Friday, March 20, 2009

Human Flesh Search Engines in the World of Finance

Today I encountered a new term: "listed company human flesh search engine" (上市公司人肉搜索).

Those who follow China are familiar with the term "human flesh search engine" as a metaphor for a spontaneous online uprising of people whose main purpose is to exact revenge for a perceived wrong -- an online equivalent of the mob who showed up outside Dr. Frankenstein's house with torches and pitchforks.

This term has now been prefixed with "listed company" to describe people who obtain inside information on listed companies and spread that information online for the purposes of manipulating the share price.

The Shenzhen Stock Exchange announced today that it would be taking steps to counter this kind of behavior, first of all by simply warning investors of the risks of following the advice of such unauthorized communication. They even used a term that I have not often encountered in the Chinese press: 投资者关系 or investor relations -- a concept that has been slow to catch on in China so far since the only investor most listed companies have to worry about is the government.

Secondly, and most importantly, the Exchange vows to strengthen supervision over the manner in which listed companies release information to the public, ensuring that information is released in a more timely manner. In a lesson that many governments could stand to learn, the Exchange gets the fact that rumors can be countered with more timely release of official information.

An "industry insider" was quoted as saying that, from this point forward, people without credentials would have to "shut their mouths", and only those with approved credentials would be able to conduct equity analysis for public consumption. Organizations providing analysis will be supervised by both the authorities and the investing public. If someone has a problem with a particular analyst's work, they may file a complaint.

This is a good start, and many of the provisions make sense; however, as with all good starts, there are shortcomings. First, the internet is a big place, and while the authorities have developed the capability to filter out political content, it will be much harder to filter out information regarding companies. Any filter that blocks certain keywords could end up blocking legitimate information channels as well.

Second, while it is good that there are legitimate equity analysts with valid credentials in China, I have yet to find anyone in China who accords fundamental analysis any importance in their investment decisions.

It is early days yet, and Chinese shares still do not reflect the underlying value of the firms they represent. And even if they did, the state's controlling share in most of the listed companies makes inside information as to the state's intentions one of the most important pieces of information for determining the future direction of a stock price. Will credentialed analysts be privy to such information?