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Copyright © International Chamber of Commerce (ICC). All rights reserved. ( Source of the document: ICC Digital Library )
by Daniel Arthur LAPRÈS
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As early as 1996, the World Bank pronounced the state of financial regulation in China to be “basically sound and in accordance with international principles”.2
In the fashion illustrative of the approach of the reform movement in China implemented since 1978, experiments successful at the local level have evolved into national phenomena. More specifically in the context of the capital markets, what was allowed to begin as street trading of bonds, shares, or commodities, has evolved into a network of technically sophisticated markets.
According to the China Securities Regulatory Commission (CSRC) 2007 Report, the Shanghai and Shenzhen stock exchanges had listed a total of 1,434 companies with a total market capitalization of RMB 8,940 billion (corresponding to about 44% of 2006 Gross Domestic Product), but of which only some RMB 2,500 billion were in tradeable shares.3 The market included 104 securities and 183 futures brokerage firms. There were also 58 fund management companies (including 24 joint ventures) managing some 53 closed-end funds and 252 openended funds with total assets of RMB 856 billion.4 Yet the nation’s huge savings pool, estimated at some US$ 2.3 trillion by the end of 2007, funded with 25% of disposable income, is mostly (86%) on deposit with the banking system.5
The range of securities traded includes: treasury bonds and financial bonds (issued by emanations of the State, such as the Export Import Bank) traded principally on an inter-bank market (spot and repurchase agreements), corporate bonds, convertible corporate bonds, international organization bonds in local currencies, shares in Chinese companies (A shares), and warrants on shares in Chinese companies. Trading is also conducted in futures contracts on commodities and currencies.
The often-repeated official commitment to convertibility of the renminbi on the capital account has not been implemented, though cracks in the walls around the domestic capital markets have increased the permeability between the domestic and overseas financial markets. In particular, the authorities have opened up the following passages through the wall of non-convertibility. They have spawned an overseas market for shares in companies traded on the Chinese stock exchanges (B-shares). They have promoted the listing of Chinese companies on foreign stock exchanges (so-called H-shares). They have permitted the raising of funds among the public overseas through companies constituted abroad to finance activities in China. They have permitted foreign institutional investors to acquire and trade shares in Chinese companies that are traded on the domestic stock exchanges (A-shares).6 They have removed most barriers to foreign direct investment by Chinese enterprises and individuals, and have allowed the launching of funds in China to conduct portfolio investment abroad.7
While State interventionism in the financing of business activity has been in contraction since the inception of the reform and opening up in 1978, the State’s influence remains decisive in the financial sector. Though some 70% of economic activity is now under private control, almost all the companies quoted on the stock exchanges are State-owned enterprises (SOEs), as are most financial intermediaries and service providers.
A major impediment to efficiency of the markets remains the cumulating of ownership and regulatory authority in the State and its ramifications. The authorities have addressed this problem by creating an organization to act as interface between the State/owner of the major enterprises, and a separate management, which is expected to act independently and respond to the interests of its enterprise.
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A particularly thorny problem remaining on the agenda of the authorities as regards the stock markets is the approximately two thirds of the stock market capitalisation that is tied up in non-tradable shares. In February 2004, the State Council concluded that this situation hindered transparency and price setting and discouraged investment and innovation.8 By the end of 2004, non-tradable shares of listed companies accounted for 64% of total share capital in the domestic market, with 74% thereof in the hands of the State.9 On April 29, 2005, the CSRC created a framework to allow pilot companies to convert their non-tradable shares into tradable shares. Proposals to such effect must be approved by a two-thirds majority vote of the shareholders’ meeting. A lock-up period of one year after conversion is imposed and shareholders may sell no more than 5% of their holdings in each of the following two years.10 As of May 15, 2006, 919 companies had completed or were in the process of implementing the reforms.11
In connection with the reform of non-tradable shares, issues of new shares were suspended between April 2005 and April 2006. Before the end of 2006, 71 companies conducted IPOs, raising about RMB 156.25 billion; 2 companies made rights issues raising RMB 432 million; and another 45 companies carried out new issues raising RMB 81.77 billion. In China during 2007, IPOs of Chinese companies plus the first offerings of their stock by foreign companies already listed elsewhere totaled some $ 90 billion, about as much as in New York and London combined.
The pursuit of openness on the capital markets as a vehicle of efficiency has emphasized the importance of truthful (shi shi), accurate (zheng que) and complete (wan zheng) disclosure by issuers of securities.12 Despite the imposition a Code of Corporate Governance and draconian criminal sanctions in egregious cases, the markets remain rife with breaches of good governance, fraud and corruption. A perennial debate among decision-makers concerns whether financial regulatory authorities should turn a blind eye to such improper behaviour lest confidence in the markets be sapped and their development thereby hampered. After a requirement was imposed in 2007 that companies in polluting industries, such as power generation, cement, and electrolytic aluminum, meet environmental standards before listing their shares, ten initial public offerings scheduled for the second half of 2007 were delayed on this account by China’s environmental protection agencies.
A characteristic of the Chinese financial regulatory edifice has been the coexistence of parallel regulatory frameworks for domestic and foreign investments. Generally, conflicts between the regulatory regimes are avoided by interpreting the foreign regime as “special”, in that it complements the general system. To a large extent, this differentiation has had to be reduced as a result of China’s accession to the World Trade Organization (WTO), which entailed the adoption of its principles of non-discrimination, including in the provision of financial services. Chinese participation in the Services Agreement concluded during the Uruguay Round of Negotiations has improved foreign access to the Chinese market for financial services.
As of the end of 2006, Shanghai and Shenzhen Stock Exchanges each had three overseas special members. They had respectively granted 46 and 19 special B-share trading seats to overseas securities companies. The CSRC had approved seven joint venture securities companies and 24 joint venture fund management companies. Since 2002, foreign institutions have been allowed under the Qualified Foreign Institutional Investor (QFII) scheme to invest in A shares. Since 2001, foreign companies have been able to offer and list A shares and, since 2002, they can take over Chinese listed companies.
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China practises the segregation of the sub-sectors of its financial markets into banking, securities and insurance activities, each with its own regulatory framework and specific regulatory authority.13 During the first quarter of 2008, after banking and insurance regulators signed a memorandum of understanding to boost cross-sector cooperation, the State Council cleared the way for banks and insurers to invest in each other on a trial basis, a step toward the goal of creating large financial firms that operate in a variety of sectors.
A peculiarity of the Chinese stock markets is that trading activity is dominated by individuals rather than financial institutions. At the end of 2006, the CSRC counted 78 million accounts but that number probably reached 100 million in the market run-up during 2007.
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Large and complex economic organizations arose in China prior to the 20th century. By the mid-Qing, these economic organizations were usually either government-sponsored enterprises or family businesses that included members of an extended lineage.
The Western concept of a joint stock corporation was introduced into China by the Company Law of 1904. It was based on English and Japanese examples, but appears to have made little impact in the actual management and control of the companies registered under it. Although the law itself provided for shareholder rights, the infrastructure for enforcement was lacking, and actual control of companies remained with corporate insiders.
In 1869, foreign firms opened the Shanghai Stock Market14 and in 1872 the first stock in a Chinese company was issued by the Shanghai General Bureau of Shipbuilding and Commerce.15
China’s first legislation on securities exchanges was issued by the Ministry of Agriculture and Commerce of the Northern Government (Bei Yang Zheng Fu) in December of 1914.
The first official stock exchange was opened in Shanghai in 1920.16 It was prone to cycles of boom and bust, as well as scandals.
By 1930, the Guo Min Dang government in Nanjing compiled and published a compendium of laws with respect to stock and commodity exchanges and securities transactions.
Markets were suspended during the Sino-Japanese War and the Second World War but the nationalist government reopened the Shanghai Stock Exchange in 1946 and it became the major exchange of its time in Asia.
After the Communist Revolution, the Shanghai stock market was quickly closed and all industrial companies were placed under State ownership. The belief was that events of the early 20th century were merely part of the capitalist phase of history and that the new government would more efficiently allocate resources by administrative means rather than by market direction. However by the mid-1970s it was clear that these administrative means had failed to develop high rates of economic growth.
In August 1984, the country’s first joint-stock company, Beijing Tianqiao Department Store Co. Ltd., was founded and Shanghai Feilo Acoustics Co. Ltd. became the first Chinese company to go public.
While the system of central planning functioned, the State Plan allocated credit and there was no need for mechanisms to convert savings into investment. Stripped of its intermediation function, the banking system served to collect and transfer funds. Enterprises financed their capital needs with funds allotted to them under the State Plan. Households had no need of loans, or savings, as all their needs were satisfied by their enterprises.
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After the launching of the reform movement in 1978, governments at all levels began financing the shortfalls in their budgets by issuing bonds, which initially were placed with often reluctant SOEs. In this early period of reform, SOE workers and peasants were compelled to buy the bonds of their enterprises or local governments. However, these instruments were not originally intended to be transferable. In fact, as so many of their holders did not want them in the first place, a secondary bond market, indeed a vibrant secondary market, did develop.
Though the first issue of treasury bills occurred in 1981, it was only in 1987 that annual issues reached RMB 10 billion. At this time, new treasuries also started to make their appearances: construction bonds in 1987, fiscal bonds in 1988, and inflation-proof bonds in 1989. Simultaneously, enterprise bonds were introduced to the market: financial institution bonds in 1985, national investment corporation bonds in 1987, and SOE bonds in 1992. Local enterprise bonds were first issued in 1986. Short-term commercial paper was issued for the first time in 1988, and large-sum negotiable certificates of deposit in 1988. By 1991, the outstanding amount of treasuries had reached RMB 100 billion and by 1996, RMB 426.5.
Secondary trading began in earnest in 1988, when the authorities allowed State treasury bills to be openly traded in five cities, including Shanghai and Wuhan.
Over the course of the 1990s, the Treasury bond market would become much more important than its corporate compartment.17 The principal market for bond trading is the interbank market, where the central bank, the People’s Bank of China (PBOC), conducts its open market operations.18 Other participants in the interbank market include commercial banks, securities companies, insurance companies, securities investment funds and credit cooperatives.19 Trading is also conducted on the Shanghai and Shenzhen Stock Exchanges among securities companies, insurance companies, securities investment funds, trust and investment companies, credit cooperatives, and other non-financial institutional and individual investors. The central bank does not participate in this market, nor do the commercial banks.20
According to the CSRC 2007 Report, RMB 693 billion worth of bonds were issued in 2006. Turnover on the interbank bond market amounted to RMB 9,970 billion, and that on the exchange bond market RMB 156 billion. T-bonds, corporate bonds and convertible bonds accounted respectively for 93%, 5% and 2% of all bonds. As of 2006, outstanding Treasuries amounted to RMB 2,900 billion, policy-related financial bonds, RMB 2,500 billion and central bank notes, RMB 3,200 billion. Turnover of bond repurchase agreements accounts for 89% of total bond turnover.
Commercial paper, offered by companies due in less than one year, which traded at a 4.2 times ratio of the trading volume to the outstanding stock at the end of 2007, was the most liquid of all types of debt in China’s interbank market. According to a report of the China Government Securities Depository Trust & Clearing Co., China’s interbank debt turnover ratio was 1.34 in 2007 (compared to an average turnover ratio of about 15 for the United States bond market).
Since April 25, 2008, the PBOC has allowed trading on the interbank market of unsecured corporate debt maturing in more than a year but the CSRC has prohibited the funds under its jurisdiction from taking part in such trading.
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When the share holding system for Chinese enterprises was initially re-instated, company shares were allocated to employees and were not transferable.21 During the latter half of the eighties, such shares became transferable in practice, thus giving rise to an over-the-counter market for corporate securities.22
By 1989, some 2,700 enterprises had been converted into limited companies, the shares of which had been issued to the public among whom trading was being conducted.
In 1990 and 1991, stock exchanges were opened in Shenzhen and Shanghai. A feverish public interest in acquiring shares arose after Deng Xiao Ping’s visit to Southern China during which he proclaimed that China would replace the planned economy with a socialist market economy.23
From the early 1990s, A shares and B shares were found in circulation on the Chinese capital markets as well as warrants on such shares, and mutual fund investment instruments.
Also in the early 1990s, local governments set up securities exchanges and over-thecounter markets, but in 1997, numerous illegal stock exchanges were forced to close.
The ministries and commissions of the State Council established the STAQ and NET systems for trading legal-person shares, but on September 27, 1999, stock trading on these systems ceased.
By the mid nineties, annual trading on the Shanghai and Shenzhen markets had reached some USD 250 billion. As of 1996, some 822 A shares were traded on the Shanghai and Shenzhen Exchanges. In 1996, there were more than 20 million holders of shares in the PRC.24 Total market capitalization as of the end of 1996 corresponded to US USD 80 billion (approximately one fifth of the size of the Hong Kong market of the time).
According to the CSRC 2007 Report, by the end of 2006, Chinese companies had raised RMB 1,100 billion from the listing of A-shares, 109 companies had raised RMB 38 billion from the issue of B-shares, and 143 companies had issued their shares on overseas markets raising USD 95 billion.
The Zhengzhou Grain Wholesale Market opened trading in October 1990. Futures trading on commodities then spread around the country and as of 1994 there were 50 specialized exchanges trading in as many as 35 products. But due to unprofessional conduct of trading by unfamiliar parties in an under-regulated environment, excesses proved fatal. At that point, the CSRC was mandated to put the sector in order.
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Currently, there are three futures exchanges (the Shanghai Futures Exchange,25 the Zhengzhou Commodity Exchange26 and Dalian Commodity Exchange).27 All three offer trading in agricultural products while the Shanghai Exchange also lists contracts on metals and rubber. Twelve commodity futures contracts, mostly agricultural products and metals, are traded. The most actively traded products are soybean, wheat and copper. In 2005, futures trading volume amounted to some US USD 13.45 trillion.28
Only firms approved by the State Council and the CSRC may engage in futures trading on overseas markets. As of 2006, 17 firms had obtained such authorizations.29
On September 8, 2006, the China Financial Futures Exchange was opened in Shanghai for trading in financial derivatives and mainland stock index futures.
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One of the by-products of the empirical evolution of the Chinese capital markets has turned out to be the multiplicity of claims of jurisdiction over operations of a financial nature. In one or another context, each of the following authorities has issued norms impacting upon the capital markets: the State Council, the Ministry of Finance, the Ministry of Justice, the State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Public Security, the National Development and Reform Commission (NDRC, formerly the State Planning Commission), the State Commission for Restructuring the Economic System, the State Administration of Industry and Commerce, the State Administration for Foreign Exchange (SAFE), the People’s Bank of China (PBOC),30 the Bank of China (BOC), the China Securities Regulatory Commission (CSRC), the Municipalities of Shanghai and Shenzhen, numerous provincial regulatory authorities, the stock exchanges in Shenzhen and Shanghai, and last but not least, the Chinese courts and arbitral organizations.
Other countries also experience jurisdictional overlaps and conflicts among authorities concerned with securities regulation, but the empirical nature of the developmental process in China creates unusual uncertainty. This is because progress often proceeds through official tolerance of presumably impermissible activities until they are either regulated or prohibited by whichever of the potentially competent authorities decides to take the initiative. Often, the first authority to act is situated at the lowest echelon. While this practice avoids launching the entire nation on hazardous projects, its disadvantages include the creation of layers of not always consistent regulation and a duplication of procedures.
The NDRC has traditionally played a very important role in the financial sector in so far as it set down the annual national plan with respect to the issue of securities, both within China and on overseas markets. However, the process of liberalization of the economy has sprung many of the fetters under control of the Commission, and the pursuit of this process has reduced the importance of its role.31 The current Plan includes a commitment to “continue to promote the reform and opening up of the capital market”.32
The mother of the capital market regulatory authorities in China is the PBOC, which took under its aegis the original issues of bonds and subsequently those of company shares. Article 31 of the PBOC law provides that “the PBOC shall, in accordance with law, monitor and regulate developments of the capital markets so as to promote their coordinated development”.
Article 32 of the PBOC authorizes the Bank to monitor and investigate financial institutions, other institutions and individuals, inter alia, for compliance with regulatory rules on the renminbi, with regulatory rules on the inter-bank lending market and inter-bank bond market, with foreign exchange regulations, with regulatory rules on gold, with clearing and settlement regulations, and with antimoney laundering regulations.
At the outset of the regulatory efforts, the cities of Shanghai and Shenzhen joined with the PBOC to establish a framework for the issue, listing and trading of shares on exchanges in their respective cities. But in August 1996, they were relieved of their management powers over their respective stock markets.
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In 1992, two national authorities were created simultaneously by edict of the State Council to oversee and regulate the securities markets: the Securities Committee of the State Council (SCSC) and the CSRC, but in 1998 the former was disbanded and its functions were transferred to the latter.33
Under Chapter X of the Securities Law,34 the CSRC is responsible for the application of the regulatory framework. Its main tasks include:
The executive organ of the CSRC is comprised of a chairman and five vice-chairmen and assistant chairmen. The Commission consists of 17 functional departments and three affiliate institutions. In addition to its headquarters in Beijing, the CSRC operates 38 regional offices and local regulatory bureaux. As of December 2006, they had 2,131 staff members of an average age of 35 years old, of whom 46% held masters or doctorate level degrees.36
In carrying out its duties, the CSRC is entitled to enter sites of illegal activities and to conduct investigations, and to freeze assets subject to judicial approval.37 Where the CSRC suspects the commission of criminal offences, it refers the case to the judicial authorities.38 In the conduct of their activities, the agents of the CSRC must respect the confidentiality of persons under investigation.39 Members of the CSRC must perform their duties faithfully, honestly and impartially.40 Rules of the CSRC must be made public, as must all decisions to impose fines.41
The CSRC entertains relations with the International Organization of Securities Commissions (IOSCO) of which China has been an ordinary member since 1995 and of which it was elected as an executive member from 1998 to 2004 as well as with other international institutions. The CSRC has concluded 38 agreements with securities regulatory authorities in 36 jurisdictions which provide inter alia for regulatory cooperation.42 At the 2006 Annual Meeting, Mr. Shang Fulin, Chairman of the CSRC, was elected as Vice-Chairman of IOSCO’s Executive Committee.
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The stock exchanges in Shanghai43 and Shenzhen44 that opened in the early nineties have for their part tended to suffer a curtailment of their original areas of jurisdiction, often as a result of market anomalies due to management failures or improprieties. For instance, the stock exchanges have seen their jurisdiction over the licensing of brokers transferred to the CSRC. At the present time, the stock exchanges play their most important role in the determination of trading and clearing conditions and the settlement of trading disputes.
Chinese courts intervene in at least three securities-related areas. First, the courts use the criminal laws to punish corruption, embezzlement, and other seriously improper behaviour. Secondly, the courts have had to complete securities regulations with recourse to civil law. In one case, the court, ruled in favour of a bona fide purchaser for value of a lost bearer certificate.45 In another case, a people’s court ruled that a plaintiff in a civil suit could obtain damages while the CSRC had already fined the defendant and confiscated its gains on illegal futures trades.46 A third angle along which the Chinese courts intervene in securities-related matters is through the exercise of recourses against administrative decisions. In certain instances, these recourses are specified in the securities regulations, but those based on generally applicable administrative law would also presumably be available to dissatisfied parties. On the other hand, in 2001, when two large scandals threatened to flood the courts with hundreds of complaints for insider trading, fraud or market manipulation, the Supreme Court ordered the lower courts to suspend hearing complaints.47
In a word, the securities regulatory framework in China is complex with multiple opportunities for conflicts of jurisdiction and, in the case of foreign operations, duplication of controls. As indicated by the efforts undertaken thus far, the authorities are manifestly conscious of the sub-optimal allocation of jurisdiction and are undertaking measures for its improvement.
According to the CSRC, as of 2004 there were some 300 laws and regulations applying at the national level to the issue and trading of securities.48
3.2.1. Principal sources of norms applicable to the Chinese capital markets
The principal sources of national norms with respect to the issue and trading of securities are:
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Norms of particular interest to foreign investors include:
3.2.2. Introduction to the principal norms applicable to the Chinese capital markets
The Company Law organizes the basic corporate framework in which shares and bonds may be issued and transferred. For instance, the Company Law indicates which forms of company may issue bonds and shares to the public, the internal corporate procedures to be completed to approve such issues, how registered and bearer bonds and shares are transferred, and under what circumstances shares may be listed and traded on stock exchanges.
The Issue and Trading Regulation of April 22, 1993 contained the first national norms pertaining specifically to the Chinese capital markets until Securities Law came into effect in 1999.
The Securities Law applies to the issue and trading of corporate shares, bonds and other securities but does not apply to government bonds that are subject to separate norms.
Under article 2 of the Securities Law, the Company Law serves to complete any gaps in its provisions. Where there is any special provision in any other law or administrative regulation, the special provision prevails.
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Securities may not be issued to the public unless they have been approved by the CSRC, and issuers of securities must make public the relevant offering documents prior to issuing the securities.50
While securities issuers are responsible for, and must disclose the results of, their operations, investors bear the investment risks arising from changes in the fortunes of the securities issuers.51
Article 127 of the Company Law consecrates general principles, which manifest the commitment of the authorities to the development of efficient markets. It requires that shares be issued in accordance with the principles of openness (gong kai), fairness (gong ping) and impartiality (gong zheng).
For its part, article 3 of the Issue and Trading Regulation enshrines the principles of openness, fairness and good faith (cheng shi xin yong). Elsewhere in the Regulation, reference is made to truth (zhen shi xing), exactitude (zhun que xing) and completeness (wan zheng xing) in the process of information disclosure by listed companies, and to fair competition (gong ping jing zheng) in the activities undertaken by members of the profession. With respect to accounting standards, reference is made to generally accepted standards (ye wu biao zhun) and morality (dao de zhun ze).
The Securities Law consecrates in its article 3 the principles of openness, fairness and impartiality in securities issues and trading, and in its article 4 those of equality before the law, the autonomy of the will of the parties, liability to compensate, and good faith.
The prohibitions of fraudulent practices, insider trading and market manipulation are elevated to the level of general principles by article 5 of the Law.
The cloistering of the securities business, the banking business, the insurance business and trust business is set down as a general principle in article 6 of the Law.52
The objectives of the regulatory authorities are, in accordance with the laws, to implement centralized and unified regulation of the national securities market.53
The self-regulation of the industry, within parameters set down by the regulatory authorities, is promoted by the institution of a Securities Industry Association.54
The CSRC has jurisdiction over the actors of the securities industry (stock exchanges, securities companies, securities registration and clearing institutions and the regulatory authorities).55
The Issue and Trading Regulation defines the jurisdiction of the CSRC as covering all entities and individuals engaging in the issue and trading of shares and related activities in China. The Regulation applies not only to shares but to all securities in the nature of, or possessing the function of, shares. In fact, the CSRC has exercised jurisdiction over aspects of the issue or trading of government and corporate bonds, shares, commodities and derivatives (futures and warrants).
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Provision is made for the issue and trading abroad of renminbi-denominated shares (the B Share Regulations).56
“Socialist public property” may not be harmed in the process of issuing and trading of shares among the public.57 Transfers of State-owned assets may not cause harm to the “rights and interests” of the State.58 A particularly delicate problem arises in the context of the valuation of State assets when there is no market reference price. Not only does this create opportunities for abuse, it also increases risk for investors.
The Regulation requires that all companies issuing shares and bonds to the public adhere to the industrial policies set down by the government.59
Promoters, directors and leading underwriters must sign the prospectus, thus warranting that they contain no false or seriously misleading statements or important omissions.60
In performing their duties, certified public accountants, appraisers and lawyers are accountable for the truthfulness, accuracy and completeness of the contents of the documents they issue in accordance with recognized business standards and ethics codes of the respective professions.61 One general principle stated in the Regulation, which might be described as characteristically Chinese, prohibits discrimination among operators and investors based on their regional origin within China.62
Issuers of securities must provide each subscriber with a prospectus.63
The Securities Law imposes that all issues of securities to the public be underwritten by a securities company on either a best efforts or a firm acquisition basis.64 Underwriters are liable for falsehoods, misleading statements and major omissions in the documentation.65 Where the value of issues exceeds RMB 50 million, an underwriting syndicate must be organized.66 Underwriting periods may not be shorter than ten days nor may they exceed 90 days. Underwriters may not “front load” their own orders or retain shares during the underwriting period.67 Once the underwriting period is over, the underwriter disposes of any remaining securities in accordance with the underwriting agreement.
Chapters XI of the Securities Law and VII of the Issue and Trading Regulations set down a variety of administrative sanctions in the event of violations of the rules governing securities issues and trading. In cases of criminal conduct, the procuratorate is seized. Article 207 of the Securities Law covers the eventuality of wrongdoers’ assumption of civil liability and the primacy given to the payment of damages over the payment of fines. Article 77 of the Issue and Trading Regulations specifically provides that violators of its provisions are liable to pay civil compensation for the damage thus caused.
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3.2.3. The Code of Governance for Listed Companies
On January 7, 2001, the CSRC promulgated with immediate effect the Code of Corporate Governance for Listed Companies (the Corporate Governance Code).
The Code is intended to promote “commonly accepted standards in international corporate governance” among companies listed on Chinese stock exchanges. It provides protection for investors and sets down “the basic behaviour rules and moral standards” to guide the conduct of directors, supervisors, managers and other senior management members of listed companies. The requirements of the Code are to be introduced into the articles of association of listed companies. The CSRC may intervene to obtain that major departures by listed companies from the Code’s provisions be corrected.68
The Code imposes on listed companies certain obligations that they might not otherwise bear, at least not clearly. All shareholders, especially minority shareholders, are entitled to “fair treatment”.69 Issuers must establish “efficient” channels of communication with their shareholders.70
Shareholders may bring suit to stop breaches of laws or regulations or infringements of their rights and interests by resolutions of shareholders’ meetings or the resolutions of the board of directors.71 Shareholders are recognized to have the right to request the company to sue directors, supervisors and managers for damages caused to the company by their violations of laws and regulations or the articles of association.
Listed companies must “make every effort, including fully utilizing modern information technology”, to increase the number of shareholders attending the shareholders’ meetings. The time and location of the shareholders’ meetings must be set to maximize shareholder participation.72
Payments to shareholders for their votes are prohibited.73
Institutional investors are guaranteed a role in the appointment of directors, the compensation and supervision of management and major decision-making processes.74
The contracts of listed companies with related parties must be reduced to writing and the signing, amendment, termination and execution of such agreements must be disclosed.75
Listed companies must avoid the instauration of monopolies with related companies and maintain arm’s length terms of dealing.76
Listed companies are prohibited from providing financial guarantees for their shareholders or their affiliates.77
The controlling shareholders will “sever the company’s social functions and strip out non-operational assets”.78 Non-operational institutions, welfare institutions and their facilities are not to be included in the listed company.
“Surplus employees may be dispersed.”79
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Controlling shareholders of listed companies must encourage selection, promotion, demotion, remuneration and termination of managers and employees through competition.80
Controlling shareholders owe a duty of good faith toward the listed company and other shareholders, they must “strictly” comply with laws and regulations while exercising their rights as investors, and they may not take advantage of their position for personal benefit.81
Controlling shareholders must ensure the independence of listed companies.82
The management, financial officers, sales officers and secretary of the board of directors of listed companies may not hold posts other than that of director in a controlling shareholder’s entities.83
It is incumbent upon controlling shareholders to define clear demarcations of ownership of assets among their listed subsidiaries.84
Controlling shareholders and their subsidiaries may not engage in the same or similar businesses as those of their listed subsidiaries.85
Procedures for the election of directors of listed companies must be “open” and “impartial”.86
In order to favour representation of minority shareholders on the boards of directors of listed companies, the cumulative voting system is mandatory whenever the controlling shareholders own more than 30% of the shares.87
Directors of listed companies are obligated to devote “time and energy adequate for the performance of their duties” and they must “clearly” express their opinions on the matters discussed.88
Directors account personally for harm caused to their companies by resolutions that are illegal or contrary to the articles of association, except “those proved to have objected and whose objections have been recorded in the minutes”.89 Subject to approval of the shareholders’ meeting, the company may buy liability insurance for directors, provided that illegal acts and violations of the articles of association be excluded.90
Directors of listed companies must adopt “prudent” decision-making processes.91
The board of directors must treat all the shareholders equally and must take account of the interests of stakeholders.92
The board of directors must provide all directors with relevant background materials for the items on the agenda and other information and data that may assist the directors in their understanding of the company’s business development.93
Listed companies’ boards of directors may not delegate “matters affecting the material interests of the company” to the chairman.94
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Listed companies’ boards of directors must comprise some directors who are “independent” of the company as well as of its controlling shareholders. 95 Such directors may not hold any other positions.96 They must carry out their duties independently, while paying special attention to the protection of minority shareholders.97 They are given pre-eminent roles on any audit committees, appointments committees and remuneration and appraisal committees the board may constitute.98
Members of the supervisory boards of listed companies are also independent.99
Supervisory boards may report directly to securities regulatory authorities any violation of laws, regulations or the company’s articles of association by directors, managers or other senior management personnel.100
Supervisory boards may call on directors, managers and other senior management personnel, internal auditing personnel and external auditing personnel to attend their meetings and to answer their questions.101
The performance of independent directors and supervisors is evaluated through a combination of “self-review and peer review”.102
Boards of directors and supervisory boards must report to the shareholder meetings on the performance of the directors and the supervisors, and they must communicate the assessments of their work and the amounts of their compensation.103
To the extent possible, listed companies must recruit management personnel in a fair and transparent manner.104
Public notice must be given of appointments and removals of managers.105
Listed companies should link the remuneration of management personnel to the company’s performance and to the individual’s work performance.106
Beyond respecting the rights of stakeholders such as banks and other creditors, employees, consumers, suppliers, the community, listed companies should “actively cooperate with them to promote the company’s sustained and healthy development”.107
Listed companies must encourage employees’ feedback regarding the company’s operating and financial situations and important decisions affecting their benefits, through direct communications with the board of directors, the supervisory board and management personnel.108
Article 86 of the Code provides that:
While maintaining the listed company’s development and maximizing the benefits of shareholders, the company shall be concerned with the welfare, environment and public interests of the community where it is located, and shall pay attention to the company’s social responsibilities.
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Listed companies must ensure that their information disclosures are “easily comprehensible” and they must provide “economical, convenient and speedy access” to information including through such means as the internet.109
In addition to other legal requirements, the Governance Code imposes on listed companies that they publicly disclose:
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The general sources of norms governing the issue and trading of corporate bonds are the Company Law and the Securities Law. Examples of measures concerning specific types of bonds include those governing convertible corporate bonds, bonds issued by commercial banks and those issued by securities companies, and bonds issued in local currency by international organizations.
The PBOC has jurisdiction over the interbank lending market as well as over the interbank bond market.111 In addition, the CSRC regulates public issues and trading of debt, the NDRC approves bonds issued by State-owned firms to fund infrastructure projects and the SASAC oversees bond issues by the 150 largest companies under its control.
At first, the issue of bonds was subject to the approval of the PBOC in consultation with the Investment Department of the State Planning Commission. In fact, a large portion of this financing was allocated to SOEs to carry out projects included in the State Plan. What was left of the bond quota was spread among the provincial governments.112
Under the terms of Chapter VII of the Company Law, the right to issue corporate bonds is restricted to companies limited by shares, wholly State-owned companies, limited liability companies owned by two or more SOEs and investment companies.
Bonds are evidenced by certificates on which must be stated the name of the company, the face value of the bond, the interest rate and the date of repayment. The Company Law stipulates that bonds must be signed by the chairman of the board of directors of the issuer and that they must be stamped with the company’s seal.113
For a company to qualify to issue bonds, it must:
The procedure of issuing corporate bonds begins with a resolution of the board of directors (or, in the case of wholly SOEs, the approval of the appropriate State authority).
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An application is then made to the CSRC that discloses basic information about the company (amount of the company’s assets, the value of its outstanding bonds) and states the financial particulars of the issue (amount, interest rate, term, repayment schedule, the underwriter). The application is accompanied by the company’s business registration certificate, its articles of association, an asset valuation report and an investment verification report. Once the issue has been approved, public notice is given.
Company bonds may be registered or bearer. They are assignable exclusively on approved exchanges. They are transferred by endorsement in the case of registered bonds and by physical delivery in the case of bearer bonds. Where bearer bonds are transferred, the transfer becomes effective only after delivery to the transferee.115
Companies may issue bonds convertible into shares. Such issues to the public are subject to approval by the Committee for the Examination of Share Issues of the CSRC.116 The issue and trading of convertible corporate bonds are governed in particular by:
The issue of convertible corporate bonds without the CSRC’s approval is prohibited.117
Convertible corporate bonds must be for maturities between three and five years.118
No company the last bond issue of which was not fully subscribed or which is in arrears of its obligations may issue convertible bonds.119
Issues of convertible bonds must be underwritten by securities institutions approved by the CSRC for underwriting share issues.120
Listed companies may issue convertible bonds only upon recommendation of the people’s government at the provincial level or the relevant department of the State Council in charge of the company in addition to that of the CSRC.121
To qualify to issue convertible bonds, listed companies must meet the following standards:
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The interest rate of convertible corporate bonds must not exceed interest rates for bank deposits and the value of the convertible corporate bonds to be issued must be at least RMB 100 million.122
The conversion price of convertible bonds of listed companies is the average price of the shares over the month prior to the issue, plus a certain premium (though for “key” SOEs, it is the average price of the shares due to be issued minus a discount).123
To list convertible bonds, the stock exchange where the shares are listed is used.124 They may not be converted into shares during the first six months after the underwriting period.125
Typically, the secondary market for bonds was developed before the corresponding legal framework had been established. Even after the enactment of a regulatory framework for bond trading, problems have plagued its actual implementation.
In 1987, there were 40 securities trading centres at which treasury bills were traded without any formal approval or regulation. Then in 1988, the central government officially allowed the establishment of bond trading centres in 61 cities.126
In January 1995, bond futures trading reached astronomical levels: RMB 1,400 billion for the month compared with only RMB 5.18 billion on the spot market and RMB 1.57 billion on the repo market. Then the so-called Bond Future Contract 327 incident occurred, in which China’s largest brokerage went bust, owing an admitted one billion renminbi after a failed attempt to rig the treasury futures market. In the aftermath, SOEs were forbidden to take positions on the futures markets unrelated to their underlying activities, and financial firms were ordered not to trade futures contracts whether for their own account or the accounts of clients.127
Under articles 57 and 58 of the Securities Law, companies may apply for listing and trading of their bonds on securities exchanges provided their terms correspond to at least one year, and provided that the amount of the issue will correspond to at least RMB 50 million. Companies approved by the CSRC must then meet the requirements of the listing exchange.
Listings of corporate bonds may be suspended by the CSRC in any of the following events:
The CSRC may intervene to delist corporate bonds in similar serious cases.128
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On April 20, 2005, the PBOC and the CNRC promulgated the Administrative Rules for Pilot Securitization of Credit Assets (the Asset Securitization Rules).
Banks may initiate securitization by entrusting their credit-based assets to a trustee that issues asset-backed securities the payments on which depend on the cash flows derived from the underlying credit assets.129
Asset-backed securities are issued and traded on the national inter-bank bond market.130
In addition to the initiating bank, the trustee and the investors, asset securitization operations involve parties servicing the loan, fund depository institutions, securities registration organizations and custodians. In conducting and implementing asset securitization operations, all must comply with the rules applicable to their professions.
Investors in asset-backed securities are entitled to the benefits from the entrusted property and bear the risks of losses. They are entitled to decide significant issues that may affect their interests through general meetings of holders.131
Entrusted credit-based assets are not included in the dissolution, liquidation or bankruptcy of trustees, loan managers, fund depository institutions, securities registration organizations or custodians or other agencies involved in securitization transactions.132
Claims against a trustee for its management of trust property are not offset against liabilities in connection with the assets of the initiator, the trustee or of the other participants in an asset securitization operation, and claims and liabilities arising from the management, utilization or disposal of property entrusted on different accounts are not offset against each other.133
Trustees, loan managers, fund depository institutions, securities registration and custodian units and other agencies involved in transactions must be faithful to their duties and they must be honest, credible, prudent and diligent.134
The CBRC is responsible for the supervision of securitization of credit assets135 while the PBOC regulates their issue and trading on the national inter-bank bond market.136
4.3.1. Initiating asset securitization operations
Initiators of asset securitization operations must make a public announcement in nationwide media informing obligees that they have transferred credit assets to the special purpose trust.137
The initiator must conclude a written agreement with the trustee of the credit assets subject to securitization.138
If the trustee observes that the credit assets are not of the quality specified in the trust contract, the trustee must require the initiator to redeem or replace the entrusted property.
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4.3.2. Trustees
Trustees must be trust investment companies established according to law or other institutions, approved by the CBRC.139
In asset securitization operations, the trustees issue the asset-backed securities and they manage the entrusted property. They must allocate trust benefits in accordance with the trust contract. They are responsible for making periodic disclosures of information about the entrusted property and the asset-backed securities.140
Only commercial banks or other specialized institutions may be appointed as depositaries of entrusted property.141
Trustees may resign and they may be dismissed by the general meeting of the holders of asset-backed securities.142
If a trustee were to be deprived of its licence, closed, dissolved, or declared bankrupt, the CBRC would designate a temporary trustee before a new trustee were appointed.143
4.3.3. Loan managers
Trustees appoint loan managers to manage the loans underlying the securitization operation. Initiators of securitization operations may act as managers of the underlying credit assets.144
Loan managers must set up specialized departments and open a separate account for each trust and separately manage property entrusted on different accounts.145
Loan managers consign to depositary institutions the proceeds of their management of the credit assets.146
If a loan manager fails to perform its duties or to meet the terms of its contract, it may be dismissed by the trustee with the agreement of the general meeting of the holders of the securities.147
4.3.4. Fund depositary institutions
In asset securitization operations, fund depositary institutions are appointed by the trustee to manage the accounts concerning entrusted assets.
Neither the initiator nor loan managers may act as fund depositary institutions in the same transaction.148
While the proceeds of entrusted property are in its possession, a fund depositary institution may only invest such proceeds in accordance with the contract and upon the order of the trustee. The instruments must be as liquid as treasury bonds, policy financial institutions bonds and other financial products approved by the PBOC.149
If a fund depositary institution fails to perform its duties or to meet the terms of its contract, it may be dismissed by the trustee with the agreement of the general meeting of the securities holders.150
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4.3.5. Issue and trading of asset-backed securities
Prior to issuing asset-backed securities, the trustee must apply to the PBOC which must, within five business days of receipt of a complete application, reply whether it will be considered and, in the event of a rejection, supply a written explanation. If the application is accepted for consideration, the PBOC must indicate its approval or rejection of the application within 20 days.151
Asset-backed securities in the national inter-bank bond market are to be subjected to credit rating on an on-going basis by qualified agencies. They must carry out their duties in an unbiased and fair manner.
The issuer of asset-backed securities must organize an underwriting syndicate to distribute the issue.
Only financial institutions with registered capital of no less than RMB 200 million are qualified to underwrite asset-backed securities.152
After completion of their issue, a trustee may apply to trade the asset-backed securities in the national inter-bank bond market.153
On June 15, 2005, the PBOC issued an announcement regarding the registration, custody, trading and settlement of asset-backed securities in the inter-bank bond market. According to its provisions, the actual amount of the asset-backed securities issued by the entrusted institution may not be less than RMB 500 million for each issue to be traded and circulated in the inter-bank bond market; the amount of each level of the asset-backed securities for the same issue must be no less than RMB 200 million. Asset-backed securities are traded on a spot basis on the inter-bank bond market. The initiating institution may neither subscribe for nor trade them.154
The National Inter-bank Lending and Borrowing Centre (the NILBC) and the China Clearing Company formulate rules for trading, for custody and settlement of asset-backed securities, they file them with the PBOC for prior approval, and they carry out registration, custody, trading, settlement, principal redemption and interest payment, etc. The NILBC is responsible for the ongoing monitoring of trading and China Securities Depository and Clearing Corporation (CSDCC) is responsible for the surveillance of daily settlements. Unusual incidents must promptly be reported to the PBOC. Within ten working days after the end of each quarter, the NILBC and the CSDCC must file with the PBOC a written report on the registration, custody, trading, principal redemption and interest payments, information disclosure, etc. of asset-backed securities.
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4.3.6. Information disclosure
Trustees must disclose information on the entrusted property and the asset-backed securities before their issue and throughout their term through the media designated by the PBOC.
Trustees and insiders may not reveal information before its disclosure to the public.155
Trustees are liable for the truth, accuracy, completeness and timeliness of their disclosures. Misrepresentations, misleading statements and major omissions are prohibited.156
Trustees must disclose in a timely manner all information with a substantive effect on the value of the asset-backed securities.157
Trustees’ annual reports must be audited by certified public accountants and they must be made public.158
Before they are released publicly, disclosure documents are sent to the National Inter-Bank Borrowing Centre and to the CSDCC, which report to the PBOC and render public any violations of the disclosure rules.159
4.3.7. Rights of holders of asset-backed securities
Holders of asset-backed securities enjoy the following rights in accordance with relevant legal documents:
Replacements of the trustee and any other issues specified in the trust contract are decided by the general meeting of the securities holders.161
General meetings of the holders of asset-backed securities are convened by the trustee. If the trust contract so provides, they may also be convened by the securities holders.162 Advance public notice of 30 days must be given of meetings of the securities holders who can only debate on issues announced in the public notice.163 General meetings of the securities holders may be held online.164 Decisions of the general meetings are reported to the PBOC.165
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Only companies in the form of CLSs, as opposed to LLCs, as defined under the Company Law may issue shares to the public. In addition to the conditions generally applicable to the issue of shares by a CLS, the Company Law sets down certain others with particular reference to those companies the shares of which are destined to be distributed among the public:
The conditions applicable to the issue of securities to the public in China vary depending on the nature of the offering entity.
The multi-layered approval process seeks to guarantee that a public issue of shares be approved by a consensus of official opinion.
All shares in companies proposing shares to the public at any one time must be of a single class and enjoy the same rights. The promoters of the company must not have been found guilty at any time during the previous three years of grave breaches of the law and they must hold at least 35% of the shares of the company the capital of which must be equal to at least RMB 30 million.
The proportion of the company’s shares offered to the public must correspond to at least 25% of its total share capital. A ceiling of 10% of the share capital applies to the number of shares that may be placed among employees of the issuing company. Subject to the approval of the CSRC, companies with share capitals of at least RMB 400 million may carry out public issues of less than 25% of their capital, but a floor of 10% is applicable.167
In addition, the CSRC may impose any other conditions, though no criteria are stipulated for the exercise of such discretion.
On September 16, 1999, the CSRC adopted the Regulations on the Committee for the Examination of Share Issues to the public as approved by the State Council on August 19, 1999 (the Share Issue Examination Committee Regulations). The Committee reviews all applications to issue shares and renders an opinion to the CSRC, which must take it into consideration in determining whether or not to approve the application. The process of review by the CSRC is open to the public.168
The ex officio members of the Committee are: the chief auditor of the CSRC, its chief legal counsel, its chief accountant, and the general managers of the Shanghai and Shenzhen stock exchanges. The remaining 75 members are well-known individuals (5), university professors (6), specialists from the State departments of macro-economic control (8), specialists from State administrative departments for particular sectors (8), specialists from the securities trade (8), professionals from[Page817:]the CSR (15), the stock exchanges (6), the State-owned banks (5), the All-China Federation of Industry and Commerce (1), the Chinese Academy of Sciences or the Chinese Academy of Social Sciences or similar organizations (5), and the Securities Association of China or the Chinese Association of Certified Public Accountants or the Chinese Lawyers Association (8).169 Members who are not ex officio sit for renewable two-year terms.170
Members of the Committee may not hold any office in any listed company and must avoid other work involving interests in matters related to share issue examination. They must be consistent in their application of principles, impartial, honest, devoted to their duties and they must strictly observe the applicable laws and regulations.
Committee members must remain independent and must not be subjected to any interference.171 They must not have any contact with share issue applicants.172
The decisions of the Committee are adopted by votes of the members.173 Votes are secret. A two-thirds majority of those present is required to approve an application.174
Non ex officio members of the Committee may not publicly reveal their membership and must not disclose the identity of other Committee members.175 The deliberations of the Committee are confidential.176 Members may not use any unpublished information or seek to benefit personally from their positions.177 They may not advise anyone in relation to securities transactions.178
Committee members are subject to assessment and supervision by the CSRC.179 Members may be dismissed, for instance, if they are absent from meetings twice without reason or for failing to attend three consecutive meetings of the Committee.180
They may be removed by the CSRC for any circumstance that makes continuation in office inappropriate.181
The Committee evaluates share issue applications in the light of the relevant laws, regulations and rules, the qualifications and circumstances of the applicants, the written opinions of accountants, lawyers and asset valuation entities, and reports of the CSRC.182
In the event of rejection, applicants may request that the CSRC order a re-examination. 183
Once a year, the Committee publishes a report summarizing its work and stating what are the general principles guiding its decisions at that time.184
Enterprises that are transformed into companies through the issue of shares to the public may not have net assets equivalent to less than 30% of total assets at the last closing of their accounts. No more than 20% of their net assets may be in the form of intangible assets. Furthermore, they must have shown profits over the three business years preceding their issue of shares to the public.[Page818:]Enterprises that have been transformed into LLCs through placements of shares must demonstrate that their use of previously collected funds has been consistent with the intended purposes and that such use has been beneficial. The conduct of the company’s business must have been free of serious violations of the law since the last public issue of shares.
The approval procedures for a public issue of shares are numerous and frequently redundant. For the most part, they are contained in the Issue and Trading Regulation, articles 7–28.
Prior to filing a request for authorization, all candidate companies must have reports prepared by accounting, financial and legal experts approved by the CSRC or other competent authorities. These advisors are expected to carry out their roles in accordance with normal professional standards (tong chang ye wu biao zhun) and morality (dao de zhun ze). Their role is to verify and confirm that the information contained in prospectuses is true, exact and complete. They are personally liable in the event of material omissions or false or misleading opinions.
The first echelon of approval depends on the lines of subordination of the prospective issuer. For central enterprises, this will normally be an authority acting under the State Council or a State Ministry, which in all events will solicit the opinion of the local government. Local enterprises submit their applications to their local government agency of tutelage, attached as the case may be to a province, autonomous region, centrally governed municipality or municipality with its own independent planning authority. In reviewing share issue applications, account is taken of the provisions of the State Plan with respect to the issue of securities to the public, as well as regional and industrial guidelines. In principle, this first echelon renders its conclusions within 30 days.
The reports of these authorities are transmitted to the CSRC, which renders its recommendations, in principle within 20 days. Upon the latter’s approval, the issuer then seeks the approval of the stock exchange where the stock is to be traded. Trading in the shares cannot begin prior to listing.
Issue applications must include: a feasibility study, audited financial statements covering the previous three years, written legal opinions, an appraiser’s report with respect to the assets of the issuer, and a prospectus. Where the sale of State-owned assets is concerned, which in fact is most often the case with public issues of Chinese shares, the application must include the approval of the State Administration for Management of State-Owned Assets. The form and contents of prospectuses are also defined by the Regulation as including: a list of the company’s founders and executives, a plan for the use of the funds collected and a description of how previously collected funds have been used, a short-term development plan, and a one-year financial forecast certified by a public accountant. Applications to the CSRC must contain the approval of the appropriate people’s government agency.
The issuer’s promoters and directors must sign the prospectus and they bear personal joint and several liability if the prospectus is vitiated by untrue or false statements or material omissions.
Prospectuses are valid for six months from the date of signing and, at the expiration of such period, issuing of shares must cease.
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All shares issued to the public must be distributed by securities companies.185 The distributor may act as underwriter or as agent for the placement. In either case, a contract must be signed between the issuer and the underwriter or agent. This contract must contain, among other items, a definition of the liability of the parties for breach of contract and the date and method of payment of the proceeds from the distribution. The general principles governing the amount of fees to be charged by underwriters and agents are set down by the CSRC.
Underwriters and agents assume an obligation during the distribution period to diligently promote the placement of the shares. During this period, they may not trade any such shares for their own account. Even beyond the underwriting period, underwriters require the permission of the CSRC to carry out such trades.
In the event of over-subscriptions, underwriters must allocate the available shares in proportion to each subscriber’s request in terms of the total subscriptions, or alternatively, the shares may be distributed by lottery subject to supervision. Underwriters may not limit the number of prospectuses they distribute, nor may they seek to make profits on the distribution of such documentation.186
The composition of a syndicate of investment bankers is mandatory whenever the face value of the issue exceeds RMB 30 million or its expected proceeds exceed RMB 50 million.187
On March 28, 2001, the CSRC promulgated the New Share Issue by Listed Companies Measures.
The CSRC oversees the issue of new shares by listed companies.188
New shares are allotted among existing shareholders and new members of the public.189 New shares must be issued for cash.190 Securities firms must be qualified as lead underwriters to sponsor such share issues.191
A listed company applying to issue new shares must meet inter alia the following conditions:
Listed companies may not issue new shares when:
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Under article 11 of the New Share Issue by Listed Companies Measures, due diligence for the lead underwriter implies “great attention” to a checklist of 17 concerns including:
Proposals for the issue of new shares by listed companies are submitted to the Share Issuance Examination Committee based on whose opinion the CSRC makes a decision whether or not to approve the application.196 Upon approval, the lead underwriter may issue letters of intent. In fixing the price of the issue, the prospectus is sent to the CSRC.197 The listed company and the lead underwriter may not provide consideration to any organization participating in rationing of the shares.198
Where the prospectus for new shares does not contain a profit forecast verified by a qualified certified public accountant, a special risk warning must be included in a prominent place in the prospectus.199
Listed companies publicly disclose the results obtained from the use of the funds raised from new shares for three years following their issue.200
Article 70 of the Issue and Trading Regulation provides that issuers must not issue shares without approval, obtain approvals through fraud or other improper means, or sell shares outside the scope of authorization (method, time).
Members of the boards of directors or supervisory boards and senior managers who are directly responsible for violations are subject to warnings and fines of amounts varying between RMB 30,000 and 300,000.
Issuing companies guilty of practices contrary to article 70 are subject to warnings, orders to return illegally obtained funds, confiscation of illegal income, fines, and, in serious cases, withdrawal of the authorization to issue shares to the public.
Accountants, appraisers and lawyers who issue documents containing seriously misleading contents or that are flawed by serious omissions are subject to warnings, confiscation of any illegal gains, fines ranging between RMB 30,000 and 300,000, and, in serious cases, suspension or expulsion from the securities business.
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Article 139 of the Company Law, articles 40 and 112 of the Securities Law and article 29 of the Issue and Trading Regulation provide that all secondary trading in shares issued to the public must be transacted through an approved stock exchange.
According to article 42 of the Securities Law, all trading in securities offered to the public is to be on spot terms.
The confidentiality of accounts with securities companies, stock exchanges, and securities registration and clearing institutions is protected by article 44 of the Securities Law.
Transfers of shares may be accomplished by endorsement or other lawful means.201
Company founders are prohibited from trading their shares in the company for a period of three years from the company’s incorporation.202
In initial public offerings, securities trading service providers and their personnel who produce auditing reports, asset appraisal reports or legal opinions are prohibited from purchasing or selling any of the concerned stocks within the underwriting period or within six months as of its expiration. From the time when a mission is accepted in connection with the issue of stock for a listed company until the documents are published, the concerned securities trading service providers and their personnel producing appraisal reports or legal opinions may not purchase or sell any of the concerned stocks.203
Where any director, supervisor and senior manager of a listed company or any shareholder who holds more than 5% of the shares of a listed company sells the stocks of the company within six months after their acquisition, or purchases any stock sold within six months thereafter, the proceeds must be integrated into the company’s profits and the board of directors must recover the proceeds. Otherwise, the shareholders may require the board to do so within 30 days, lest the shareholders bring a derivative action before the people’s courts. Where the board defaults on this obligation, the directors in charge bear joint and several liabilities.204
Except in any of the following circumstances, companies may not purchase their own shares:
In cases of takeovers of listed companies, thresholds are set down for notifying the target company, the CSRC and the public.
Persons acquiring holdings of 5% of the shares of any CLS must announce themselves to the company which, if it is a listed company, must inform the CSRC.
Except for shares of listed companies in such poor conditions as to require special treatment that are subject to +- 5% limits on daily stock price variations, a cap of +- 10% is generally applicable.
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This matter is governed not only by the provisions of the Company Law, the Securities Law and the Issue and Trading Regulation, but also by norms set down by the stock exchange on which the listing is sought.
To have its shares listed, a company must meet the following requirements:
Apt candidates submit their applications to the stock exchange from which listing is sought and the latter is expected to reply within 20 business days. The exchange’s decision is notified to the CSRC.
Applications for listing must be accompanied by, among other items, a recommendation from a member of the stock exchange, a prospectus, a financial report prepared by a firm of certified accountants, an auditor’s report and a legal opinion. Such experts are liable for the compliance of their reports with generally accepted professional standards and must certify that their reports are true, exact and complete.
After approval of the listing, the applicant company must give public notice of the admission including a list of its ten principal shareholders and the amount of their share holdings, as well as the personal resumes of the members of its board of directors. In addition to declarations of their earnings over the previous three years, newly listed companies must also provide one-year forecasts of their results.
All companies listed on a stock exchange must produce an annual report as well as a mid-year update. Listed companies must, within 120 days of the close of their business year, file an annual report with the CSRC as well as the stock exchanges on which they are listed. Interim reports are filed with the CSRC within 60 days of the end of their second quarter. These reports are to be prepared in accordance with generally accepted accounting standards and in compliance with the requirements set down by the CSRC.207
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Annual reports must include:
The mid-year report must contain:
In the event of any major incident likely to have an important influence on the price of the share, and of which the shareholders may not be aware, the concerned company must file a report with the CSRC as well as with the stock exchange on which it is listed. Public notice must also be given. A non-limitative list of such incidents includes the following:
Whenever a report about the company appears in the media and is likely to have an influence on the company’s share price, the company must provide public explanations of the situation.
Members of the Board of directors and supervisory boards must keep the CSRC informed of changes in their share holdings.
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When public notice is required, it may be given in any newspaper or magazine designated by the CSRC. Public access is also guaranteed to any document filed with the CSRC by listed companies, except for certain confidential documents, such as those pertaining to a listed company’s know-how or relating to ongoing investigations of the CSRC.
In 1987, the 13th National Congress of the Communist Party proclaimed that small SOEs could be sold to collectives and individuals. In 1994, mergers of large and medium SOEs were permitted in 100 pilot cities. In 2001–2002, the Shanghai city government reorganized 115 of the publicly listed companies under its control. In 2002, some 653 mergers and acquisitions involving listed companies were carried out in China for a total value of RMB 53.5 billion. Given the fragmentation of China’s major industries and the consequent need for consolidation to achieve gains in efficiency, the prospects for mergers and acquisitions activity in China are promising.209
Article 44 of the General Principles of Civil Law provides that when legal persons are divided or merged, the change must be registered with the competent authority and public notice must be given and their rights and obligations pass to their successors.
Under the Contract Law, where a party to a contract is merged or divided, the legal person or other organization established after the merger enjoys the rights and performs obligations under the contract.210
Chapter IX of the Company Law covers mergers and divisions of companies, while takeovers of listed companies are subject to Chapter IV of the Securities Law, complemented by Chapter IV of the Issue and Trading Regulations. Since December 1, 2002, the CSRC has set down a framework for mergers and acquisitions for listed companies by adopting the measures on the administration of information disclosure on shareholding changes of listed companies (the Listed Companies M&A Measures).211
The Company Law provides that mergers may be carried out by absorption when an entity is dissolved or by creating a new entity consolidating the parties.212 Within ten days of the decision to merge, the concerned companies must notify their creditors, and within 30 days they must make a public announcement in a newspaper. The creditors may, within 30 days as of receipt of the notice, or within 45 days as of the public announcement if it does not receive notice, demand that the company clear its debts or provide corresponding guaranties.213 In a merger, the remaining entity or the new entity, as the case may be, assumes the liabilities of the merger parties.214 Except as otherwise agreed in writing by the company and its creditors, following a partition the entities apportion among themselves the assets of the partitioned company while bearing joint and several liability for its debts.215
Under article 86 of the Securities Law, whenever an investor assumes more than 5% of the common shares of a listed company, it must within three business days give public notice as well as specific notice to the target company, to the stock exchange of listing and to the CSRC. The procedure is repeated each time the investor’s holding goes up or down by the equivalent of 5% of the company’s capital.
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Once a shareowner’s stake goes beyond 30% of all common shares, it must file a report with the CSRC while informing the object company and the stock exchange of listing.216 The acquirer must warrant the information to be truthful, accurate, complete and not misleading.
Upon the assumption of control of over 30% of any company, the acquirer must make a tender offer to all its shareholders to purchase all of or part of the company’s shares. The offer must stipulate that, where the shares tendered by the shareholders exceed the number proposed to be acquired, the purchases are allocated on a proportionate basis.
Public takeover offers must remain valid for at least 30 days but not more than 60 days.217
When the number of shares tendered is at least 75% of the issued shares, the company’s listing on the stock exchange is cancelled. When the portion exceeds 90%, the remaining shareholders have the right to sell their shares to the acquiring company on the terms of the takeover offer.218
A takeover is deemed to have failed when the tendered shares do not correspond at least to a majority of 50% of the target company’s share capital. The initiator of the takeover may not for a period of one year acquire more than 5% of the outstanding shares of the target company.219
In the case of listed companies, during the takeover period, and for a period of six months after its termination, the acquirer may not transfer the shares of the company taken over.220
Any shareholder who canvasses 25 or more people to solicit proxies to exercise voting rights must adhere to the rules of the CSRC with respect to disclosure of information and filing of reports.
Chinese rules prohibit individuals from taking control of more than 0.5% of listed companies.221
The Listed Companies M&A Measures provide a detailed framework for takeovers of listed companies.
Takeovers are purchases of actual or potential control of a listed company, whether through acquisitions of shares on a stock exchange, by offers or by agreements, whether with cash, stocks or other lawful means.222
An acquirer is deemed to have control:
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Takeovers of listed companies must respect the principles of openness, fairness, impartiality, faithfulness and reliability, and they cannot interfere with the order of the market.224 Information put into circulation must be truthful, accurate, and complete.225
Purchasers may not “take advantage” of the takeover of a listed company to its detriment or to that of its shareholders. Companies being taken over may not provide financial support for the takeover. Purchasers must provide completely effective guarantees and those who are incapable of managing the target company may be disqualified.226
The controlling shareholders of the target company as well as its directors, supervisors and senior management must act in good faith vis-à-vis the company taken over as well as its other shareholders.227
6.3.1. Takeovers by agreement
Where a listed company is taken over by agreement,228 the purchaser must immediately notify the CSRC, the stock exchange of listing and the company taken over, and give summary public notice. Unless the CSRC objects within 15 days, the purchaser may carry out the takeover.229 Where transfers of shares in certain companies are subject to other administrative authorizations, these must be obtained from the competent departments prior to implementation of the takeover.230
If the acquirer reaches 30% control of the company being taken over by agreement, it is obligated to make an offer for all its shares.231
The board of directors of the company being taken over, and in particular the independent directors, must make public their opinions on the potential influence of the takeover on the company.232
The parties must deposit the shares to be transferred with a securities registration and clearing institution, while the funds to be used for payment must be deposited with a bank.233
Directors of the company being taken over have a duty to press controlling shareholders to pay their debts to the company as well as those subject to the company’s guaranty, including, where necessary, through legal actions.234
6.3.2. Takeovers by public offers
Where any person acquires 30% of the shares of a listed company, it must on the next day notify the CSRC and make a public announcement. Acquisition of shares can only be continued if an offer is made for all the remaining shares. Starting from a position of less than 30%, offers for shares must concern at least 5% of the shares issued, and if the total were then to exceed 30%, an offer would have to be made to all shareholders.235
The acquirer must file a report with the CSRC and the stock exchange of listing as well as give summary public notice.236 Acquirers employ lawyers to provide opinion letters on the report’s truthfulness, accuracy, and completeness.237
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The directors of the company being taken over must engage the services of an independent professional institution to render an opinion on the incidence of the takeover for the company.238
Within ten days from the takeover offer, the reports and recommendations of the board of directors and of the independent consultant must be sent to the CSRC and the stock exchange of listing. The report and opinion are made public.239
Unless the CSRC objects within 15 days, the acquirer may announce the takeover offer; if the CSRC objects, the purchaser must make the appropriate amendments.240
Directors, supervisors and senior management of a company under takeover may not adopt strategies that would damage the legal rights and interests of the company or its shareholders. Once an acquirer has made public the takeover offer, the board of directors of the company that is taken over may not propose the following actions:
The offer prices are subject to lower limits based on recent market performance of the company’s stock or, for want of trading, of similar stocks, and of the book value of the shares.242
When an acquisition is to be paid in cash, at least 20% of the price must be deposited in a bank designated by the securities registration and clearing institution and, where the payment is in shares, the equivalent of the full price in shares must be turned over to the securities registration and clearing institution.243
The duration of a takeover offer must be between 30 and 60 days.244
Where the acquirer changes the terms of the offer during the takeover period as well as when there are material changes in the facts, the acquirer must give notice to the CSRC that may require amendments to the offer.245
The acquirer may not change the offer within 15 days of its expiration, unless there are competing offers, in which case the new offer would extend for at least 15 days, provided expiration would occur at the latest at expiration of the competing offer.246
Tenders of shares may be withdrawn during the takeover offering period.247
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Acquirers must purchase all shares tendered up to the amount of the offer, provided that, where shares are tendered in excess of the offer, the shares tendered are purchased pro rata.248
The depository of the shares must present them to the securities registration and clearing institution within three working days of expiration of the offer.
Within three working days of expiration of the takeover offer, the acquirer must report to the CSRC, the listing stock exchange and the company to be taken over. Public notice must be given of the result of the offer.249
After giving public notice of the offer, but prior to its expiration, an acquirer may not buy or sell shares of the company in any way other than as prescribed in the offer.250
Competing offers may not be launched less than five days before expiration of the takeover offer. Competing acquirers must send a report to the CSRC, to the stock exchange, and to the company and make a summary public announcement. Unless the CSRC objects within 15 days, the competing acquirer must make public the documentation of its offer.251
6.3.3. Exemptions
Under certain circumstances, acquirers may apply to the CSRC for exemption from sending out a takeover offer to all the shareholders of the company to be taken over, and from having to buy all the shares of the company to be taken over.252
Exemptions are available upon application to the CSRC:
The CSRC may also allow exceptions on the basis of the qualifications of the tendering shareholders or the types of shares.254
Article 53 requires that lawyer’s offices provide specific opinions on the claims of exemption by acquirers.
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6.3.4. Violations of takeover rules
Where the stock exchange objects to the conditions of a takeover, the acquirer should make the appropriate adjustments, otherwise the stock exchange brings the matter to the CSRC, which may order remedial action or the cancellation of the takeover offer. Once an objection has been raised, the acquirer should not name any directors or supervisors or senior management.255
If directors or experts violate their duties under the Measures, the stock exchange intervenes first, but if the party does not remedy the situation, it is referred to the CSRC.256
6.3.5. Takeovers of State-owned Enterprises
Special rules apply to takeovers of SOEs.
The Interim Regulations on Supervision and Management of State-owned Assets of Enterprises, adopted at the 8th Executive Meeting of the State Council on May 13, 2003, were promulgated and entered into effect on January 8, 2004 (the State-Owned Assets Supervision and Management Regulations). Since February 1, 2004, these regulations have been complemented by the Provisional Measures Governing Transfer of State Owned Assets of Enterprises.
Assets of SOEs are owned by the State.257
Article 7 consecrates three separations: the separation of the government’s functions in social and public administration from its functions as investor in State-owned assets, the separation of government functions and enterprise management, and that of ownership from management.
The State-owned Assets Supervision and Administration Commission (SASAC) performs the function of investor to supervise and administer the State-owned assets of enterprises.258 The SASAC performs its functions in accordance with the development plan and industrial policies of the State.259
The authorities to approach in connection with the takeover of an SOE, a State-owned holding enterprise, or an enterprise with State-owned equity other than those in which the State Council performs the responsibilities of investor, are the people’s government of the province, autonomous region or municipality directly under the central government, or the people’s government at the city level, for those divided into districts or autonomous prefectures.260
Decisions on divisions, mergers, bankruptcies, dissolutions, capital increases and decreases, and issues of company bonds of wholly SOEs are taken by the SASAC.261 If the division, merger, bankruptcy or dissolution involves key wholly SOEs or companies, the SASAC sends a report to the people’s government at the corresponding level for final determination. Transfers of equity by the SASAC that would entail the State’s loss of control of an enterprise must be submitted to the people’s government at the corresponding level for approval.262
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When shareholder’s meetings or boards of directors of State-owned holding companies or companies with State-owned equity decide on divisions, mergers, bankruptcies, dissolutions, capital increases or decreases, issues of company bonds, or appointments or removals of responsible individuals, the representatives of shareholders or the directors appointed by the SASAC must voice their opinions and exercise their rights to vote according to SASAC’s instructions.263
The SASAC coordinates the work concerning the merger and bankruptcy of wholly State-owned enterprises and wholly State-owned companies.264
The Securities Law defines inside information as information concerning the company’s business or financial affairs that is not made public and that might have a major effect on the market price of the company’s securities. Such events are stipulated to include dividend distribution plans, company takeover projects, and any single mortgage, sale or write-off of a major asset of the company exceeding 30% of its value.265
Insiders are those who have access to inside information
Under article 73 of the Securities Law, insiders are prohibited from taking advantage of inside information to engage in securities trading.267 Under its article 76, they may not purchase or sell the concerned securities, or divulge such information, or advise any other person to purchase or sell such securities.268 Where insider trading causes loss to investors, those responsible are subject to sanctions (disciplinary and administrative) and may be held liable to pay compensation.269
Article 59 of the Measures proscribes insider trading and fraud in the takeover context in these terms:
Anyone with knowledge of information relating to the takeover of a listed company who, prior to the lawful publicity of the relevant information on the takeover, discloses the information, buys or sells the securities issued by the listed company, or advises other persons to buy or sell the securities of the listed company, or distributes false information or undertakes fraudulent activities by taking advantage of the takeover of the listed company, shall be pursued according to the law.
Sanctions for insider trading under article 72 of the Issuing and Trading Regulation include confiscation of the ill-begotten gains and fines varying between RMB 50,000 and RMB 500,000.
Article 38 of the Issue and Trading Regulation entitles any company to recover all profits realized within six months of any share offering by members of its board of directors and supervisory boards, its senior managers, as well as individuals in similar positions within companies owning at least 5% of its shares, or in which the company itself owns at least 5% of the shares.
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Under the terms of article 62 of the Issue and Trading Regulation, members of the boards of directors, supervisory boards and supervisors of listed companies who hold shares in the same companies, must report their share holdings to the CSRC. Any trading that they undertake must, within the following ten days, be reported to the company, the stock exchange of listing and the CSRC. These obligations survive for a period of six months after severance from the company.
In order to avoid insider trading by civil servants and members of the news media involved in financial matters as well as by securities industry professionals, such persons are prohibited from owning or trading in securities other than through mutual funds. Violators are subject to warnings, confiscation of their gains and fines varying between RMB 50,000 and 500,000.270
Professional experts (auditors, accountants, lawyers) involved in an issue of securities may not undertake operations with respect to such shares for a period ending six months from the date of the placement. When called upon to issue reports, they may not buy shares of the concerned company within five working days of the publication of their report.
Article 77 of the Securities Law proscribes market manipulation. Examples of specific forms of manipulation, which are prohibited, include trading coordinated to influence market prices of securities, trading with oneself through straw men to move prices, as well as “using one’s advantage in terms of information to manipulate trading prices of securities”.
Securities professionals must report to the CSRC prohibited trading activities that come to their attention.271
Limited companies may not repurchase their outstanding shares unless the otherwise applicable authorizations have been obtained.272
Article 74 of the Issue and Trading Regulation contains a long but non-exclusive list of securities-related violations:
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Such violations may give rise to any combination of warnings, confiscation of illegal gains, and fines. Where issuing companies or securities industry professionals are guilty of offences, they face suspension or withdrawal of their licences in serious cases.
The securities authorities are given the power to apply administrative penalties ranging from mere warnings to fines of RMB 500,000, including confiscation of illegal gains and exclusion from some or all securities-related activity in the future.
Of course, the sanctions available under the criminal laws complement those provided in the Regulation as well as those stipulated by the authorities. The local criminal laws against embezzlement and corruption, including its manifestation in financial contexts can be very severe. In one instance, a former director of the finance and trade division of the Municipal Planning Bureau in Shenzhen was executed.273
All disputes about the issue and trading of securities are subject to the jurisdiction of those mediation or arbitration organizations stipulated by the parties in their contracts.274
Disputes between brokerages and other organizations connected with the stock markets, such as stock exchanges, may only be submitted to designated organizations. In an announcement of November 20, 1994, the CSRC attributed jurisdiction over such matters to the China International Economic and Trade Arbitration Commission (CIETAC).275
Capital gains are subject to taxation at the rate of 20%, though many of the tax conventions signed by China reduce the withholding rate to 10%. In some years, this tax has been waived.276
Income tax is due on trading activity and is calculated at the rate of 28% (25% to the central government and 3% to the provincial government).
A tax is applicable on all trading in shares. The rate of which was raised from 0.1% to 0.3% in May 2007 to cool the market.277
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On March 1, 2004, the CBRC adopted the Provisional Administrative Rules Governing Derivative Activities of Financial Institutions (the Derivative Instruments Rules), which authorize all banks and most non-banking financial institutions and branches of foreign banks in China to seek its approval to conduct derivatives business in China.278
On December 2, 2005, the CBRC implemented the Circular on the Relevant Issues of Business Scope of Derivatives Product Transactions by Chinese Owned Commercial Banks, removing the prohibition against their carrying out transactions in equity- and commodity-based derivatives.
On February 1, 2006, the CBRC introduced the Implementation Measures on Administrative Licensing Items Relating to Foreign-Invested Financial Institutions, which allow foreign-owned financial institutions to apply to carry on derivatives business on equal terms with Chinese-owned banks.
Financial institutions qualified to carry on derivatives business include foreign banks’ mainland branches, mainland banks, trust and investment companies, financing companies, financial leasing companies and auto-financing companies. Non-financial institutions are not qualified to provide derivatives-related services to their customers.279
The two derivatives-related activities that an approved financial institution may conduct are: trading for its own account whether for hedging or for profit, and the provision of trading services to customers as brokers or market makers.280
The Chinese regulations on derivatives are not entirely conform with the standards recommended by the International Securities and Swap Dealers Association (ISDA), in particular because generally applicable rules in Chinese law do not allow for netting of obligations, and also because perfection of security interests under Chinese law remains difficult.
The term “derivative” in the Derivative Instruments Rules applies to a financial contract the value of which depends on prices of one or more underlying assets or indices. They may be classified as forwards, futures, swaps and options, and they include structured financial instruments with such characteristics.281
Derivatives on stocks and commodities must comply with the rules applicable to each type of asset. A financial institution engaging in derivatives activities that involve foreign exchange must comply with applicable foreign exchange controls.282
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Financial institutions applying to conduct derivatives activities must meet the following conditions:
Where the applicant is a foreign bank branch, its home country or region must have established a legal framework for the regulation and supervision of derivatives activities that is applicable to the parent.284
If a foreign bank intends to carry on derivatives activities through a branch that does not meet all the above conditions, it may present an authorization from its head office to conduct specified types and volumes of derivatives activities and, except as otherwise prescribed by its head office, its derivatives transactions must be executed in real time through systems run by its head office, and settlement, exposure management and risk controls must be conducted at its head office level.285
Where a foreign-funded financial institution seeks to conduct derivatives business, the application is submitted to the CBRC’s office where it is located, and, subject to its approval, to the CBRC’s headquarters for final approval.286
[Page835:]
Institutions undertaking derivatives activities must adopt and implement:
The CBRC must communicate its decision within 60 days of receipt of a complete application.288
The senior management of a financial institution engaging in derivatives activities must have adequate knowledge of the risks associated with the financial institution’s derivatives activities and the group is accountable for the organization and delegation of powers in respect to the derivatives activities and risk management.
Institutions carrying on derivatives activities must establish independent risk management units as well as sound reporting systems. They are responsible for creating adequate access to information on their derivatives risk exposures as well as for carrying out effective oversight of their derivatives activities.289
Their senior management must choose parameters and methods for measuring risk exposures in accordance with the nature and complexity of their institution’s derivatives activities. They must stipulate and regularly update the relevant risk limits, stop loss limits, establish the contingency plan consistently with the institution’s overall strength, capital base, profit earning capacity and business principles, as well as its projection of market risks. Derivatives activities must be monitored and processed in accordance with the limits. The senior management in charge of derivatives activities must be effectively segregated from those in charge of risk management.290
When engaging in derivatives-related business, institutions must create procedures for assessing the suitability of their counterparties, including as regards their understanding of the terms of contracts, their ability to fulfil their obligations, the consistency of the proposed operations with their business objectives, as well as for assessing the credit risks on such counterparties.
Institutions may deal in high-risk derivatives, but they must properly review their counterparties. In this context, a financial institution may in good faith rely on the written documents communicated by its counterparties.291
[Page836:]
Domestic corporations and individual customers must be informed of the risks associated with derivatives as well as of the factors that might engender losses, and they must confirm in writing that they fully understand and are capable of accommodating the risks.292
In derivatives activities, financial institutions must follow the mark-to-market approach and make adjustments for the scale, scope and risk exposures of derivatives activities.293
Financial institutions engaging in derivatives business must dispose of liquidity consistent with the scale and scope of their activities, and sufficient to attest their ability to perform their contractual obligations under abnormal market conditions.294
Financial institutions engaging in derivatives activities must also set up adequate controls for operational as well as legal risks.295 When entering into a derivatives contract with its counterparties, a financial institution must refer to the legal documents in use on the relevant international derivatives market, give due consideration to elements such as the ability to protect its interests through legal enforcement in case of defaults, and take proper measures to prevent the legal risks that might arise during the drafting, negotiation and signing of the derivatives business contract.296
They must disclose to the public their risk exposures, the effects of their derivatives activities on their profits and losses and any extraordinary situations in their derivatives activities.297
The CBRC has the power to conduct “at any time” examinations of records of derivatives activities.298
Any significant risks and material losses incurred in derivatives activities must be reported to the CBRC, which may order remedial measures. Any significant changes in its derivatives activities, as well as to its transaction processing and risk management systems, must be promptly reported to the CBRC. Where these events involve foreign exchange, they must also be reported to the SAFE.299
Tape recordings of telephone calls must be kept for no less than six months, and other materials for three years starting from the expiry date of the derivatives contracts.300
Individuals who violate the provisions of the Derivative Instruments Rules are exposed to disciplinary sanctions, administrative sanctions, civil and, in appropriate cases, criminal pursuits before the people’s courts.301
Institutions acting in violation of the Derivatives Instruments Rules are subject to administrative sanctions, ranging from the confiscation of illegal gains, fines, suspension or revocation of their licences, to civil actions for reparation and in appropriate cases to criminal pursuits before the courts.302
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The fact that China’s first experiences with futures tended to be dramatic is amply illustrated by the title chosen by the State Council for its first regulations governing futures: the Circular on Preventing Blind Development of the Futures Market of 1993. To address the problems revealed in the development of the futures market, local authorities and government departments were prohibited from approving of their own accord the establishment of futures exchanges or futures brokerage companies.
On April 28, 1994, the SAIC issued its Interim Methods on the Registration and Management of Futures Brokerage Companies, and it assumed control over the registration and management of futures broker companies.
In 1994, the CSRC was designated as regulator and overseer of futures markets nationwide. During that year, the State Council stopped futures transactions on steel products, coal, sugar, rice and rapeseed oil.
In 1995, the Ministry of Commerce moved from futures to separate medium- and long-term contracts.
At the beginning of 1995, the CSRC, the State Commission of Economy and Trade and the Ministry of Commerce jointly issued the Regulations on the Participation in Futures Transactions by State-owned Enterprises and Institutions. SOEs and Stateowned institutions may only engage in futures transactions with the approval of their boards of directors or competent authorities. Unless they are profitable, they may only engage in hedging. When their positions exceed working capital (current assets minus current liabilities) by five times, approval is required from their boards of directors or competent authorities. The senior management of enterprises and institutions must supervise on a regular basis futures trading activities within their organizations.
On May 18, 1995, the CSRC issued an emergency circular to temporarily halt futures transactions on treasury bonds.
In March 1996, the State Council approved the Request for Instructions on Further Strengthening the Regulation of Futures Market to further reinforce supervision over futures markets. It prohibited financial organizations from engaging in commodity futures for their own account or as agents. Futures brokers could no longer engage in futures on their own account.
On May 27, 1998, the CSRC confirmed that no organization or individual could carry on futures transactions or cash exchange of foreign currency outside China.
On May 25, 1999 the State Council adopted the Interim Regulations on Administration of Futures Trading.
On March 20, 2007, the State Council issued the Administrative Regulations on Futures Transactions that entered into effect on April 15, 2007 and replaced the Interim Regulations of 1999. They allow financial institutions to engage in futures trading and to raise funds and offer securities for futures trading.
[Page838:]
Futures companies will be treated as financial institutions. A guaranty fund and an interest compensation mechanism for futures investors are to be established.
As short selling of futures is prohibited, investors can only profit in rising markets. With the introduction of index futures, investors will be able to make money when the index falls.
Under the new rules, the scope of “futures transactions” has been expanded to cover financial futures, which are defined as futures over financial products such as securities, interest rates, currency exchange rates and their related indices. The rules allow for settlement by physical delivery as well as by net cash settlement.
The Regulations apply to futures transactions (and to disguised futures transactions) but not to over-the-counter derivative transactions in relation to commodities or financial products.
Members of futures exchanges must be enterprise legal persons or other economic organizations that have been duly registered in China.
Futures transactions must be conducted in lawfully established futures exchanges or other trading places approved by the CSRC.
Conduct that amounts to disguised futures transactions is prohibited.
SOEs and State-owned organizations may only conduct futures transactions, either on the domestic market or on offshore markets, for hedging purposes, and they must abide by the rules issued by the SASAC and other authorities applicable to the use of State-owned assets on the futures market.
The Regulations authorize the CSRC and other regulators (including MOFCOM, SASAC, CBRC and SAFE) to jointly implement administrative rules in relation to domestic institutions and individuals’ futures transactions on offshore markets.
International payments and receipts of foreign currencies under futures transactions must comply with rules issued by SAFE. MOFCOM is authorized by the Regulations to examine and approve the range of commodities traded under offshore commodity futures transactions conducted by domestic institutions and individuals.
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The Law on Securities Investment Funds, which came into effect on June 12, 2004, governs the activities of fund managers and trustees, how funds are raised from the public,303 and how shares are subscribed, traded and redeemed. It sets down standards for fund operations and for information disclosure.304 It defines the rights of shareholders. Matters not covered in the Law are governed by the Trust Law305 and the Securities Law.306
The CSRC is attributed the competence to regulate securities investment funds.307
The Law applies to public offerings of shares in funds to invest in securities.308 The holders of shares in investment funds enjoy benefits and bear risks in proportion to their holdings.309
While envisaging specifically open and closed funds, article 5 authorizes “any other method” of operation.
Securities investment funds and trustees must dispose of appropriate sites and facilities, and they must demonstrate sound internal auditing and risk control systems.310
The appointments of senior managerial personnel, of fund managers and of the specialized departments of fund trustees must be notified to the CSRC for examination.311
Fund property must be managed separately from the manager’s or investment fund trustee’s own property and profits and losses of fund property accrue to the fund just as the manager’s and the trustee’s debts are not recoverable against the fund.312
Fund managers and investment fund trustees have duties of good faith, prudence and diligence.313
Fund management companies must have a paid-up registered capital of no less than RMB 100 million and their principal shareholders must:
Fund management companies must be approved by the CSRC.315
They must employ a legal minimum of fund managers who must also be approved by the CSRC.
The CSRC must answer applications for approval by fund management companies within six months and refusals must be explained. Where fund management companies intend to establish new branches or modify their articles of association, or in the event of other major changes, the CSRC must be notified and it must reply within two months.316
The directors, supervisors, managers and other professionals of a fund manager may not hold any position in the fund trustee or in other fund managers.317
When a fund manager leaves his/her position, the holders of fund shares must appoint a replacement within six months.318
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Security investment trust funds may be offered by commercial banks subject to approvals of the CSRC and of the CBRC.319 To qualify for offering trust funds, a bank must satisfy applicable net asset and capital adequacy requirements, it must establish a specialized department for security investment fund trusts and it must dispose of adequate facilities for the safekeeping of fund property.320
Managers of security investment trust funds are subject to the same professional disqualifications as managers of investment funds and similarly for their directors, supervisors, managers and professionals, and they must avoid the same conflicts of interest.321
Fund trustees may not cumulate the functions of trust fund manager and they may not own cross-shareholdings.322
Security investment trust funds handle the clearing and settlement of the orders of fund managers in accordance with the fund contract.323
Fund trustees may not execute orders of trust fund managers in violation of the laws, regulations or stipulations of the fund contract, and they must render account to the CSRC.324
The following individuals are disqualified to manage securities investment funds or trusts:
Directors, supervisors, managers and other practitioners of securities investment fund managers or trustees are prohibited from holding any position in the fund trustee or in other fund managers, and they may not conduct any securities transactions or other activities that impair the fund property and the interests of the fund share holders.326
Fund managers and trustees are prohibited from:
[Page841:]
The principal duties of fund managers and trustees are to keep records and accounts, to handle information disclosures, to present accounting reports and mid-term and annual reports, to monitor the net value of the fund assets and the subscription and redemption prices of the fund shares calculated by the fund manager, and to convene fund shareholders’ meetings.328
Fund managers use portfolio investment strategies in accordance with the proportions stipulated in the fund contract and the requirements of the CSRC.329
Fund property may only be invested in listed stocks and bonds and other securities approved by the CSRC.330 It may not be used:
Fund managers and trustees must make the disclosures required by law and ensure their truthfulness, correctness and completeness.332 They must make their disclosures in a timely manner and must allow investors the opportunity to consult and copy the disclosed information according to the fund contract.333
The obligation of public disclosure applies to:
[Page842:]
Prior to offering shares or accepting payments in securities investment funds, fund managers must apply to the CSRC. The application must contain:
Security investment fund contracts must include some 16 provisions intended to guarantee complete information of the public concerning the operations of the fund.335
The CSRC must reply within six months with a decision to approve or reject the application and, in the latter event, it must provide an explanation.336
Offerings of shares may only begin three days after publication of the fund contract and prospectus and must begin within six months. They must be true, accurate and complete.337
The fund is constituted within the subscription period, if:
Where the offering is successful, a statutory capital verification agency is retained to prepare an audit report, which is filed with the CSRC.339
Funds raised during the offering period are deposited in an escrow account. If the conditions of constituting the fund are not met, the fund manager must cover the expenses incurred and return their money to the investors, plus interest at the current deposit rate.340
Subject to the approval of the CSRC, fund shares of a closed fund may be traded on securities exchanges.341
For fund shares to qualify for listing, they must have terms of at least five years, their capital raised must be at least equal to RMB 200 million, and they must have attracted at least 1,000 subscribers.342
The listing and trading rules applicable to fund shares formulated by the securities exchange must be submitted to the CSRC.343
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Unless otherwise provided in the fund contract, fund managers handle subscriptions and redemptions of fund shares every workday.344
Except in cases of force majeure, of market closures or in accordance with the trust agreement, fund managers must pay redemptions promptly.
Subscription and redemption prices are calculated on the basis of the net value of the fund shares subscribed and redeemed plus or minus the relevant expenses.345
[Page844:]
The original normative structure applicable to securities companies was grounded in the Financial Institutions Regulation. The Financial Institutions Regulation consolidated several prior regulations, including the Administration of Securities Companies Procedures of 1990. Measures applicable specifically to foreign purveyors of financial services were promulgated separately.
However, on September 1, 2004, the CSRC together with the CBRC and the China Insurance Regulatory Commission (CIRC), issued a statement clarifying their relative jurisdictions. Henceforth the three compartments of the financial sector are to be subject to separate supervision by their respective specialized agencies.346 The agencies are, however, expected to cooperate.
Chapter VI of the Securities Law sets down the currently applicable framework governing securities companies. It is complemented by the measures on the administration of securities companies promulgated by the CSRC that entered into effect on March 1, 2002.
The management independence of securities companies is guaranteed by law.347
The establishment of securities companies is made subject to approval of the CSRC.348
Securities companies may be constituted as either CLSs or as LLCs.349
Subject to approval by the CSRC, securities companies may undertake any or all the
following activities:
The minimum registered capital of a securities company depends on which of the authorized activities it undertakes. The absolute minimum is RMB 50 million for companies offering brokerage services and advice. If any one of the other activities is added, then the minimum capital rises to RMB 100 million, and if two or more of those other activities are added, then the minimum capital rises to RMB 500 million.351
[Page845:]
Securities companies must possess:
The CSRC has six months from the date of acceptance of an application to render its
decision.353
Securities companies must create reserves to cover the risks of trading losses354 and they must contribute to the Securities Investor Protection Fund.355
Comprehensive securities companies must carry on their business for their own account separately from their activities as brokers or intermediaries for other parties, including separate financial and banking accounts and segregated personnel.356
A securities company may not provide financing or guarantees for its shareholders or other related persons.357
When trading for their own account, securities companies are obliged to carry on their activities in their own names and not to lend their own accounts for others to exploit.358
Under article 166 of the Securities Law, securities companies may only open accounts in the names of Chinese citizens and Chinese legal persons, and they must present lawful identity papers.
Securities companies must keep records of all instructions, even those not leading to actual trades. They must keep their business records relating to securities trading activities for 20 years.359
Securities companies must provide uniform letters of instructions for their customers, though customized arrangements may be implemented provided that records are kept of their conditions.360
Securities companies may finance their customers’ trades within the guidelines set down by the CSRC.361
They may they accept unlimited authorizations to trade securities or to decide the major conditions of such trading (types of securities, quantities or prices).362
They must avoid conflicts of interests with their customers as well as those arising among their customers.363
Customers’ trades must be executed in accordance with their instructions and a report of the conclusion of their transactions must be sent to them.364
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Their customers’ trading proceeds are deposited to separate bank accounts and they may not be seized on account of obligations of the security company, nor are they included in any security company’s liquidation or bankruptcy.365
Securities companies may not make promises to their customers about the profits to be expected from trading, nor promise to compensate their losses.366 Their personnel may not accept business outside their premises.367
Securities companies must report to the CSRC on their activities and the materials they submit must be authentic, accurate and complete.368
All transactions are to be audited on a transaction-by-transaction basis by someone other than the person handling the transactions.
Securities companies may not employ, even on a part-time basis, civil servants or other personnel disqualified under laws or regulations.369
Securities companies are liable for the violations by their employees of trading rules.370
The ratios of external liabilities of securities companies to their net assets and of their current liabilities to their current assets must meet standards set by the CSRC.
Securities companies may not commit any of the following fraudulent acts in the context of securities trading, which may injure the interests of their clients:
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Under article 71 of the Issue and Trading Regulation, securities firms may not:
The CSRC may require a securities company as well as its shareholders and actual controllers to provide information and materials within a prescribed period and their responses must be sincere, accurate and complete.372
Under article 149 of the Securities Law, the CSRC may appoint accounting firms or asset appraisal institutions to carry out audits or appraisals on the financial status, internal controls and asset values of securities companies.373
Under article 150, where the net capital or any other indicator of risk control of a securities company fails to satisfy the applicable requirements, the CSRC orders it to remedy the situation within a prescribed period. Where the situation is not remedied or has affected the sound operation of the securities company or damaged the rights and interests of customers, the CSRC may take the following measures depending on the circumstances:
Where shareholders of a securities company make false capital contributions or divert its capital, the CSRC may order remedial measures and measures to reverse transactions.374
[Page848:]
Where directors, supervisors or senior managers of a securities company fail to fulfil their duties in a diligent manner and thus give rise to any major irregularity or violation or major risk to their companies, the CSRC may require their removal from office.375
Where any illegal operation of a securities company or any major risk arising in their connection seriously disturbs the securities market or harms the interests of investors, the CSRC may suspend its business during rectification, designate another institution as trustee, take it over or close it.376 The CSRC may request the customs authorities to prevent concerned directors, supervisors, senior managers or other company personnel directly responsible from leaving the country and it may seize the people’s courts to have liens placed on their property.377
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On June 15, 1991, the people’s government of Shenzhen, together with the PBOC, issued the first stock exchange regulations. The principal responsibilities devolved upon the stock exchange authorities were: the supervision of securities traders, the supervision of listed companies, the setting of price movement limits, and the mediation of disputes over trades on the floor of the exchange.
Chapter V of the Securities Law sets down a general framework for regulating stock exchanges.
Under article 102 of the Securities Law, stock exchanges are non-profit legal persons that provide a place for the centralized trading of securities at competitively established prices.378
Stock exchanges are established or dissolved by the State Council.379 The formulation and amendment of their articles are subject to approval of the CSRC.380
In those that adopt the membership system, their accumulated net income belongs to the members, though it cannot be distributed to them while the exchange exists.381
The highest organ of administration of a stock exchange is its members’ meeting.382 Stock exchanges have a board of governors elected by the members’ meeting that manages the exchange’s affairs.383 Their managers are appointed and removed by the CSRC.384
Stock exchanges must hold annual meetings. One third of the membership may convene a meeting, as may a majority of the board of governors. Quorum for meetings is two thirds of the members and resolutions are adopted by a majority of those present.385
Only securities companies that are qualified as members of a stock exchange may trade directly on the exchange.
Members of the board of governors enjoy three-year mandates, which are renewable.386
Among other duties, the board of governors appoints the director, approves the budget, admits and excludes members.
Boards of governors are comprised of at least seven members and at most thirteen. One third must be outsiders, while at least 50% must be members. Boards of governors meet at least once a quarter. A quorum is constituted by two-thirds of the board’s membership.387
Excluded from the management of stock exchanges are individuals falling within the following categories:
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Stock exchanges must guarantee centralized trading that is fair, and they must announce realtime quotations of securities. Without the permission of a stock exchange, no one may announce real-time securities quotations.389
Where normal trading is disturbed by an emergency, a stock exchange may suspend trading. In the event of an emergency due to force majeure or if it is necessary to preserve normal trading conditions, a stock exchange may adopt appropriate measures.390
Stock exchanges must implement real-time monitoring of securities trading and must report any abnormal trading to the CSRC. They review information disclosed by listed companies and disclosures of other parties under similar duties and they adopt measures to encourage timely and accurate disclosures. A stock exchange may restrict trading through accounts manifesting anomalies and must report such initiatives to the CSRC for the record.391
Stock exchanges must withdraw a certain proportion of transaction fees, membership fees and seat fees to establish a risk fund.392
Stock exchanges regulate their membership, trading activities, and listed companies.
As regards their memberships, their most important duties include:
As regards listing activities, stock exchanges’ most important duties include:
[Page851:]
As regards trading activities, stock exchanges’ most important duties include:
The listing of a company’s shares entails the conclusion of a contract stating all the rights and obligations of the parties. Agreements must be in a form approved by the CSRC and comply with all applicable laws and regulations. They must also contain arbitration clauses and state disclosure requirements.
Investors may open accounts with securities companies and communicate their trading instructions “in writing, by telephone or otherwise”.412
Personnel of stock exchanges are prohibited from disclosing or using inside information, or having any personal interest in a member or in a quoted company.
Securities exchanges are not allowed to engage in profit-making activities. They are forbidden from releasing written materials or data forecasting securities prices or providing guarantees of stock prices.
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China’s current clearing system is dematerialized and centralized. Clearing is done on a nationwide, unified and centralized basis.413
Under Chapter VII of the Securities Law, registration and clearing institutions are constituted as non-profit legal persons for providing centralized registration, custody and clearing services for securities trading. Establishment of such companies is subject to approval by the CSRC.414
To qualify for carrying on such business, applicants must have invested capital of at least RMB 200 million, have appropriate facilities, and executive managers and business personnel who are qualified to carry on securities business.415
Before trading listed securities, holders must place all such securities in the custody of a securities registration and clearing firm.416
Such companies ensure the truthfulness, accuracy and completeness of the register of holders of securities and the records of changes in ownership of securities.417
Securities registration and clearing firms must use equipment that is adequate for protecting data, they must implement sound management systems and they must establish complete risk control systems.418
Important original documentation must be kept for up to 20 years.419
Securities registration and clearance firms must establish reserves funded from revenues to cover their business risks.420
A clearinghouse could only be dissolved with the approval of the CSRC.421
Settlement terms are T+1 for A shares and T+3 for B shares.422
In providing its netting service for a stock exchange, a clearing institution requires participants to deliver securities and funds in full and guaranties delivery on a delivery versus payment (DVP) basis. Until delivery is concluded, no one may use the concerned securities, funds or collaterals. Where a clearing participant fails to deliver on schedule, a securities registration and clearing institution has the right to dispose of the properties in accordance with the applicable rules.423
On April 4, 2000, the CSRC promulgated jointly with the Ministry of Finance the interim measures for the management of securities clearing risk funds,424 which were complemented by the measures for the administration of clients’ securities transaction clearing funds promulgated by the CSRC on May 16, 2001 which came into effect on January 1, 2002.
In March 2001, the CSRC created the CSDCC (Chinaclear) to act as depository and clearing house for listed securities. It operates offices in Shanghai and in Shenzhen. It has signed memoranda of understanding with its equivalent agencies abroad, including the Depository Trust and Clearing Corporation in New York and the Hong Kong Securities Clearing Company.
As of June 2005, the clearinghouse had accumulated losses of some USD 12.1 billion and was being financed by central bank lending.425
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A share clearing process426
[Page854:]
Chapter VIII of the Securities Law is concerned with the establishment of investment consulting organizations and credit-rating institutions. Such persons are expected to have professional knowledge and to have engaged in the securities business for not less than two years.427 The specific criteria for admission to these professions are defined by the CSRC.428 Their rate structures are subject to CSRC regulation.429 When such persons are led to issue documentation such as audit reports, appraisal reports or legal opinions for the issuance or listing of securities or securities trading activities, they must verify the truthfulness, accuracy and completeness of the contents of such reports. In the event of any false record, misleading statement or major omission in the documents for which they are responsible, and which causes losses, they bear the burden to prove the absence of fault lest they bear joint and several liabilities together with the concerned issuer and listed company.430
On December 25, 1997, the CSRC promulgated the provisional measures on the administration of securities and futures investment advisors (the Investment Advisors Measures).431 The measures apply to consultancy services provided directly or indirectly for consideration in the form of securities or futures investment analyses, forecasts or recommendations.432 A licence of the CSRC is a required condition for carrying on the profession of investment advisor.433
To qualify as an investment advisor, an applicant must have a registered capital of at least RMB 1 million and employ at least five professional advisors.434 Individuals must join specialized agencies to carry on the activity of investment advisor.435
Only Chinese citizens may apply for the professional qualification as a securities and futures investment consultant.436 Though applications are filed at the local office of the CSRC, the decisions are made by the CSRC in Beijing.437
Investment advisors must act with objectivity, fairness, honesty and good faith438 as well as prudence, due diligence and responsibility.439 Their advice must be consistent among clients.440 They are subject to supervision by the local offices of the CSRC.441
The maintenance of the status is predicated upon an annual review by the CSRC, based on the advisor’s annual report and financial statements.442
According to article 24 of the Measures, no investment advisor may:
As of the end of 2006, there were 105 securities investment advisers, 70 accounting firms approved to intervene in the securities business and 101 asset evaluation companies.
Violations of the Measures entail administrative, civil and penal sanctions depending the degree of their gravity.443
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Chapter IX of the Securities Law provides for the creation of a securities industry association as a “self-regulating organization” and as a “public organization with the status of a legal person”.444
The functions are fulfilled by the Securities Association of China (SAC) that was constituted on August 28, 1991 and the China Futures Association established on December 29, 2000.445 They are subject to the jurisdiction of the CSRC and of the Ministry of Civil Affairs.
Their organs of authority are their general assemblies and boards of directors.
The principal functions of the associations are:
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In 2005, the Securities Investor Protection Fund (SIPF) was launched to protect investors and to promote confidence in the markets. It was capitalized with RMB 6.3 billion. The chairman of the SIPF is recommended by the CSRC, subject to approval of the State Council.
SIPF revenues come primarily from five sources:
When security companies have their licences revoked or are placed under CSRC administration or are closed and liquidated, the CSRC develops a plan and executes it with the approval of the State Council. After compensating the creditors of failed securities companies, the SIPFC may succeed to its claims and enjoys the right to participate in the proceeds of liquidation.
The SIPF may only invest hold bank deposits, treasury bonds, central bank bonds and notes, financial bonds issued by central financial institutions and other instruments approved by the State Council.
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Chapter XI of the Securities Law provides a long list of the various infractions against securities laws that give rise to the imposition of penalties including warnings, confiscation of illegal gains, orders to pay compensation, fines ranging up to RMB 300,000 for individuals and RMB 600,000 for legal persons, or up to five times the illegal gains, imprisonment, demotions, suspensions of activities and closures.
Persons directly responsible for the violations as well as the people in charge may be called to answer for illegal conduct.447
Specifically prohibited activities include the issue,448 underwriting449 or trading450 of securities without proper authorizations,451 including corporate bonds,452 the issue or circulation of false information that affects securities trading,453 failure to keep proper records,454 improper use of raised funds,455 violations of trading limits,456 operation of illegal securities businesses,457 stock exchanges,458 or clearing institutions,459 illegal exercise of a securities-related profession,460 improper alterations of trading records,461 production of illegal reports,462 insider trading,463 market manipulation,464 improper disruptions of the securities markets,465 improper use of securities accounts,466 improper implementation of customers’ instructions,467 improper use of their collateral or funds or securities,468 promises of profits or of compensation for losses,469 abuse of the rights and interests of shareholders of a company taken over by the acquirer,470 failure of a securities company effectively to carry on its business for three consecutive months,471 implementation of illegal mergers or partitions of listed companies,472 carrying on activities outside the company’s objects473 or commingling accounts that should be kept separate,474 and obstruction toward the CSRC.475
Staff members of securities regulatory institutions are subject to pursuits for misfeasance for personal gain, neglect of duties, and intentional obstructionism toward parties. They may be subject to administrative sanctions.476
If stock exchanges allow listings that are not qualified, they may be subjected to sanctions by the CSRC.477
Funds collected on account of fines are paid into the State Treasury.
Appeals against penalties applied by the CSRC may be brought before the people’s courts. The collection of civil damages takes precedence over that of fines.
In cases where the offences amount to criminal offences, the CSRC refers the matter to the judicial authorities.
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A comparison between the prospects identified at the time of the first edition in 1997 and the evolution of events since reveals a mixture of progress and stagnation.
In 1995, after a review of the Chinese securities markets in conjunction with the CSRC, the World Bank issued a series of recommendations for reform. First, the A and B share markets should be merged, thus eliminating the existing opportunities for arbitraging between types, to the ultimate detriment of the Chinese issuers. Secondly, the walls between the Shanghai and Shenzhen exchanges should be removed enabling companies to list their shares on both exchanges. Thirdly, the regulatory process should be streamlined through increased concentration of authority in the CSRC. Finally, the development of capital markets should be encouraged following the successful efforts of such countries as Mexico, Brazil, Malaysia and Thailand in attracting foreign portfolio investment.
Overall progress on these fronts has been significant. Though the A and B share markets have not been merged, Chinese residents may in some circumstances buy B shares, and qualified foreign institution investors may buy A shares. The CSRC has become the dominant regulatory agency. The State Council reiterated in 2004 its commitment to the reform, opening-up and steady development of China’s capital markets.
The widespread application of the Three Separations will enhance the independence of listed companies and encourage competition and innovation.
The CSRC has acted frequently to combat improprieties on the capital markets but much progress remains necessary.
One objective of policy-makers should be the widening of the range of instruments offered on the capital markets.
1 This chapter will deal with norms that concern activities on the domestic capital markets. The chapter on the Regulation of International Capital Flows treats more particularly international financial flows for portfolio investment and Chinese overseas investment. The chapter on Criminal Law presents the rules on financial crimes such as money laundering.
2 The Chinese Economy: Fighting Inflation, Deepening Reform, Washington D.C., 1996, p.35. In its review of the PRC under article IV of the IMF Treaty, the Board of Directors in June 2006 presented a positive image of the evolution of national policy relating to the capital markets, recognizing “the progress realized in reviving the equity markets, the strong growth in the short-term corporate bills market, and the launching of the interbank market for asset-backed securities, as important steps” and that “allowing bonds to be issued based on a disclosure-based system, while removing the cap on corporate bond interest rates and streamlining regulatory responsibilities will be key steps to accelerating the development of this market”, http://www.imf.org/external/np/sec/pn/2006/pn06103.htm.
3 In 2000, the Chinese stock markets’ capitalization was hit amounted to RMB 4.745 trillion, China Statistics, http://www.allcountries.org.
4 Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/ Sample_Chapters/02~chapter_1.pdf, p. 32.
5 Diana Farrell and Susan Lund, Putting China’s Capital to Work, Far Eastern Economic Review, May 1, 2006, http://www.mckinsey.com/aboutus/mckinseynews/chinacapital.asp.
6 By mid-2006, 40 foreign institutions had invested in securities worth RMB 48.2 billion, Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/Sample_Chapters/ 02~chapter_1.pdf, p. 5.
7 These measures are presented in the chapter on The Regulation of international capital flows.
8 State Council’s Guidelines on Promoting Reform, cited in Opening-up and Steady Development of China’s Capital Market Xiao Yu, Ending the Split Share Structure, Government interferes to correct a long-standing plague, Beijing Review, http:/ /www.bjreview.com.cn/En-2005/05-28-e/bus-2.htm.
9 Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/ Sample_Chapters/02~chapter_1.pdf, p. 3.
10 The measures are controversial because of the depressing effect they are likely to have on the price levels of A shares. Still, the cloistering of the share markets is considered to harm investor confidence and diminish pricing efficiency. Filip Moerman, China’s Quest for Sound Capital Markets, International Financial Law Review, September 2005.
11 The companies engaged in the process represented 71% of total market capitalization, Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/Sample_Chapters/ 02~chapter_1.pdf, p. 3.
12 Article 13 of the Securities Law. See also, Terence Poon, Beijing Allows Banks, Insurers To Cross-Invest (WSJ), January 23, 2008.
13 Article 6 of the Securities Law.
14 Jiangyu Wang, Dancing with wolves: Regulation and Deregulation of Foreign Investment in China’s Stock Market, Asian-Pacific Law & Policy Journal, Vol. 5 (2004), p. 5.
15 China Securities Handbook, Hongru Liu ed., 1992, p.513-514.
16 Initial Public Offering prospectus of Shanghai Tyre & Rubber Co. Ltd, lead manager: Shanghai Shenyin Securities Company, July 15, 1992, p. 55.
17 In 2005, the total issues of bonds amounted to RMB 704.2 billion, a significant increase over the RMB 4.9 billion in 1981. In 2005, the turnover of exchange-traded bonds reached RMB2.8367 trillion, Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/Sample_Chapters/02~chapter_1.pdf, p. 11.
18 Articles 23-25 of the PBOC Law.
19 As of the end of December 2003, there were outstanding: USD 213 billion in T-bills, USD 141 billion in financial bonds and USD 41 billion in central bank bills.
20 As of the end of 2003, there were listed on the Shanghai and Shenzhen stock exchanges: USD 43.2 billion in treasury bills, USD 4.4 billion in corporate bonds and only USD 254 million in convertible bonds. Annual turnover on the spot market corresponded to USD 106.2 billion and to USD 646.3 billion on the repurchase market.
21 At the outset, these instruments created difficulties of legal classification because of the hybrid array of the rights and obligations attached to them: guaranteed interest payments, claims on profits and redemption options. In general, however, the Chinese literature has classified these instruments as shares.
22 The first over-the-counter market for trading in shares was opened in 1986 by the Industrial and Commercial Bank of China, Shanghai Branch.
23 Share issues were so oversubscribed that subscription rights had to be apportioned by auctions.
24 Wang Tong, China’s Macroeconomic Management Reforms, lecture at Ecole Nationale des Ponts et Chaussées, Paris, April 1, 1997, p. 9.
25 As of December 2006, the Shanghai Futures Exchange had 209 members of which 172 were brokerages and 34 were trading for their own account with a total of 200 trading terminals nation wide, China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2007, p. 43.
26 As of December 2006, the Zhengzhou Futures Exchange had 226 members of which 180 were brokerages and 46 were trading for their own account, China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2007, p. 44.
27 As of December 2006, the Dalian Futures Exchange had 194 members of which 90% were brokerages, China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2007, p. 44
28 Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/ Sample_Chapters/02~chapter_1.pdf, p. 2.
29 China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2004, p. 4.
30 Article 31 of the PBOC law provides that “the PBOC shall, in accordance with law, monitor and regulate developments of the financial markets so as to promote their coordinated development”. Article 32 authorizes the BOC “to conduct supervision and examination on following activities of the financial institutions, other institutions and individuals:(1) compliance with regulatory rules on reserve requirement;(2) activities relating to special lending of the People’s Bank of China;(3) compliance with regulatory rules on the Renminbi;(4) compliance with regulatory rules on the inter-bank lending market and inter-bank bond market;(5) compliance with foreign exchange regulations;(6) compliance with regulatory rules on gold;(7) conduct as fiscal agent on behalf of the People’s Bank of China;(8) compliance with clearing and settlement regulations; and(9) compliance with anti-money laundering regulations.”
31 In 1994 the quota for issue of securities set down by the State Planning Commission was reportedly fixed at USD 1 billion but in fact only some USD 200 million were issued.
32 Report on the Implementation of the 2004 Plan for National Economic and Social Development and on the 2005 Draft Plan for National Economic and Social Development, submitted to the Third Session of the Tenth National People’s Congress on March 5, 2004, regulatory commission at http://english.people.com.cn/200503/15/eng20050315_176927.html.
33 None of the readily accessible texts appears to define the composition of these institutions, nor the conditions of appointment, service or dismissal of their members.
34 The Securities Law as revised was promulgated by the Sixth Meeting of the Standing Committee of the Tenth NPC on October 27, 2005 and it entered into effect as of January 1, 2006. It was originally adopted by the Standing Committee of the Ninth NPC on December 29, 1998.
35 Article 179 of the Securities Law.
36 Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/ Sample_Chapters/02~chapter_1.pdf, page 32. For comparison’s sake, it is noted that as of December 2003, the CSRC’s 1,511 staff members were of an average age of 36.5 years old and 36% of their number held a masters or doctorate level degree, China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2004, p. 40.
37 Article 180 of the Securities Law.
38 Article 186 of the Securities Law.
39 Article 182 of the Securities Law.
40 Article 182 of the Securities Law.
41 Article 184 of the Securities Law.
42 China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2007, p. 57.
43 The Shanghai Stock Exchange opened on December 19, 1990. Its trading area is the largest in Asia. It is linked to a satellite and optical communications network through which to communicate real-time information nationwide and abroad. It can execute up to 28 million trades a day and clear up to 60 million transactions daily at a speed of more than 16,000 transactions per second. As of December 2006, the Exchange had 151 members (down from 180 in 2003), of which 136 were domestic firms, companies and three overseas special members (down from four in 2003). Seats had been given to 40 overseas securities companies to trade B shares, Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/Sample_Chapters/02~chapter_1.pdf, p.26. China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2007, p. 38.
44 The Shenzhen Exchange was established on December 1, 1990. It also communicates real-time information nationwide and abroad. It can execute up to 20 million trades a day. It had 176 members (down from 205 in 2003), including 141 domestic securities firms, 32 domestic securities-related companies and three overseas special members (down from four in 2003). Overseas companies held 19 seats to trade B shares (down from 46 in 2003), Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/Sample_Chapters/ 02~chapter_1.pdf, p.26, p. 27, China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2007, p. 39.
45 J & A Shenzhen Development Centre, China Law and Practice, March 31, 1995, p. 21.
46 Fajing Information Consultancy Service Department, China Law and Practice, March 31, 1995, p. 20;
47 The Yin Guang Xia scandal entailed losses of some RMB 574 million, the other scandal involved the Yorkpoint Science and Technology Co., Jiangyu Wang, Dancing with wolves: Regulation and Deregulation of Foreign Investment in China’s Stock Market, Asian-Pacific Law & Policy Journal, Vol. 5 (2004), p. 43.
48 China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2004, p. 35.
49 The Company Law was adopted at the Fifth Session of the Standing Committee of the Eighth NPC on December 29, 1993 with effect on July 1, 1994. It was amended for the first time on December 25, 1999 in accordance with the Decision of the 13th Session of the Standing Committee of the NPC on Amending the Company Law and further amended on August 28, 2004 in accordance with the Decision of the 11th Session of the Standing Committee of the 10th NPC on Amending the Company Law and it was amended for the third time at the 18th Session of the 10th NPC on October 27, 2005 with effect on January 1, 2006.
50 Articles 10 and 11 of the Securities Law.
51 Article 27 of the Securities Law.
52 The principle appears to be fraying somewhat at the margins in that, for instance, legal persons are authorized to hold up to 5% of the shares of companies quoted on the stock exchanges and in that companies quoted on the stock exchanges may trade in securities which they have held for at least six months, and in that investment companies may pledge up to 60% of their share portfolios. See also article 4 of the New Share Issue by Listed Companies Measures that prohibits companies listed on the stock exchanges from raising funds to invest in commercial banks, securities companies and other financial institutions.
53 Article 7 of the Securities Law.
54 Article 8 of the Securities Law.
55 Article 9 of the Securities Law.
56 Article 6 of the Securities Law.
57 Article 4 of the Issue and Trading Regulation.
58 Article 36 of this Regulation.
59 Article 8 of the Issue and Trading Regulation and article 16 of the Securities Law.
60 Article 17 of the Issue and Trading Regulation.
61 Article 18 of the Issue and Trading Regulation.
62 Such protection is specifically provided in article 23 of the Issue and Trading Regulation for securities houses in outlying areas in the context of the constitution of underwriting syndicates by lead managers located most often in Shanghai or Shenzhen. In the same regulation’s article 37, all principals are guaranteed equal treatment from their financial service providers (securities houses, clearing agents, share depositaries, registration agents).
63 Article 19 of the Issue and Trading Regulation.
64 Articles 28 of the Securities Law.
65 Article 31 of the Securities Law.
66 Article 32 of the Securities Law.
67 Article 33 of the Securities Law.
68 Preamble of the Corporate Governance Code.
69 Article 2 of the Corporate Governance Code.
70 Article 3 of the Corporate Governance Code.
71 Article 4 of the Corporate Governance Code.
72 Article 8 of the Corporate Governance Code.
73 Article 10 of the Corporate Governance Code.
74 Article 11 of the Corporate Governance Code.
75 Article 12 of the Corporate Governance Code.
76 Article 13 of the Corporate Governance Code.
77 Article 14 of the Corporate Governance Code.
78 Article 16 of the Corporate Governance Code.
79 Article 17 of the Corporate Governance Code.
80 Article 18 of the Corporate Governance Code.
81 Article 18 of the Corporate Governance Code.
82 Article 22 of the Corporate Governance Code.
83 Article 23 of the Corporate Governance Code.
84 Article 24 of the Corporate Governance Code.
85 Article 27 of the Corporate Governance Code.
86 Article 28 of the Corporate Governance Code.
87 Article 31 of the Corporate Governance Code.
88 Articles 33 and 34 of the Corporate Governance Code.
89 Article 38 of the Corporate Governance Code.
90 Article 39 of the Corporate Governance Code.
91 Article 40 of the Corporate Governance Code.
92 Article 43 of the Corporate Governance Code.
93 Article 46 of the Corporate Governance Code.
94 Article 48 of the Corporate Governance Code.
95 On August 16, 2001 the CSRC adopted the Guidelines for establishing independent directors of listed companies.
96 Article 49 of the Corporate Governance Code.
97 Article 50 of the Corporate Governance Code.
98 Article 52 of the Corporate Governance Code.
99 Article 61 of the Corporate Governance Code.
100 Article 63 of the Corporate Governance Code.
101 Article 67 of the Corporate Governance Code.
102 Article 70 of the Corporate Governance Code.
103 Article 72 of the Corporate Governance Code.
104 Article 73 of the Corporate Governance Code.
105 Article 76 of the Corporate Governance Code.
106 Article 77 of the Corporate Governance Code.
107 Article 82 of the Corporate Governance Code.
108 Article 85 of the Corporate Governance Code.
109 Article 89 of the Corporate Governance Code.
110 Article 91 of the Corporate Governance Code.
111 Article 4 of the Law on the People’s Bank of China, adopted at the Third Session of the Eigth NPC on March 18, 1995, and amended in accordance with the Decision to Amend the Law on the People’s Bank of China made at the sixth meeting of the Standing Committee of the Tenth NPC on December 27, 2003.
112 China Public Investment and Finance, World Bank, Washington, 1995, p. 77-78.
113 Article 156 of the Company Law.
114 Article 16 of the Securities Law.
115 Article 161 of the Company Law.
116 Article 25 of the Share Issue Examination Committee Regulations.
117 Article 7 the Convertible Corporate Bonds Measures.
118 Article 14 of the Convertible Corporate Bonds Measures.
119 Article 15 of the Convertible Corporate Bonds Measures.
120 Article 18 of the Convertible Corporate Bonds Measures.
121 Article 8 of the Convertible Corporate Bonds Measures.
122 Article 9 of the Convertible Corporate Bonds Measures.
123 Article 17 of the Convertible Corporate Bonds Measures.
124 Article 21 of the Convertible Corporate Bonds Measures.
125 Article 26 of the Convertible Corporate Bonds Measures.
126 David Wall, op. Cit. 42, at p. 9.
127 China Bans State Firms from Futures Speculation, Gang Zheng, China Finance, April 1996. See also Development & Prospects of China’s Futures Markets, Qiao Gang, paper presented to the China Financial Markets & Opportunities for Foreign Investors Conference, London, June 24, 1996, page 1, and China’s Securities Market 1995, Gao Ji Shen, China Finance, January 1996.
128 Article 55 of the Securities Law.
129 The trustee’s duty to pay investors is limited to the proceeds of the asset-backed securities, article 2 of the Asset Securitization Rules.
130 Article 3 of the Asset Securitization Rules.
131 Article 4 of the Asset Securitization Rules.
132 Article 6 of the Asset Securitization Rules.
133 Article 7 of the Asset Securitization Rules.
134 Article 8 of the Asset Securitization Rules.
135 Article 9 of the Asset Securitization Rules.
136 Article 9 of the Asset Securitization Rules.
137 Article 12 of the Asset Securitization Rules.
138 Article 13 of the Asset Securitization Rules.
139 Article 16 of the Asset Securitization Rules.
140 Article 17 of the Asset Securitization Rules.
141 Article 18 of the Asset Securitization Rules.
142 Article 19 of the Asset Securitization Rules.
143 Article 20 of the Asset Securitization Rules.
144 Article 21 of the Asset Securitization Rules.
145 Article 24 of the Asset Securitization Rules.
146 Article 25 of the Asset Securitization Rules.
147 Article 26 of the Asset Securitization Rules.
148 Article 27 of the Asset Securitization Rules.
149 Article 30 of the Asset Securitization Rules.
150 Article 31 of the Asset Securitization Rules.
151 Article 33 of the Asset Securitization Rules.
152 Article 39 of the Asset Securitization Rules.
153 Article 42 of the Asset Securitization Rules.
154 The rule is subject to the exception that the entrusted institution is permitted to redeem securities ahead of schedule according to related regulations (or contracts).
155 Article 44 of the Asset Securitization Rules.
156 Article 45 of the Asset Securitization Rules.
157 Article 49 of the Asset Securitization Rules.
158 Article 50 of the Asset Securitization Rules.
159 Article 51 of the Asset Securitization Rules.
160 Article 52 of the Asset Securitization Rules.
161 Article 53 of the Asset Securitization Rules.
162 Article 54 of the Asset Securitization Rules.
163 Article 55 of the Asset Securitization Rules.
164 Article 56 of the Asset Securitization Rules.
165 Article 58 of the Asset Securitization Rules.
166 On December 28, 2003 the CSRC promulgated the interim measures on the sponsor system for securities public offerings.
167 Article 50 of the Securities Law.
168 Article 2 of the Share Issue Examination Committee Regulations.
169 Article 4 of the Share Issue Examination Committee Regulations.
170 Article 6 of the Share Issue Examination Committee Regulations.
171 Article 12 of the Share Issue Examination Committee Regulations.
172 Article 21 of the Share Issue Examination Committee Regulations.
173 Article 10 of the Share Issue Examination Committee Regulations.
174 Article 21 of the Share Issue Examination Committee Regulations.
175 Article 21 of the Share Issue Examination Committee Regulations.
176 Article 14 of the Share Issue Examination Committee Regulations.
177 Article 12 of the Share Issue Examination Committee Regulations.
178 Article 12 of the Share Issue Examination Committee Regulations.
179 Article 16 of the Share Issue Examination Committee Regulations.
180 Article 7 of the Share Issue Examination Committee Regulations.
181 Article 7 of the Share Issue Examination Committee Regulations.
182 Article 9 of the Share Issue Examination Committee Regulations.
183 Article 22 of the Share Issue Examination Committee Regulations.
184 Article 24 of the Share Issue Examination Committee Regulations.
185 Article 20 of the Issue and Trading Regulations.
186 Article 25 of the Issuing and Trading Regulations.
187 Article 22 of the Issuing and Trading Regulations.
188 Article 6 of the New Share Issue by Listed Companies Measures.
189 Article 2 of the New Share Issue by Listed Companies Measures.
190 Article 3 of the New Share Issue by Listed Companies Measures.
191 Article 3 of the New Share Issue by Listed Companies Measures.
192 Article 9 of the New Share Issue by Listed Companies Measures.
193 Article 10 of the New Share Issue by Listed Companies Measures.
194 Where there is no reasonable explanation for the failure to meet the threshold, the chairman of the board of the company, its certified public accountants, its legal representative and the account representative and account manager in the securities company must make public apologies in newspapers designated by the CSRC, article 32 of the New Share Issue by Listed Companies Measures. Similar apologies are required of such persons, excluding the accountants, when weighted net returns for the year fail to reach the bank deposit rate, article 33 of the New Share Issue by Listed Companies Measures.
195 Article 10 of the New Share Issue by Listed Companies Measures.
196 Article 17 of the New Share Issue by Listed Companies Measures.
197 Article 19 of the New Share Issue by Listed Companies Measures.
198 Article 21 of the New Share Issue by Listed Companies Measures.
199 Article 26 of the New Share Issue by Listed Companies Measures.
200 Article 27 of the New Share Issue by Listed Companies Measures.
201 Article 140 of the Company Law.
202 Article 142 of the Company Law.
203 Article 45 of the Securities Law.
204 Article 47 of the Securities Law.
205 Article 30 of the Issuing and Trading Regulations.
206 Curiously, whereas the Securities Law stipulates a threshold of 1/3 of the directors (Article 62(7) the comparable provision in the Securities Regulation is 30% (article 60(10)).
207 Compliance at first left much to be desired. According to a study conducted in March 1996, only two of the 38 companies having listed B shares had filed their annual reports on time. But the regularity of filings now poses less of a problem than does the reliability of their contents. B Share Earnings Reports Are Delayed by Rules and Bad News, Chongmeng Xuan, The China Finance Association Newsletter, March 25, 1996
208 Curiously, whereas the Securities Law stipulates a threshold of 1/3 of the directors (Article 62(7) the comparable provision in the Securities Regulation is 30% (article 60(10)).
209 For instance, in 2003 China had 120 automakers, 130 aluminium producers and over 500 breweries. The most active M&A sectors were machinery and equipment, information technology, petroleum and chemicals, wholesaling and retailing, and the largest total values were in the metals/non-metals, petroleum and electricity sectors, Ping Lin, Merger Control in China, http://www.ln.edu.hk/econ/staff/plin/Merger%Control%20in%20China-Lin.pdf.
210 It was adopted at the 2nd Session of the 9th NPC on March 15, 1999.
211 Promulgated by the CSRC on September 28, 2002, the Measures entered into effect as of December 1, 2002.
212 Article 173 of the Company Law.
213 Article 174 of the Company Law.
214 Article 176 of the Company Law.
215 Article 177 of the Company Law.
216 Article 88 of the Securities Law.
217 Article 83 of the Securities Law.
218 Articles 86 and 87 of the Securities Law and article 49 of the Issue and Trading Regulations.
219 Article 51 of the Issue and Trading Regulations.
220 Article 91 of the Securities Law.
221 On the other hand, B shares are expressly excluded from the scope of application of this restriction, as are presumably shares quoted on foreign exchanges, article 46 of the Issue and Trading Regulations.
222 Articles 2, 4 and 6 of the Listed Companies M&A Measures.
223 Article 61 of the Listed Companies M&A.
224 Article 4 of the Listed Companies M&A Measures.
225 Article 5 of the Listed Companies M&A Measures.
226 Articles 7 and 8 of the Listed Companies M&A Measures.
227 Articles 8 and 9 of the Listed Companies Takeover Measures.
228 Takeovers as a result of inheritances are treated according to the provisions applied to takeovers by agreement, article 21 of the Listed Company Takeover Measures.
229 Article 12 of the Listed Companies Takeover Measures.
230 Article 16 of the Listed Companies Takeover Measures.
231 Article 13 of the Listed Companies Takeover Measures.
232 Article 15 of the Listed Companies Takeover Measures.
233 Article 18 of the Listed Companies M&A Measures
234 Article 20 of the Listed Companies M&A Measures
235 Article 24 of the Listed Companies M&A Measures.
236 Article 25 of the Listed Companies M&A Measures.
237 Article 28 of the Listed Companies M&A.
238 Article 31 of the Listed Companies M&A.
239 Article 32 of the Listed Companies M&A Measures.
240 Though the CSRC may still demand changes, article 30 of the Listed Companies M&A Measures.
241 Article 33 of the Listed Companies M&A Measures.
242 Article 34 of the Listed Companies M&A Measures.
243 Article 35 of the Listed Companies M&A Measures.
244 Article 36 of the Listed Companies M&A Measures.
245 Articles 37 and 39 of the Listed Companies M&A Measures.
246 Article 38 of the Listed Companies M&A Measures.
247 Article 41 of the Listed Companies M&A Measures.
248 Article 42 of the Listed Companies M&A Measures.
249 Article 43 of the Listed Companies M&A Measures.
250 Article 44 of the Listed Companies M&A Measures.
251 Article 48 of the Listed Companies M&A Measures.
252 Article 48 of the Listed Companies M&A Measures.
253 Articles 49 and 51 of the Listed Companies M&A Measures.
254 Article 52 of the Listed Companies M&A Measures.
255 Articles 54, 55 and 56 of the Listed Companies M&A Measures.
256 Article 57 of the Listed Companies M&A Measures.
257 Article 4 of the State-Owned Assets Supervision and Management Regulations.
258 Articles 6 and 12 of the State-Owned Assets Supervision and Management Regulations.
259 Article 31 of the State-Owned Assets Supervision and Management Regulations.
260 Article 5 of the State-Owned Assets Supervision and Management Regulations.
261 Article 21 of the State-Owned Assets Supervision and Management Regulations.
262 Article 23 of the State-Owned Assets Supervision and Management Regulations.
263 Article 22 of the State-Owned Assets Supervision and Management Regulations.
264 Article 25 of the State-Owned Assets Supervision and Management Regulations.
265 Article 75 of the Securities Law. Under the Issue and Trading Regulation, article 81 (15), inside information is defined as important information known to concerned issuers, securities companies, legal persons intending to carry out a takeover, securities supervision and control organizations, self-regulating bodies governing the securities business, and persons closely associated therewith.
266 Article 74 of the Securities Law.
267 See also article 72 of the Issuing and Trading Regulations.
268 The rule does not apply to legal persons or any other organizations that hold alone or with others not less than 5% of the company’s shares.
269 Article 76 of the Securities Law.
270 Article 78 of the Securities Law, and article 72 of the Issue and Trading Regulations.
271 Article 84 of the Securities Law.
272 Article 41 of the Issue and Trading Regulation.
273 Associated Press, December 28, 1995.
274 Article 79 of the Issue and Trading Regulations.
275 Article 80 of the Issue and Trading Regulations.
276 1995 and 1996 are examples.
277 Liu Lisheng, An Overview of China’s Markets, CSRC, 2006, http://books.elsevier.com/bookscat/samples/9780120885800/ Sample_Chapters/02~chapter_1.pdf, p. 14, and Geoff Dyer, Worries Surface about a Potential Bubble, FT, October 9, 2007.
278 Article 5 of the Derivative Instruments Rules.
279 Article 2 of the Derivative Instruments Rules.
280 Article 4 of the Derivative Instruments Rules.
281 Article 3 of the Derivative Instruments Rules.
282 Article 6 of the Derivative Instruments Rules.
283 Article 7 of the Derivative Instruments Rules.
284 Article 7 of the Derivative Instruments Rules.
285 Article 7 of the Derivative Instruments Rules. Comparable requirements are applicable to branches of Chinese commercial banks, article 12 of the Derivative Instruments Rules.
286 Article 8 of the Derivative Instruments Rules.
287 Article 10 of the Derivative Instruments Rules.
288 Article 11 of the Derivative Instruments Rules.
289 Article 15 of the Derivative Instruments Rules.
290 Article 16 of the Derivative Instruments Rules.
291 Article 18 of the Derivative Instruments Rules.
292 Article 19 of the Derivative Instruments Rules.
293 Article 21 of the Derivative Instruments Rules.
294 Article 22 of the Derivative Instruments Rules.
295 Articles 23 and 24 of the Derivative Instruments Rules.
296 Article 25 of the Derivative Instruments Rules.
297 Article 25 of the Derivative Instruments Rules.
298 Article 25 of the Derivative Instruments Rules.
299 Article 27 of the Derivative Instruments Rules.
300 This is without prejudice to accounting rules, article 28 of the Derivative Instruments Rules.
301 Article 29 of the Derivative Instruments Rules.
302 Articles 30, 31 and 32 of the Derivative Instruments Rules.
303 Privately offered funds appeared in the early 1990s and were successfully promoted by securities companies. The Law on Securities Investment Fund does not concern such private placements. There appear to be no official statistics on private funds though some estimates place their total value at RMB 800-900 billion in 2002 which would probably have shrunk to RMB 200 billion in recent years due to the stock market slump; these may serve in part to funnel capital out of the country, HKEx, 15 January, 2004, p. 9. http://216.239.59.104/search?q=cache:61cA09TY1ZYJ:www.hkex.com.hk/research/ rpapers/IIMC.pdf+institutional+investors+in+mainland+china&hl=en.
304 The text is complemented by the Interim Measures for the Administration of Securities Investment Funds, approved by the State Council on November 5, 1997, and promulgated by the Securities Commission under the State Council on November 14, 1997
305 The Trust Law was promulgated by the 21st Session of the Standing Committee of the Ninth NPC on April 28, 2001 and it entered into effect on October 1, 2001
306 Article 2 of the Security Investment Fund Law.
307 Article 11 of the Security Investment Fund Law.
308 Article 2 of the Security Investment Fund Law.
309 Article 3 of the Security Investment Fund Law.
310 Articles 13 and 26 of the Security Investment Fund Law.
311 Articles 16, 17 and 27 of the Security Investment Fund Law.
312 Articles 6, 7 and 8 of the Security Investment Fund Law.
313 Article 9 of the Security Investment Fund Law.
314 Article 12 of the Security Investment Fund Law.
315 Article 12 of the Security Investment Fund Law.
316 Article 14 of the Security Investment Fund Law.
317 Article 189 of the Security Investment Fund Law.
318 Article 23 of the Security Investment Fund Law.
319 Article 25 of the Security Investment Fund Law.
320 Article 26 of the Security Investment Fund Law.
321 Article 27 of the Security Investment Fund Law.
322 Article 28 of the Security Investment Fund Law.
323 Article 29 of the Security Investment Fund Law.
324 Article 30 of the Security Investment Fund Law.
325 Articles 15 and 27 of the Security Investment Fund Law.
326 Articles 18 and 27 of the Security Investment Fund Law.
327 Articles 20 and 31 of the Security Investment Fund Law.
328 Articles 19 and 29 of the Security Investment Fund Law.
329 Article 57 of the Security Investment Fund Law.
330 Article 58 of the Security Investment Fund Law.
331 Article 59 of the Security Investment Fund Law.
332 Article 60 of the Security Investment Fund Law.
333 Article 61 of the Security Investment Fund Law.
334 Article 36 of the Security Investment Fund Law.
335 Article 37 of the Security Investment Fund Law.
336 Article 39 of the Security Investment Fund Law.
337 Articles 42 and 43 of the Security Investment Fund Law.
338 Article 44 of the Security Investment Fund Law.
339 Article 44 of the Security Investment Fund Law.
340 Article 46 of the Security Investment Fund Law.
341 Article 47 of the Security Investment Fund Law.
342 Article 48 of the Security Investment Fund Law.
343 Article 49 of the Security Investment Fund Law.
344 Article 52 of the Security Investment Fund Law.
345 Article 55 of the Security Investment Fund Law.
346 The CBRC is responsible for supervising and regulating banks, financial asset management companies, trust investment companies and other deposit-taking financial institutions (article 4) whereas the CIRC oversees insurance companies and their branches, insurance groups, and insurance holding companies (article 6).
347 Article 128 of the Securities Law.
348 Originally, the PBOC was the lead regulator of securities companies.
349 Article 126 of the Securities Law.
350 Article 125 of the Securities Law.
351 Article 127 of the Securities Law.
352 Article 124 of the Securities Law.
353 Article 128 of the Securities Law.
354 Article 135 of the Securities Law.
355 Article 134 of the Securities Law.
356 Article 136 of the Securities Law and article 45 of the Issue and Trading Regulations requires that multi-service securities firms separate their sales and administrative personnel involved in trading for the house’s account from those personnel involved in trading as agents for firm clients. This provision has also suffered frequent abuse.
357 Article 130 of the Securities Law.
358 Article 137 of the Securities Law.
359 Article 147 of the Securities Law.
360 Article 140 of the Securities Law.
361 Article 142 of the Securities Law.
362 Article 143 of the Securities Law.
363 Article 136 of the Securities Law.
364 Article 141 of the Securities Law.
365 Article 139 of the Securities Law.
366 Article 144 of the Securities Law.
367 Article 145 of the Securities Law.
368 Article 148 of the Securities Law.
369 Article 133 of the Securities Law.
370 Article 146 of the Securities Law.
371 Article 79 of the Securities Law.
372 Article 148 of the Securities Law.
373 Article 149 of the Securities Law.
374 Article 151 of the Securities Law.
375 Article 152 of the Securities Law.
376 Article 153 of the Securities Law.
377 Article 154 of the Securities Law.
378 On August 21, 1996, the SCSC promulgated the Stock Exchange Administrative Measures evacuating municipal governments from this field and staked its claim to ultimate control over the stock exchanges.
379 Article 102 of the Securities Law.
380 Article 103 of the Securities Law.
381 Article 105 of the Securities Law.
382 Article 16 the Stock Exchange Administrative Measures.
383 Article 106 of the Securities Law and article 17 of the Stock Exchange Administrative Measures.
384 Article 107 of the Securities Law.
385 Article 16 the Stock Exchange Administrative Measures.
386 Article 20 the Stock Exchange Administrative Measures.
387 Articles 21 and 22 of the Stock Exchange Administrative Measures.
388 Article 108 of the Securities Law and article 28 the Stock Exchange Administrative Measures.
389 Article 113 of the Securities Law.
390 Article 114 of the Securities Law.
391 Article 115 of the Securities Law.
392 Articles 116 and 117 of the Securities Law.
393 Article 40 the Stock Exchange Administrative Measures.
394 Article 43 the Stock Exchange Administrative Measures.
395 Seat leases are prohibited, article 44 the Stock Exchange Administrative Measures.
396 Article 47 the Stock Exchange Administrative Measures.
397 Article 50 the Stock Exchange Administrative Measures.
398 Article 51 of the Stock Exchange Administrative Measures.
399 Article 52 of the Stock Exchange Administrative Measures.
400 Article 53 of the Stock Exchange Administrative Measures.
401 Article 56 of the Stock Exchange Administrative Measures.
402 Article 57 of the Stock Exchange Administrative Measures.
403 Article 58 of the Stock Exchange Administrative Measures.
404 Article 62 of the Stock Exchange Administrative Measures.
405 Article 30 of the Stock Exchange Administrative Measures.
406 Articles 31 and 32 of the Stock Exchange Administrative Measures.
407 Article 34 of the Stock Exchange Administrative Measures.
408 Article 37 of the Stock Exchange Administrative Measures.
409 Article 39 of the Stock Exchange Administrative Measures.
410 Article 38 of the Stock Exchange Administrative Measures.
411 Articles 50 of the Stock Exchange Administrative Measures.
412 Article 104 of the Securities Law.
413 Article 158 of the Securities Law.
414 Article 155 of the Securities Law.
415 Article 156 of the Securities Law.
416 Article 159 of the Securities Law.
417 Article 160 of the Securities Law.
418 Article 161 of the Securities Law.
419 Article 162 of the Securities Law.
420 Article 163 and 164 of the Securities Law.
421 Article 165 of the Securities Law.
422 China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2004, p. 45.
423 Article 167 of the Securities Law.
424 They entered into effect on the same date. The State Council had approved the measures on January 31, 2000.
425 Elaine Kurtenbach, China’s Securities Clearing House in Financial Trouble Due To Brokerage Defaults, The Associated Press, June 16, 2005.
426 China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2004, p. 46.
427 Article 170 of the Securities Law.
428 Article 170 of the Securities Law.
429 Article 172 of the Securities Law.
430 Article 173 of the Securities Law.
431 The text had been approved by the State Council on November 30, 1997.
432 Article 2 of the Investment Advisor Measures. These are complemented by the Interim Procedures on Administration of Securities and Futures Investment Consultancy, issued by the CSRC on April 1,1998.
433 Article 3 of the Investment Advisor Measures.
434 Article 6 of the Investment Advisor Measures.
435 Article 12 of the Investment Advisor Measures.
436 Article 13 of the Investment Advisor Measures.
437 Article 11 of the Investment Advisor Measures.
438 Article 4 of the Investment Advisor Measures.
439 Article 19 of the Investment Advisor Measures.
440 Article 25 of the Investment Advisor Measures.
441 Article 5 of the Investment Advisor Measures.
442 Article 12 of the Investment Advisor Measures.
443 Articles 32-37 of the Investment Advisor Measures.
444 Article 174 of the Securities Law.
445 As of December 2003, the SAC had 229 members including 2166 securities companies, 2 asset management companies, 19 securities investment find management companies, 83 securities investment advisers and 9 special members. Securities companies are obliged to join the Association, China Securities Regulatory Commission, China’s Securities and Futures Markets, April 2004, p. 50.
446 Article 176 of the Securities Law.
447 Article 227 of the Securities Law.
448 Articles 188 and 189 of the Securities Law.
449 Article 191 of the Securities Law.
450 Article 190 of the Securities Law.
451 Article 216 of the Securities Law.
452 Article 224 of the Securities Law.
453 Articles 191, 192, 193, 207, 213, 221, 222 and 223 of the Securities Law.
454 Article 225 of the Securities Law.
455 Article 194 of the Securities Law.
456 Articles 195 and 204 of the Securities Law.
457 Article 197 of the Securities Law.
458 Article 196 of the Securities Law.
459 Article 226 of the Securities Law.
460 Articles 198 and 199 of the Securities Law.
461 Article 200 of the Securities Law.
462 Article 201 of the Securities Law.
463 Article 202 of the Securities Law.
464 Article 203 of the Securities Law.
465 Article 206 of the Securities Law.
466 Articles 208 and 209 of the Securities Law.
467 Article 210 of the Securities Law.
468 Article 211 of the Securities Law.
469 Article 212 of the Securities Law.
470 Article 214 of the Securities Law.
471 Article 217 of the Securities Law.
472 Article 218 of the Securities Law.
473 Article 219 of the Securities Law.
474 Article 220 of the Securities Law.
475 Article 230 of the Securities Law.
476 Article 228 of the Securities Law.
477 Article 229 of the Securities Law.