* CSRC cracking down on insider trading at mutual funds
* Mutual fund managers resigning in droves
* Three prosecutions completed, 30-plus investigations
* Investigation follows similar campaign in bond market in
By Lu Jianxin and Pete Sweeney
SHANGHAI, July 1 A crackdown by Chinese
regulators on insider trading in the country's $1.2 trillion
mutual fund industry has sparked an exodus of fund managers from
The investigation is part of efforts to rebuild investor
confidence in the country's lagging stock markets.
More than 100 asset managers have quit their jobs so far
this year, almost twice as many as in the same period last year,
according to Chinese data provider iFund. Industry sources
reckoned a good many of the departures were due to fears of
being caught up in the investigation.
A focus of the investigation is so-called "rat trading".
This involves fund employees using illegally obtained inside
order information to front-run client orders, that is building
positions in advance of a buy or sell instruction in order to
take a risk-free profit when the transaction is executed.
Regulators are also investigating tip-offs by fund employees
to relatives or friends on what stocks the fund plans to buy or
sell, allowing them to take positions in advance.
The China Securities Regulatory Commission (CSRC) said in
May that it was investigating more than 30 such cases, having
concluded investigations into employees at Everbright Pramerica,
China International Fund Management Co and Harvest Fund and Ping
An Asset Management.
Three former managers at these fund firms, including one who
worked for more of the firms, have been found guilty of "rat
trading" and have been handed over to the police, the CSRC said.
The penalties have not been announced, though imprisonment is a
rarity in such cases.
One of the guilty who had worked for Ping An had left the
company, a spokesperson for Ping An told Reuters in an email.
"The company is closely following and supporting the
unfolding of the 'rat hunt' campaign," the spokesperson said.
Ping An said employees are banned from directly or indirectly
The other companies did not comment when contacted by
Fund managers said the problem was rampant but declined to
give details, saying they were not allowed to discuss it with
One fund manager said he expected the results of the probe
to be released over time, and could involve some big names.
"The results will be announced gradually, possibly
surprising the market since they are related to some industry
stars," the fund manager said, requesting anonymity to avoid
falling foul of the market regulators.
China has the world's 10th biggest mutual fund industry,
with official Chinese data showing it is home to 91 mutual fund
companies, with 680 funds managing 7.25 trillion yuan ($1.2
trillion) worth of assets as of the end of May, 2014.
The industry also boasts one of China's highest average
annual salaries of over 1 million yuan ($160,300) per year,
though fund managers have struggled to justify their earnings
given the poor performance of equities in recent years.
CLEANING OUT THE RATS
More than $1.4 trillion - equivalent to 16 percent of
China's gross domestic product in 2013 - has been wiped off the
value of the Shanghai and Shenzhen exchanges since the Shanghai
composite index peaked at 6,124 points in October 2007.
The index has declined over 60 percent from that peak, a
performance completely at odds with China's rapid economic
growth over that time, and contrasting with rallies seen in
other Asian stock markets.
One reason domestic investors avoid the stock market in
general is the widespread suspicion that the exchanges are
platforms for insiders to fleece ordinary investors.
"Recent investigations showed that inside trading is still a
prominent problem in the asset management industry," CSRC
spokesman Deng Ge said at a recent press conference.
The mutual fund investigation follows a similar one last
year into the trading practices in China's bond market.
It also follows the CSRC's prosecution of fund managers at
Everbright Securities in the aftermath of the stock
market "flash crash" in September, during which Everbright
employees hedged against the impact of their own trading error
at the expense of retail investors.
"From bonds to funds, regulators want to squeeze out
irregularities in the capital markets to pave the way for
further expansion," said Wang Ming, head of marketing at
Shanghai Yaozhi Asset Management Co.
"The clean-up of the fund industry also aims to expand the
cohort of institutional investors in the stock market; China's
bond market is already dominated by institutions," he said.
Institutional investors, mainly mutual funds and brokerages,
hold just 10.87 percent of listed Chinese stocks, CSRC data
shows, whereas they hold the majority of shares in most
If investor confidence in China's stock markets is restored
, the prize would be substantial.
Investors have scorned Chinese equities, preferring housing
and high-yield bonds instead, leaving China with one of the
world's worst performing stock markets since markets elsewhere
began recovering from the global financial crisis.
The speculative investment in housing and high-yielding but
obscure wealth management products has produced economic
distortions, and Beijing wants the stock market to be a viable
alternative for both companies and investors.
Besides the regulatory clean-up, the CSRC is also
liberalising the funds market and has just issued new guidelines
that loosen derivative trading regulations, aiming to encourage
innovation and promising to let in more foreign
At the same time, the latest version of China's fund law,
promulgated in June 2013, permits fund managers to trade stocks
on their own accounts for the first time under tight conditions.
(Editing by Nachum Kaplan and Simon Cameron-Moore)