Capvision has revealed troubles of China's expert networks, but not for the reasons you imagine
On the ground context on China’s expert network and investment research industry - demystifying recent events
In a highly publicized event, one of the largest expert networks in China, Capvision, was reportedly investigated by Chinese state security services months ago. At least several experts in Capvision’s network have been imprisoned. Although the company claimed that itself was not punished, the event has shocked many outside of China and has been interpreted as a sign that China is further tightening on information flow of the country in general.
The recent turmoil at Capvision: what outsiders misunderstand
Those who work in China’s information service industry, such as us, are not the least surprised. What did surprise us was the level of misinterpretation and fear-mongering by the outside world. Besides obvious errors such as this editorial by the world-renowned Financial Times that wrongly labels Capvision as a “US Company”, we think such a gap in understanding mainly stems from two factors.
First, the outside world does not, or does not care to read official messages carefully: the two cases cited in official news (here is an excellent translation), one involving stealing internal documents from a state-owned enterprise with security clearance, and another one with sharing information about specs of a specific type of fight jet, do sound completely illegal, no matter which country you live in.
Understandably, China may look opaque to many outsiders. So ironically, when China is unequivocal about something, people often do not feel comfortable taking these obvious messages seriously.
But the message is unequivocally simple and the line is unequivocally clear in this case: do not touch on state secrets and do not steal internal documents from high-security clearance companies. It is really not that hard to do.
The bigger misunderstanding: China's expert network is problematic, but not for the reasons you imagine
The second reason, and we think the bigger reason, is that foreign onlookers are not familiar with the general context of China’s expert network industry, essentially a component of China’s investment research industry.
To start, China’s barely 30-year-old investment research industry is still at an early stage of development and is actually under-regulated by western standards. As cited by a recent report by securities regulator after inspecting some stock brokerages’ research arms, there are many instances of unprofessional and non-compliant practices, such as private sharing of stock recommendations without authorizations, making investment advice on unfounded assumptions, a lack of proper background checks for experts, etc. Generally speaking, there is also a more lax attitude towards insider trading compared with more developed markets. To be sure, The authority is aware of these issues and is constantly inspecting the industry. But the culture and practices of the general market cannot be changed in one day.
Within this context, anyone working in China’s financial services industry knows that expert network is a tricky business. Here is the dilemma in a nutshell: On the one hand, there are many instances of so-called “fake experts” exaggerating or even outright fabricating information for money. On the other hand, if the experts are real, sometimes the fear is that they may be too real, inevitably bordering on inside information. To make the matter worse, unlike western capital markets, China’s investment industry has become highly dependent on information coming out of expert networks.
What's problematic with expert networks for the financial service industry in China
To properly contextualize the Capvision case, it is important to have a full understanding of how the expert network business works in China, and what it means for the financial service industry. We cannot explain this issue better than Mr. 裴培 Pei Pei, a former sell-side analyst and now an influencer specializing in China’s tech and capital markets, whose recent article discussing the Capvision case accurately explained this issue.
Here is a short summary of the key points:
Capvision is the largest provider of "expert network" services in the China on-shore market. The business model is simple: investors pay companies like Capvision to connect with industry experts for insights into specific industries, companies, or market rumors.
The majority of clients using "expert network" services are institutional investors, particularly those involved in secondary market trading.
In China, institutional investors have a significant demand for "expert interviews" because they generally distrust the expertise of sell-side analysts. Moreover, investment decisions in China often need to be made quickly, causing investors to rely on external experts for a "crash course" on industry nuances.
As a result, China's expert network business remained under-regulated compared to the West, sometimes creating grey areas and fostering fraudulent activities. The recent scandal has prompted discussions about potentially reducing reliance on expert networks in China's equity research and financial service sectors.
Here is our full translation of his article:
Will the expert network model come to an end for the A-share market? A discussion from the Capvision case
by Pei Pei
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