An Odd Concept Even in China: Stock Holdings of Anticorruption Organs

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It's no secret that the government is everywhere in China's stock market, but it was still unexpected for a branch of the country's top anticorruption agency to put down its name as a shareholder of three listed firms.

The shareholdings by a joint subsidiary of the Sichuan branch of the Communist Party's Central Commission for Discipline Inspection and the province's Inspection Office have triggered an intense debate (here in Chinese ) in the local media and blogspace over irregularities involving various government agencies in a society where business and political interests are increasingly intertwined.

In late April, some curious Chinese journalists found out through the companies' first-quarter financial reports that an entity called 'The Service Center of the Sichuan Province Commission for Discipline Inspection and Inspection Office' had become a shareholder of Zhongyuan Huanbao, a water-treatment concern; Mingfufa, a telecommunications-equipment maker, and Dongfang Yinxing, a property developer.

The 'Service Center' owns 1.6 million shares of Mingfufa, 930,000 shares of Dongfang Yinxing and around 300,000 shares of Zhongyuan Huanbao, making it one of the top ten stakeholders of each listed firm.

The disclosure prompted a wave of public rage as journalists and Internet users cast doubt on the legitimacy of such dealings and expressed concerns that the government agencies are playing the stock market with taxpayer money.

Shortly after domestic media reported the holdings, the two Sichuan agencies jointly issued a statement, saying that the Service Center stock holdings were due to ongoing, undisclosed investigations into certain assets in the three listed companies. With the help of China Securities Depository & Clearing Corp., the Service Center took over the shares from their previous holders Jan. 23, the statement said.

'At the moment, the shares in question are in the process of being liquidated and submitted to the national treasury,' the statement said, adding that the agencies involved have never been and won't in the future be engaged in any stock trading.

While the official clarification failed to appease some observers, others believed it might be true.

To begin with, China's political and legal systems work differently when it comes to dealing with such assets: In the West, a court would have taken over the assets and frozen them until the investigation was completed; in China, the disciplinary commission does have the right to keep such assets under 'receivership' before turning the probe into a lawsuit and handing the assets over to the court.

Also, it would seem an extremely risky decision for a government agency to register its official name at the stock exchange as an outright shareholder if it indeed wanted to invest in the market.

Still, big questions remain over the way the case was and will be handled: The official statement mentioned only the process of transferring the stocks to the national treasury, without alluding to any potential role of a court.

Ironically, while the intellectuals in China pontificate on the implications of this saga, investors in the stock market appear to have moved on. And it turns out that as investments go this was one wasn't bad: From Jan. 23 to May 19, Dongfang Yinxing's shares soared by 81%, with Mingfufa up by 42% and Zhongyuan Huanbao gaining 30%. In the same period, the benchmark Shanghai Composite Index rose by 34%.

The next question for the Service Center: Any stock tips？

Shen Hong

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