Rail merger threatened by insider trading allegations

CNR Corp displays their products at Modern Railways Exhibition in Beijing on Oct 28, 2014.[Photo/CFP]

The largest amount of stocks traded were by Gao Zhi, CNS's vice-president and his relatives. They bought and sold nearly 2 million shares in CSR with total investment exceeding 10 million yuan prior to the trading suspension, according to the information.

Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, said the trading allegations complicate the merger of the two companies, adding that key to determining whether the trades were classified as insider trading depends on how the regulator dictates the formation date of the sensitive information.

"The allegation has attracted public attention and triggered market reaction, which could be viewed as positive progress for China's stock market as it is becoming much more sophisticated and sensitive to potential illegal activities," Dong said, adding that the final result depends on the regulators' investigation.

Rumors of the merger of CNR and CSR first surfaced in August last year when the two companies engaged in a price war to compete on overseas orders. The central authorities then accelerated the completion of the merger plan, according to Chinese media report.

Liu Guohua, a lawyer at Guangdong-based Benben Law Firm, was quoted by the Chinese media as saying it was "unacceptable that the senior executives of the two companies claimed that they did not know the information.

"It was obviously price-boosting news for the companies as the merger will create an industrial giant."

Zhong Nan contributed to this story.