.”
Chinese stocks surged the most in five weeks on Jan. 19 as Phoenix Satellite Television Holdings Ltd. reported on its website that inflation had cooled to a 4.6 percent annual pace in December and the economy had grown 10.3 percent last year. The numbers were confirmed by the statistics bureau the next day.
The market began rising soon after 10:30 a.m., about 50 minutes before the Hong Kong-based Chinese broadcaster ran its report. It cited an unidentified official with the People’s Bank of China as saying that the economic figures were “leaked.”
The benchmark index ended the day 1.8 percent higher. After the official releases the next day, the market closed down almost 3 percent.
Last June, Reuters reported figures for consumer prices, exports and new loans, which it said were divulged by an unidentified government official at an investor conference. Reuters cited three people who attended the event without publishing their names. Export and new loan data are released by other government bodies.
The report spurred the biggest gain in the Shanghai Composite Index in two weeks and set off a stock rally from Europe to the U.S. Official releases later matched or were close to the numbers. The National Bureau of Statistics said it would investigate the leak. It hasn’t said what the outcome was.
Traders have become so accustomed to selective disclosure they routinely speculate on numbers regardless of whether the talk in the market is true or not.
Three separate consumer price index figures circulated for February all turned out to be wrong, said Shi, the Nanjing 21st Century investment manager, over lunch in Nanjing’s business district on March 23. Shi, who says he didn’t trade on the March rumors, considers himself near the end of the information chain. The figures “come to my ears naturally, with the wind,” he said.
On the morning of Feb. 12, Shi said he was on an Internet forum frequented by equity traders when someone posted: “Heard CPI to be 4.9.” The median forecast for January was 5.4 percent, according to economists surveyed by Bloomberg News.
That afternoon, sipping mocha on the porch of the New Magazine Cafe in Nanjing with friends, two of them said they had heard the 4.9 figure, according to Shi. By Sunday evening, it was posted online by at least two users of Sina Weibo, a Chinese microblogging service similar to Twitter.
“I expected some kind of data beautification, but not to this extent,” Shi said. He had been aware that China was scheduled that month to change the way it calculates inflation. The weighting for food, which was a major driver of price gains last year, was reduced.
The number was probably already known by some market players because the Shanghai index rose before the weekend, Shi said. The index gained 1.9 percent over two days through Friday, Feb. 11.
Shi figured the market would rally when it opened on the Monday and then fizzle when more people became aware of the basket adjustment, he said. He was right. The index closed unchanged on the day of the official announcement. The statistics bureau says it reported the leak of January’s consumer price index to relevant agencies, without elaborating.
In the past, such statistics weren’t of much use beyond government policy makers, says Lu of Bank of America-Merrill Lynch. They have become more important as China’s financial market has grown, he said.
China’s stock market last month overtook Japan as the second-biggest by market capitalization after the U.S. China plans to introduce a so-called international board this year, allowing foreign companies to sell shares to Chinese investors, Fang Xinghai, director general of Shanghai’s financial services office, told Bloomberg TV in July last year.
“As China’s significance grows, having reliable, quality data released on a consistent and timely framework is very important,” said Fraser Howie, the Singapore-based co-author of two books about China’s financial markets. “Global markets are looking at Chinese data to give them a picture of global growth.”
China will inevitably take steps to level the playing field, says Khiem Do, the Hong Kong-based head of Asian multi-asset strategy at Baring Asset Management (Asia) Ltd.
“Of course it’s going to improve,” Khiem said. “It comes with being a mature financial system.”