China needs to get tougher with market offenders

By Li Qiaoyi Source:Global Times Published: 2017/12/26 20:48:40

Illustration: Peter C. Espina/GT


Faraday Future, a US electric vehicle startup backed by Jia Yueting, founder of Chinese tech conglomerate LeEco, has secured a new round of funding, according to recent media reports. If confirmed, this could be the only good news in a long time for Jia, who resigned as chairman of LeEco's main listed arm amid mounting debt, leaving the troubled California startup as Jia's best hope for the future.

The China Securities Regulatory Commission (CSRC) Beijing Bureau issued a notice late on Monday ordering Jia, the actual controller of LeEco's listed arm, to return to China by the end of the year to deal with the company's problems. Jia, on a national blacklist of debt defaulters, is currently in the US, pushing ahead with his car-making ambitions.

LeEco's fall from grace is a cautionary tale for China's technology sector as a whole. In particular, the company's failure has cast a shadow over Baofeng Group Co, a Beijing-based Internet company with a similar business model to LeEco.

Apparently, LeEco's failure has drawn a rethink at Baofeng. Speaking at an event in Beijing early in December, Feng Xin, founder of Baofeng, told his audience that, the sinking of a rival company (believed to be LeEco) has raised issues for Baofeng. At the event, Baofeng TV, the company's broadcast arm, announced that it had secured investment of 800 million yuan ($122 million) from two investors.

However, the fall of LeEco attests not just to the problems of an overly expansionist business model, but to the risks of amplification through stock market hype.

To be fair, efforts by market regulators over the past year to curb speculation and cut risk have helped avert bubbles that could have formed in some emerging sectors. But for the country's stock market - second only to the US by market capitalization - to genuinely serve as a barometer of the vibrancy of the Chinese economy, regulators need to get even tougher.

At the heart of LeEco's predicament was the unruly expansion of an upstart firm that used to enjoy likening itself to Netflix. The firm, formerly known as LeTV, burst onto the scene as a video stream site but quickly sought expansion in areas ranging from smartphones and online entertainment to electric vehicles.

An expansionist model that failed to come to terms with market realities stretched the company too thin and left it all but crippled by debt. Le Corporation, a Hong Kong subsidiary of LeEco, recently filed for bankruptcy.

In all this mess, one issue is crying out for greater attention: stock market hype. It was a groundless frenzy of enthusiasm that pushed the value of LeEco's Shenzhen-listed arm to an all-time high of more than 150 billion yuan in May 2015. This stellar performance appears to have been taken by the company's major shareholders as an opportunity to cash in.

In a typical example, as he dumped billions of yuan of shares in 2015, Jia said that the proceeds would be lent to the listed arm, interest-free for no less than five years, to fund expansion. But there is no evidence that Jia delivered on this bold statement and, in an open letter to the Shenzhen Stock Exchange in November, he claimed that he was simply unable to lend money to the company as promised.

In response, CSRC Beijing Bureau decided earlier in December to ask Jia for a written report on his understanding of the existing problems and the precise measures which should be taken to correct them. The regulator deemed Jia's failure to honor his promise a violation of market rules and regulations. This brought another round of negative coverage for both Jia and LeEco in the mainstream media.

Unfortunately, it is still not the case that behavior like Jia's automatically results in heavy punishments and huge penalties for offenders. The costs of breaking the rules are not yet high enough to deter wrongdoers from offending again.

There is no denying though, that China is now playing hardball in its efforts to curb stock market manipulation. In January, hedge fund billionaire Xu Xiang was sentenced to five and a half years behind bars and fined a record 11 billion yuan for price manipulation and insider trading.

The overall trend in the A-share stock market this year was blue-chips out-performing benchmark indices. This helped to ease concerns that baseless hype could inflate stock prices, especially micro- and small-cap stocks, out of all proportion to the value of the actually business entities behind the paper.

The CSRC is assuredly making progress, but it must be pointed out that the achievements so far have yet to generate fine examples of sober-minded investment. The stock market is still comprised mostly of individual investors in inherently weak positions, prone to becoming the victims of those who set out to break market rules. What is needed now is tougher, targeted measures against market wrongdoers, with the legal penalties for stock market irregularities heavier and more clearly signposted.

The author is a reporter with the Global Times.

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