“killing the rooster to scare the monkey” over "ratholes"

So many animals in one article made this FT piece a "must blog post".

It will come as no surprise that there exist a large number of loopholes and shady dealing in the Chinese stockmarket.

The financial sector will always be ahead of the giant lumbering government. This is also true for Western countries as the sub prime and Northern Rock fiasco's demonstrate.

At least China is moving in the right direction:

China cracks down on market ‘ratholes’ [FT]

China’s securities regulator has banned one fund manager from the country’s capital markets for life and another for seven years in a warning to the industry to clean up lax internal controls.

The two managers were banned after buying shares in companies their funds invested in and then selling them for a profit – a practice known as “building a rathole” in Chinese.

Tang Jian, a former manager for China International Fund Management, a joint venture between JPMorgan and Shanghai International Trust Co, was banned for life after storing up Rmb1.53m ($220,000) in his rathole, according to the China Securities Regulatory Commission (CSRC).

Wang Limin, formerly a manager at China Southern Fund Management, was banned for seven years after similarly making a profit of Rmb1.5m.

Both managers were also fined Rmb500,000 and had their illicit earnings confiscated.

The transactions occurred in 2006 as the Chinese stock market was heating up and investors began pouring into a market that rose nearly six-fold in the two-and-a-half years to October 2007.

The benchmark Shanghai Composite Index has since dropped by almost half from that peak.

The index rose 1 per cent on Tuesady to 3,148 points, on expectations the government will introduce new measures to support slumping prices.

Such punishment, and the public release of details of such cases, is a common tactic – referred to as “killing the rooster to scare the monkey” – used by the regulator in the face of widespread irregularities and malfeasance in the country’s capital markets.

“The scale in China of corruption, poor disclosure, insider trading and market manipulation basically swamps the regulator’s limited resources,” said Fraser Howie, author of a book on China’s capital markets. “This is just how the market works and these guys were either unlucky or stupid.”

The CSRC issued a warning to fund management firms through state media yesterday that it was prepared to punish companies whose lax internal controls allowed managers to break trading laws and regulations.

It also ordered firms to monitor all communications of investment managers in the workplace.

Assets under management in China’s mutual fund industry total Rmb2,500bn, with funds controlling about 23 per cent of the market capitalisation of all tradeable shares on the Shanghai and Shenzhen exchanges, according to CSRC figures.

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