China’s research clampdown: a step in the wrong direction

China’s securities firms are about to be subject to an alarming rule that will limit their capacity to provide independent research. The decision to grade firms on their ability to manage the reputation of China and guide public opinion is a big step back for the country’s financial system.

  • By Rebecca Feng
  • 15 Aug 2019
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The Securities Association of China (SAC) said earlier this month that it would assign a “reputation management” score to each securities firm based on two criteria – the ability to guide public opinions on the market and regulations, and the ability to handle negative news about themselves. A draft rule was distributed to leading securities houses on the mainland.

Firms are encouraged to guide public views by publishing research on market regulations or be quoted in media stories. But the devil is in the detail. These research and quotes must “agree to the official talking points and tones of the SAC,” according to the draft rules. In terms of managing the firms’ reputation, points will be deducted based on the number of negative news stories appearing in media publications and how widespread these publications are.

Onshore sources added that firms will be given additional points if their research or opinions are cited in one of the big four state controlled securities journals, state controlled Xinhua News, or the official newspaper of the Central Committee of the Communist Party, People’s Daily. The big four securities journals are Xinhua-managed China Securities and Shanghai Securities News, People's Daily-managed Securities Times, and state backed Securities Daily.

This “reputation management” score will then go into a rating assigned to each securities firm annually by the China Securities Regulatory Commission (CSRC), ranging from AAA to E. Those with a higher rating will receive perks such as an easier time obtaining business licences and less frequent regulatory checks. In 2018 and 2019, the highest rating given was AA.

It is not hard to see why the move will damage the independence and fairness of securities firms’ market research. However, a big side effect is that the new measures will widen the information gap between institutional investors and the greater public, which is already a concern.

Securities houses will become more cautious in producing controversial research, for fear of being reported by the media, they will start to deliver more in-depth and controversial research only to a small group of targeted clients. Meanwhile, when appearing in public media, they will make sure that their views cannot be in any way interpreted as critical of new regulations. Better still for them, if they can be understood as hailing market innovations, such as the new Star board, the government wants to promote.

“Interesting scenes will start to emerge in the stock market,” a source at the securities regulator said. While the so-called experts unanimously recommend one set of investment strategies, realities in the market will reflect that institutional investors are employing another set of strategies.

As a result, the public media could become a source of misleading, unfair, and incomplete opinions. Those relying on mainstream news for investment strategies, namely retail investors and smaller investors, are more likely to be under informed.

Other potential problems may appear. First, there are no clear definitions of what is “negative” and “positive” news. The judgement will be made by “third party public opinion analysis institutions”, according to the official rules. The high level of subjectivity may lead to collusion with these third party institutions.

Second, the so-called “WeMedia” — publications and platforms on the WeChat app — is flourishing in China. Many of them are one-man shows. As long as their articles do not go viral, these content producers are not usually held responsible for producing “fake news”. It will be unfair for securities houses to have to monitor and control “negative news” about themselves on these platforms. 

Lastly, rather than encouraging firms to be more open to media, the rules are likely to take a toll on firms’ day-to-day business. A fair report of any deals will often contain both positive and negative opinions.

One corporate communications head summed it up: “I guess the safest response is not doing any business.”

  • By Rebecca Feng
  • 15 Aug 2019

Panda Bonds Top Arrangers

Rank Arranger Share % by Volume
1 Bank of China (BOC) 18.86
2 Industrial and Commercial Bank of China (ICBC) 14.39
3 China Merchants Bank Co 14.21
4 China Merchants Securities Co 8.85
5 Agricultural Bank of China (ABC) 5.90

Bookrunners of Asia-Pac (ex-Japan) ECM

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 China International Capital Corp Ltd 4.57 23 12.70%
2 China Securities Co Ltd 3.53 7 9.80%
3 Morgan Stanley 3.39 11 9.41%
4 CITIC Securities 3.29 11 9.14%
5 Goldman Sachs 1.70 13 4.74%

Bookrunners of Asia Pacific (ex-Japan) G3 DCM

Rank Lead Manager Amount $bn No of issues Share %
  • Last updated
  • Today
1 Citi 7.04 40 7.50%
2 HSBC 6.16 53 6.56%
3 UBS 4.68 31 4.98%
4 JPMorgan 4.49 30 4.78%
5 BofA Securities 4.36 17 4.64%

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