i Source of law
Primary source

The primary sources of securities law include the Securities Law,2 the Securities-Investing Funds Law, the Company Law, and the Criminal Law, approved by the National People’s Congress (NPC) or its Standing Committee.

The Securities Law provides that the securities regulatory department in the State Council, currently the China Securities Regulatory Commission (CSRC), oversees the securities market.

Other regulations
Ordinances by the State Council

The Regulation on the Supervision and Administration of Securities Companies and the Regulation on the Risk Disposal of Securities Companies regulate securities companies.

The Ordinance on the Regulation of Futures Trading is the primary regulation on the financial futures market, for which the main regulatory body is the CSRC as well.

Judicial interpretations by the Supreme People’s Court

The Supreme People’s Court (SPC) identifies the emerging issues that arise when the laws are applied in judicial practice, and it promulgates interpretations to unify the application of laws in the court system of the People’s Republic of China (PRC).

Relevant interpretations include the Interpretation on Several Issues in the Application of Law in Criminal Cases of Insider Trading and Disclosure of Inside Information (the Judicial Interpretation on Insider Trading),3 and Some Provisions of the SPC on Adjudicating Cases of Civil Compensation Arising from False Statement in Securities Market (the Judicial Interpretation on Claims for False Statement).

CSRC rules

The CSRC, the primary regulatory authority for the securities market under the Securities Law, publishes and amends various securities regulations.

Supplementary rules by stock exchanges and other regulators

The main securities exchanges in the PRC, the Shanghai Stock Exchange4 and the Shenzhen Stock Exchange,5 also publish transaction rules.

ii Regulatory authorities

The CSRC, a ministerial public institution directly supervised by the State Council, regulates China’s securities and futures market. Pursuant to Article 179 of the Securities Law, it has the following powers:

  • a formulating relevant rules and regulations on the supervision and administration of the securities market;
  • b formulating the qualification standards for securities practices and codes of conduct;
  • c implementing supervision and administration; and
  • d investigating and punishing violations of laws or regulations.

The CSRC has different departments for different functions, including the Enforcement Bureau for conducting investigations and the Administrative Penalty Committee for determining administrative penalties.

The CSRC has delegated a large portion of its regulatory power to its branches.

iii Judicial authorities

The Intermediate People’s Courts (IPCs) are the courts of first instance for civil or criminal cases related to securities fraud.6

According to the Administrative Litigation Law, administrative lawsuits against the CSRC as the body rendering the administrative decision are filed at the First IPC of Beijing, and those against branches of the CSRC are filed at the district courts where the branches are located.7

iv Common securities claims

Currently, common securities claims include claims related to false statement, insider trading, trading with misappropriation of non-public information, market manipulation, short-swing trading, defrauding clients, unauthorised issuance of securities, among which many may be prosecuted according to the Criminal Law.

False statement

Article 69 of the Securities Law stipulates the civil liabilities of false statement, with Article 181 dealing with the administrative liabilities.

‘False statement’ in the securities market refers to ‘any of the behaviours of the obligor regarding information disclosure in violation of the securities laws, such as making false records of major events contrary to the facts, making misleading statements, making major omissions when disclosing information, or disclosing information inappropriately, during the issuance or transaction of securities’.

For example, in Chen Lihua et al. v. Daqing Lianyi & Shenyin Securities Corporation,8 the issuer was held liable for the losses suffered by the investors as a result of false statements in the prospectus and its false statement of profits in an annual report; the sponsor and underwriter were held jointly and severally liable for false statement in the prospectus as a result of their failure to exercise due diligence and care.

Insider trading and trading with misappropriation of non-public information

Article 76 of the Securities Law stipulates the civil liabilities of insider trading, with Article 180 providing the administrative penalties.

Insider trading means any insider who has access to insider information or has unlawfully obtained any insider information on securities trading, purchases or sells the securities of the relevant company, or divulges such information, or advises any other person to purchase or sell such securities.

Insider trading should be differentiated from ‘trading with misappropriation of non-public information’ under Paragraph 4 of Article 180 of the Criminal Law, which refers to the use of non-public information related to securities transactions by employees of securities-investing funds, securities companies, other financial institutions, the stock exchanges and regulatory authorities, including front running by fund managers and stockbrokers. Administrative liability for this has not been specifically provided for in the Securities Law.

Market manipulation

Article 77 of the Securities Law provides a ground for civil action and Article 182 stipulates administrative penalties for market manipulation.

Market manipulation includes, but is not limited to:

  • a centralising advantages in funds, quantity of share or information to trade jointly or frequently;
  • b collaborating with others to trade securities at a time and price, and by a method, agreed upon in advance; and
  • c trading securities between the accounts under the trader’s own control.

More market manipulation situations are provided for in the CSRC rules.

Short-swing trading

Article 47 and Article 195 of the Securities Law regulate short-swing trading by imposing a six-month period of prohibition of reverse trading, after any securities transaction, upon shareholders holding 5 per cent or more of the total shares of the listed company, as well as the directors, supervisors and senior officers of the listed company. Profits from short-swing trading will be disgorged for the benefit of the listed company.


Article 79 of the Securities Law prohibits fraudulent conduct by securities companies and their employees and provides a civil cause of action for injured investors.

Unauthorised public offerings are prohibited by Article 188 of the Securities Law.


i Forms of action

The forms of action against securities wrongdoings include individual actions and joint actions.

Representative action under Article 54 of the Civil Procedure Law (CPL) – one type of action allowing the joining of mass plaintiffs as a class after the case is registered and thus most similar to ‘class actions’ – is not permitted according to Article 4 of a 2002 Notice of the SPC and Article 12 of the Judicial Interpretation on Claims for False Statement.

However, under Article 13 of the Judicial Interpretation on Claims for False Statement, the court may consolidate proceedings arising out of the same securities-fraud activity to a joint action, and notify plaintiffs of individual lawsuits to join an existing joint action. Mass plaintiffs in a joint action may designate several representatives, to improve the efficiency of the proceedings.

Shareholder derivative actions on behalf of and for the interest of the listed company may arise in cases for (1) the disgorgement of profits for short-swing trading, and (2) for pursuing recourse against wrongdoers who cause losses and liabilities to the listed company, according to Article 151 of the Company Law.

Article 15 of the CPL permits social organisations to act on behalf of and for the benefit of public interests in court proceedings. In July 2016, the very first securities support litigation, Liu et al. v. P2P Financial Information Service Co, Ltd (P2P Co),9 was admitted by the Shanghai First Intermediate People’s Court for trial. In the case, China Securities Medium and Small Investors Service Center supported the individual plaintiffs and acted as their attorney.

ii Procedure

General procedural rules are laid down in the CPL and special rules are supplemented by the SPC through judicial interpretations.

There is no special judicial interpretation for private lawsuits in relation to short-swing trading, insider trading, market manipulation and defrauding clients. Therefore, in practice the courts will be likely to follow the procedural rules for civil claims against misstatements as provided in the Judicial Interpretation on Claims for False Statement.

Noticeably, for a private lawsuit of false statement to be admissible, the plaintiff must rely on an administrative penalty decision rendered by a regulatory authority (e.g., the CSRC or its branches, or the Ministry of Finance) or a criminal conviction.10

The two-year limitation for general civil claims applies to claims for securities fraud.11 The limitation period starts when an administrative penalty decision is publicised or, in cases without an administrative penalty decision, when a criminal conviction takes effect.

Article 5 of a 2002 Notice of the SPC provides special rules on the jurisdiction of the courts to try private actions for false statement. Only the IPCs of one or two cities in each province are competent to hear securities disputes.

iii Settlement

According to Article 50 of the CPL, parties in civil matters may settle their disputes at any time. There is no prohibition against settlement in securities disputes. Further, under Article 4 of the Judicial Interpretation on Claims for False Statement the courts shall encourage the parties to settle. Some cases are even settled before any civil lawsuit has been filed.12

iv Damages and remedies
False statement

Article 30 of the Judicial Interpretation on Claims for False Statement provides that civil compensation is limited to the losses actually incurred as a result of the false statement, including for those who bought the affected securities in the period between the date of misstatement and that of the disclosure or correction of the false statement, and for those who continued to hold the securities and consequently incurred losses (Article 18).

For calculation of losses, a benchmark day should be set, which is in most cases the day when the accumulative trading volume of the securities reaches 100 per cent of all tradable affected securities, or the thirtieth transaction day after the date of the disclosure or correction of the misstatement (Article 33).

If the plaintiff-investor sells securities on or before the benchmark day, the plaintiff-investor’s loss shall be calculated by the margin between the price of the purchase and that of the sales (Article 31); if the plaintiff-investor sells securities or still holds securities after the benchmark day, the loss shall be the margin between the average price for buying the securities and the average of the closing prices during the period from the date of the disclosure or correction of the false statement to the benchmark day, multiplied by the quantity of securities (Article 32).

Though Article 19 excludes losses caused by ‘systematic risks of the securities market’, ascertaining this is a big challenge and had not been tested until the recent case of Wang Jianhua et al v. Foshan Light Co, Ltd, in which the risks were calculated by reference to the fluctuation of the index of the stock exchange and taken into account.

Civil actions for insider trading and market manipulation

Private actions for compensation of loss resulting from market manipulation are rarely seen and investors lost the only two publicly known cases for failing to prove losses or causation.

As for private actions related to insider trading, Chen Wei, et al. v. Everbright Securities in 2015 is the first case where the investors prevailed. For investors, the obstacle to winning such cases is largely the high evidential standard required for the investor to prove causation between the loss and the manipulative acts.


Proceeds from short-swing trading will be disgorged for the benefits of the listed company.

Remedies for defrauding clients are determined according to principles and rules of contract law and tort law.


i Forms of action

The CSRC, in addition to performing daily regulatory functions, takes charge of investigations into misconduct and violations of law in the securities market when evidence of any violation comes to its attention.

Non-punitive regulatory measures

‘Non-punitive regulatory measures’ refers to injunctive measures and restrictions the CSRC may impose on the subjects of an investigation when the investment is ongoing, or when the targeted non-compliance is not remedied, or where, after investigation, the CSRC finds the illegal behaviour does not need to be re-addressed by administrative sanctions.

The concept of non-punitive regulatory measures is first brought up in the CSRC’s Circulation on Further Completing the Administrative Penalty System of the CSRC.13 Thereafter, multiple non-punitive measures are named in the rules promulgated by the CSRC.14 There are currently dozens of non-punitive regulatory measures, ranging from public exposure, through the issuance of warning letters and recording on credit files, to materially adverse actions such as limitation of business activities, limitation on the payment of salaries or benefits to directors, supervisors or senior management, and decisions on persons’ competence for certain positions.

Administrative penalties (including denial of access to the market)

Under the PRC Administrative Penalty Law, only laws and administrative regulations may prescribe administrative penalties. Most types of violation of securities law will lead to administrative penalties.

Criminal penalties

Criminal penalties may be imposed for the following acts: fraudulent issuance of stocks and bonds (Article 160 of the Criminal Law); non-compliant disclosure of or failure to disclose important information (Article 161); unauthorised public offering (Article 179); insider trading (Article 180); trading with misappropriation of non-public information (Article 181); faking and spreading false information in relation to transaction of securities (Article 181); inveigling clients into transactions of securities (Article 181); market manipulation (Article 182); and provision of false verifications (Article 229).

The prosecution and trial of insider-trading criminal cases is further governed by an SPC judicial interpretation.

ii Procedure
Investigation and regulatory measures

Investigations by the Enforcement Bureau of the CSRC normally commence with an informal investigation, where the Enforcement Bureau makes informal inquiries and collects information and documents. Based on the information obtained in the informal investigation, the Enforcement Bureau decides whether to initiate a formal investigation. Once the formal procedure commences, the Enforcement Bureau has the power to take administrative coercive measure, such as sealing up premises, facilities or properties; detaining properties; and restricting the personal freedom of those under investigation.

Administrative penalty proceedings (including hearings) and administrative review

After the investigation is completed, case file is transferred to the Administrative Penalty Committee for review to decide the penalty to be imposed.

Except in cases with uncontested facts and light penalties, the Administrative Penalty Committee issues a prior Notice of Administrative Penalties to the subject of the investigation, stating the facts, reasoning, administrative decisions and the subject’s rights to start a hearing.

The subject of the investigation may submit statements, arguments for the case or apply for a hearing under the Rules on Administrative Penalty Hearings.15

The subject of an administrative penalty may request the CSRC to conduct an administrative review, or bring an administrative lawsuit against the CSRC to revoke the penalty decision under Article 6 of the Administrative Penalty Law.

Criminal proceedings

If the case under investigation involves potentially criminal acts, the CSRC shall notify the public security authority and transfer the materials to the department for investigation of economic crimes of the public security authority, for the latter to initiate a criminal investigation process according to the Criminal Procedure Law.

The first instance court for such a criminal case is the court of intermediate level; the procuratorate of that level prosecutes and the public security authority of the municipal level or above is responsible for the investigation.

iii Settlement

Article 2 of the Implementing Measures for the Pilot Programme for Administrative Reconciliation (the Reconciliation Measures) provides that during the investigation an administrative settlement agreement may be reached between the CSRC and investigation subjects upon an application filed by the latter, for the purpose of correcting the suspected illegal acts, eliminating the adverse consequences of the violation, making administrative reconciliation payment to compensate the losses of investors, and accordingly terminating the procedures for investigation and law enforcement.

Since the Reconciliation Measures were only promulgated by the CSRC on 17 February 2015 and are still relatively new, there have as yet been no reported cases resolved by administrative conciliation.

Plea bargaining in criminal cases is not permitted in China, but the cooperative attitude of the defendant in the criminal investigation and prosecution will be an alleviating factor for sentencing.

iv Sentencing and liabilities

The administrative penalties imposed on the offender vary according to the severity of the behaviour and its consequences, and administrative penalties include (1) orders of correction; (2) warnings; (3) confiscation of illegal gains, unlawful property or things of value; (4) administrative detention; (5) fines; (6) denial of access to the market; (7) suspension of production or business; and (8) temporary suspension or rescission of permit or business licence, etc. Criminal liabilities for securities-related crimes include fixed-term imprisonment, fines and confiscation.

Liabilities for insider trading and market manipulation




Administrative liabilities of the responsible persons if committed by an entity



Criminal liabilities of the responsible persons if committed by an entity



Disposition of the securities; confiscation of illegal gains; a fine of one to five times the illegal gains or, if no illegal gains, 30,000–600,000 yuan

A warning; a fine of 30,000–300,000 yuan

A fine; imprisonment of no more than five years and, in particularly severe cases, no more than 10 years

Imprisonment of no more than five years



Disposition of the securities; confiscation of illegal gains; a fine of one to five times the illegal gains or, if no illegal gains, 300,000–3 million yuan

A warning; a fine of 100,000–600,000 yuan

A fine;

imprisonment of no more than five years and, in particularly severe cases, no more than 10 years

Imprisonment of no more than five years and, in particularly severe cases, no more than 10 years


i Jurisdictional issues
Private actions

PRC courts have jurisdiction over disputes arising out of any acts conducted in the PRC securities market as the courts of the place where an allegedly tortious act was conducted. For example, in Nanning Sugar v. Martin Currie Ltd, the PRC court entertained a claim against an American investor, in relation to its short-swing trading of Nanning Sugar stocks.

Theoretically, PRC courts also have jurisdiction over disputes arising out of acts conducted outside China but having adverse consequences in China, as courts of the place where the injury occurred, and over disputes against Chinese companies or persons listed or engaged in transactions at overseas exchanges that have no other factor connecting them to China, as courts of the place where the defendants are based. However, there have been no such cases reported so far, and the court may refuse jurisdiction for forum non conveniens.

Public enforcement

Without a statute or ordinance indicating how broadly the CSRC’s regulatory powers extend in cross-border matters, the CSRC is clearly authorised by the Securities Law to regulate any acts conducted in the PRC securities market, including those conducted by qualified foreign institutional investors who enter the PRC securities market under the terms of the Administrative Measures on Investment in Domestic Securities by Qualified Foreign Institutional Investors.

It has yet to be tested whether CSCR’s jurisdiction may cover acts conducted offshore but having influence in China.

i Conflict of law issues

Article 39 of the Law on the Application of Laws in Foreign-Related Civil Relations, determines that the law applicable to rights and obligations under valuable instruments is the law of the place where the rights under the instruments are realised or other laws that have a significant relation to the valuable instruments.

The dominant principle for determining applicable laws in relation to obligations, including contracts and torts, is party autonomy, and a selection of the governing law in transaction documents will be respected. Failing an agreement of the parties (as in most actions in tort), the ‘most significant relationship’ test applies. Therefore, the law of the PRC will apply in disputes arising out of securities-fraud activities conducted in the Chinese securities market.

ii Cross-border enforcement assistance

The CSRC signed the International Organization of Securities Commissions’ Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information regarding securities and futures in 2007.

As of June 2016, the CSRC has also signed 63 memoranda on mutual assistance on the regulation of securities activities with the authorities of 58 countries and regions, including the Securities and Exchange Commission of the United States.16

If there is no agreement between the Chinese authorities and the foreign jurisdiction, requests for assistance are decided case by case.

Under the mechanism of the Shanghai-Hong Kong Stock Connect launched in 2014, and Shenzhen-Hong Kong Stock Connect 2016, which enables investors in the Shanghai, Shenzhen or Hong Kong stock markets to trade securities listed in the other, the CSRC and the Securities and Futures Commission of Hong Kong (SFC) aim to further improve the mechanism for identification and notification of suspected misconduct and initiate effective investigatory cooperation to combat cross-border misconduct, including misleading disclosure, insider trading, market manipulation and other fraudulent activities. The Tang et al. administrative penalty case, the very first case concerning cross-border market manipulation through the Shanghai-Hong Kong Stock Connect, has seen pursued based on the joint efforts made by the CSRC and the SFC17 in 2016.


i Laws and regulations

The NPC had a first reading of a draft amendment to the Securities Law in April 2015, but there was no further progress after that. The highlight of the draft is the transition from the approval system to a registration system for public listing. It is anticipated by the legislature that the draft amendment is likely to be submitted to the NPC Standing Committee for review again in April 2017.18

A large number of laws and regulations related to security litigation were revised, including the Securities Investment Fund Law, which for the first time brought private funds under supervision, and the Rules on Administrative Penalty Hearings, which expanded the right to hearings and provide more detailed provisions on the conduct of hearings.

New regulations were passed, including the Reconciliation Measures (see Section III.iii, supra); the Guiding Opinions on Promoting the Sound Development of Internet Finance promulgated by multiple institutions, including the People’s Bank of China, and which confirms the regulatory power of the CSRC over equity crowdfunding; the Measures for Administration of Private Investment Funds’ Fund-Raising Behaviour; and the Measures for Administration of the Qualifications of Securities and Futures Investors.

ii CSRC sanctions

The year 2016 witnessed a steady, relatively high number of securities cases investigated by the CSRC, and a more stringent level of enforcement. According to CSRC statistics, the CSRC filed 302 new cases in 2016, a 23 per cent rise compared with the average number of cases filed in 2013, 2014 and 2015, and including 178 foreign-related cases – a 24 per cent rise. 233 cases were closed. 393 people involved were given restraining orders preventing travel abroad; 55 cases were transferred to the public security departments to further pursue criminal liabilities, and among them, 45 cases have been officially registered by the police, hitting a new historic high in terms of the number of CSRC-transferred criminal cases being officially registered. Among all the cases filed in 2016, 73 cases were related to information disclosure; 63 cases related to insider trading and 30 cases related to failure to report and disclose when holding 5 per cent of total issued stocks of a listed company, or having a 5 per cent increase or decrease. Cases related to market manipulation numbered 46. The CSRC also stepped up its probe into front running, with 28 cases investigated in 2016; violations by securities professionals also took up 20 cases.

The traditional types of cases, namely false statement, insider trading and market manipulation, continued to dominate the majority of the cases filed, with a total of 182 of these types, accounting for 60 per cent of the total number of cases. The aforementioned three categories accounted for 24 per cent, 21 per cent and 15 per cent, respectively, of the total number of cases, occupying the top three spots in the overall caseload. Among them, false statement cases involving the intermediate agencies saw an increase of 25 cases in terms of the number of cases being filed, a 67 per cent increase. This speaks to the fact that the level of enforcement has been strengthened comprehensively at all stages of information-disclosure-related violations. As for market-manipulation cases, several new cases came into the public purview such as market manipulation through false information, cross-market manipulation, manipulation through government loans or futures contracts, and cross-border manipulation, signalling the developments and complexity now found in the traditional types of cases. The enforcement efforts against stock trading using non-public information were ramped up, with the number of rat-trading violations hitting 28, an increase of 87 per cent. For the 14 cases filed involving misconduct in the new over-the-counter market, the misconduct took the form of falsifying financial information, false statements and manipulation of stock prices.




False statement



Insider trading



Market manipulation



Failure to disclose a change of 5% of shareholding



Front running



Illegal securities operation or consultation



Other types






Furthermore, the CSRC has released the following details of 20 typical law-violating cases from 2016.19

Case Name



Stock manipulation by Tang et al.

First cross-border market manipulation case abusing the Shanghai-Hong Kong Stock Connect

Market manipulation

Manipulation of the stock price of Hong Da Chemical Co, Ltd by Zhu Hongde and Shanghai Yongbang Co, Ltd

First case punishing the manipulation of the market by utilising advantageous assets and information position

Zhong Zin Fu Ying Co, Ltd and Wu Junle’s conspiracy to manipulate the stock prices of Te Li Co, Ltd and De Li Si Co, Ltd

The total forfeiture and fines exceeded more than 1.1 billion yuan, setting a new record high in terms of CSRC administrative monetary penalties.

Manipulation of ‘Methanol 1501 Futures Contract’ by Jiang Wei

First criminal case in manipulating the contract prices for commodity futures

Market manipulation taking advantage of the position as a securities practitioner by Zhu Weiming

CSRC issued an administrative penalty for Zhu, a security professional, and banned Zhu from entering the security market for life.

Market manipulation by Ren Liangcheng

Ren layered the order with no economic basis or reasonable intent to actually execute these orders; however, he used rapid orders and cancellations to construct artificial prices for the relevant financial instruments, thereby inducing investors’ decisions on capital allocation. CSRC punished Ren for committing layering in the capital market.

Faking of financial information by Liaoning Zheng Long Food Co, Ltd

CSRC imposed the highest amount of penalty even though Zheng Long Food Co, Ltd had already withdrawn its IPO application after discovery of the financial forgery.

IPO fraudulent issuance and violation of information disclosure

Fraudulent issuance of Dandong Xintai Electric Co, Ltd

First case ordering compulsory delisting procedure because of issuance deception

Kang Hua Agriculture Co, Ltd and Busen Group Co, Ltd’s false statement

First financials fabrication case in back-door listing of a major asset reconstructing and reorganisation

Financial information fabrication by Shen Xian Yuan Co, Ltd

First financials fabrication case investigated in the new over-the- counter markets

Failure to carry out due diligence in its financial consultancy business by Zhong De Securities Co, Ltd

CSRC imposed a fine of 3 million yuan on Zhong De Securities Co, Ltd and forfeited its revenue in the amount of 3 million yuan in relation to due diligence failings by its financial consultants.

Intermediate agencies’ violation of laws and regulations

Failure of BDO and China Alliance Appraisal Co, Ltd to fulfil due diligence obligations

CSRC crackdown on the auditing and appraisal industry

Violation of the Accounting Standards by Reanda Certified Public Accountants Co, Ltd

CSRC punished the Reanda Certified Public Accountants Co, Ltd for failing to observe the due diligence obligations stipulated in the Accounting Standards and for fraudulent misrepresentation in accounting reports.

Abnormal trading of Ping Tan Development Co, Ltd

CSRC imposed forfeiture of nearly 20 million yuan in total for the insider trading committed by four managers.

Insider trading and trading on non-public information

Insider trading by Luo Xiangyang

CSRC imposed fines and banned Luo Xiangyang and his brother from entering the securities trading market for life because Luo took unfair advantage of his professional position and committed insider trading with his brother.

Front-running by Li Jianchao

CSRC transferred Li’s rat-trading case for criminal prosecution. Li was sentenced to prison for three years. Li, once dubbed the ‘champion manager’ for public funds, traded on non-public information and made illegal gains in the amount of 16.82 million yuan.

Fabrication and dissemination of fraudulent information by ‘Midasjr’ (a WeChat public account)

First case in which CSRC targets WeChat public accounts and media for fabricating and dissemination of fraudulent information

Fabrication and dissemination of fraudulent information

Abnormal trading of Amarsoft Co, Ltd

CSRC investigated and cracked down on securities agencies violation.

Illegal operation of Qingyuan Investment Co, Ltd

CSRC issued warning and imposed fines on the private fund management.

Private fund’s violation of laws and regulations

Illegal operation of a securities business by Hundsun Co, Ltd

CSRC crackdown on illegal over-the-counter asset allocation

Illegal operation of business

It is also worth mentioning that the CSRC released on 30 March 2017 that it imposed fines of 3.47 billion yuan in total on one individual, Mr Xian Yan, the ultimate controlling owner of two public companies, P2P Co and Huiqiu Tech, and a lifelong ban for trading stocks, for manipulating the stock of P2P Co and failures on information disclosure. The move marked the highest fine ever for an individual. The harshest punishment for Xian Yan underscores China’s resolve to crack down on securities market fraud.

iii Court decisions

In 2016, several high-profile legal battles were brewing in China.

Vanke Labour Union v. Baoneng (still pending)

This case – China’s most high-profile hostile takeover legal battle – involved several public companies and has generated shock waves across the Chinese capital market. The contested ongoing legal battle serves as a catalyst for potential legal and securities reforms.

Vanke, the biggest Chinese real estate developer, has become a target of an unsolicited takeover attempt by Baoneng. The plaintiff Vanke Labour Union, also a stockholder, claimed that the defendant Baoneng’s purchase of Vanke’s issued stocks beyond 5 per cent should be rendered null and void as a result of its failure to disclosure its increase in the stockholding as required by the Securities Law. Currently, no substantive court rulings have been handed down. The legal battle is still ongoing, and practitioners and scholars across the country, and even the CSRC, are waiting for the court to address the contentious issue; that is, whether a failure to disclose an increase of shareholding shall invalidate the transaction or result in a restriction on the voting rights. This takeover is considered to be a milestone for the development of hostile acquisitions in China’s capital market.

Shanghai Xing Sheng Shi Ye Development (Group) Co, Ltd v. Shanghai Kainan Investment Holdings Group Co, Ltd et al. (with Shinmay Property Co, Ltd as a third party) (still pending)

This lawsuit is the first case where the shareholder of a listed company has sued the ‘barbarians at the gate’. The original largest shareholder of Shinmay (a listed company), Xing Sheng Co, Ltd, sued the new largest shareholder group, the barbarians at the gate trying to take over corporate control. During the shareholding filing process, the defendants concealed the fact that they held multiple trading accounts on behalf of persons acting in concert. By buying in large number of shares and climbing to a 16.53 per cent shareholding position in the listed company, they subsequently became Shinmay’s largest shareholder.

Xing Sheng Co, Ltd pleaded in the complaint for the deprivation and restriction of the defendants’ shareholder rights, including but not limited to voting rights. In June 2016, the Shanghai First Intermediate People’s Court ruled against Xing Sheng Co, Ltd’s claims because it failed to prove that it suffered damage as a result of the defendants’ non-disclosure, and therefore lacked the factual and legal basis to support its claim. The court branded the case as a ‘new type of securities fraud liabilities case’. Xing Sheng Co, Ltd lodged an appeal.

65 Investors v. ChalkiS Heath Industry Co, Ltd

In 65 Investors v. ChalkiS Heath Industry Co, Ltd (ChalkiS),20 the court of first instance ruled that a false statement by ChalkiS underestimating its performance could not have induced the plaintiffs to make the decision to buy shares. The court also held that, in this case, during the period of the plaintiff’s investment, the stock price was influenced by domestic and foreign industrial policies and systemic economic risks, and other external factors. Therefore, the court held that there was no causation between the plaintiff’s investment loss and the defendant’s false statement, and the court rejected all the plaintiff’s claims for compensation.

Liu et al. v. P2P Co, Xian Yan and seven other senior managers

In this case – the first securities public-interest lawsuit – the plaintiffs were investors in the P2P Co. In March 2016, Shanghai CSRC issued an administrative penalty, in which it stated that P2P Co violated the relevant securities laws by its failure to disclose major lawsuits and guarantee commitments for the outsiders during the period between 2 March 2013 and 15 April 2015. The CSRC imposed a penalty in the amount of 400,000 yuan on P2P and penalty of 550,000 yuan on Xian Yan and other senior managers.

The plaintiffs pleaded that the defendant’s fraudulent misrepresentation constituted torts, and the plaintiffs suffered damage as a result of the defendant’s tortious behaviour. Given the causation between the two, the plaintiffs filed a lawsuit seeking compensation. China Securities Medium and Small Investors Service Center, a public-interest institution established by the CSRC with the aim of giving a voice to small retail investors, represented the plaintiff in the lawsuit, marking the first securities-related public-interest litigation in China.

Beijing Fei Du Internet Technology Company Limited v. Beijing Nuo Mi Duo Catering Management Company Limited

In January 2015, in the first case related to equity crowdfunding, Beijing Nuo Mi Duo Catering Management Company Limited commissioned ‘Renrentou’, an internet-based platform operated by Beijing Fei Du Technology Company Limited to raise 880,000 yuan to open a catering branch. The money was raised on time; however, both parties went to court because of the disputes arising from the crowdfunding agreement. Renrentou opined that Nuo Mi Duo had made an incorrect disclosure of information, including the rental information, forcing Renrentou to suspend the crowdfunding and refund the investors’ money. In defence, Nuo Mi Duo questioned the legality of Renrentou’s online crowdfunding.

Beijing Haiding District People’s Court ruled that the crowdfunding agreement was valid, and Nuo Mi Duo should pay the damages for contract breach given its failure to disclose relevant information correctly. The final ruling by Beijing First Intermediate People’s Court on 22 December 2015, released around January 2016, upheld the original judgment on appeal. However, what the case left unanswered was the question of whether the investors should be identified as stockholders having equity interests in the catering branch or as ordinary creditors having those rights against the debtor, should the catering branch be opened successfully.

Regardless, this case marked the first court ruling upholding the validity of an equity crowdfunding agreement, and showed the judicial tolerance for financial innovation.


Following the dramatic overhaul of the stock market and the crackdown on the financial futures market in 2015 and 2016, false statement, insider trading and market manipulation (and particularly those in new forms) will remain the focus of the CSRC’s regulatory efforts. It is expected that the CSRC will be emphatically watching out for cases concerning market risk prevention, cases that draw intense media scrutiny and social outcry, cases that influence market reforms, and cases involving fraudulent practices.

Besides the crackdown efforts, there is plenty to look out for in 2017:

  • a The expected structural changes to the stock market, including a transition from the approval system to a registration system, and an international board, are still under discussion. The draft Securities Law is likely to be submitted to the NPC Standing Committee for second reading in April 2017. Remarkably, the once prevalent share-issuance registration system for the Chinese stock market will be gradually replaced by a more relaxed system. As reported by the Securities Times, the amendment has laid out the blueprint for establishing a multilayered information-disclosure mechanism, thus creating a solid foundation for over-the-counter markets. With respect to investor protection, a ‘suitability management system’ of securities and futures investors may be put into place. The controlling shareholders, ultimate controlling owners, directors, supervisors and senior officers of the issuer will be strictly required to act in an honest manner with integrity to comprehensively fulfil their publicly made commitments and shall not impair the legitimate rights and interests of investors. Other major areas to watch out for are the cash dividend system, the increase in the minimum shareholding percentage for the shareholders’ meeting and the perfecting of the shareholder derivative lawsuit practice. Last but not least, the idea of having an investor protection agency as the representative in a lawsuit may also very well be on the horizon.
  • b The number of securities-related public interest litigation cases is very likely to increase rapidly, following the mass crackdown on securities fraud by the CSRC.
  • c The regulation of internet finance, especially equity crowdfunding, will be another hot issue to watch, particularly after several pilot cases concerning the risks associated with fintech (though the rules on crowdfunding are still under drafting).
  • d The SPC has for a long time been urged to promulgate special judicial interpretations in relation to insider trading and market manipulation; these are much needed and, once made, will give greater clarity to private actions in these areas.

1 Peng Xuejun, Sun Shiqi, Hu Ke and Liu Siyuan are partners at Jingtian & Gongcheng.

2 http://china.findlaw.cn/gongsifalv/touzi/wszjtz/105229.html (English version); www.88148.com/Info/201503063398.html (Chinese version).

3 www.law-lib.com/law/law_view.asp?id=385050.

4 www.law-lib.com/law/law_view.asp?id=385050.

5 www.sse.com.cn.

6 www.szse.cn.

7 www.csrc.gov.cn/pub/newsite/flb/flfg/sfjs_8249/201312/t20131205_239350.html.

8 www.bjcourt.gov.cn/cpws/paperView.htm?id=100363186803.

9 www.chinacourt.org/article/detail/2016/11/id/2354930.shtml.

10 SPC Gazette, Vol. 11 of 2005.

11 The limitation period is revised to three years by the General Principles of the Civil Law, which will become effective on 1 October 2017.

12 Article 6, Judicial Interpretation on Claims for False Statement.

13 Wanfu Bio-Tech case: http://finance.eastmoney.com/news/1349,20141110443762435.html.

14 The CSRC’s Circulation on Further Completing the Administrative Penalty System of the CSRC, Zheng Jian Fa [2002] No. 31, 04/25/2002.

15 For example, Article 64 of Measures for the Administration of Issuance of Securities by Listed Companies issued by the CSRC, CSRC Order No. 30, 5 June 2006, provides such measures as regulatory interview, decisions on competence for certain positions, and recording on credit files.

16 http://news.xinhuanet.com/fortune/2016-06/27/c_1119121984.htm.

17 www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201702/t20170224_312641.html.

18 www.cs.com.cn/xwzx/201703/t20170305_5195397.html.

19 www.csrc.gov.cn/pub/newsite/zjhxwfb/xwdd/201702/t20170224_312641.html.

20 www.cninfo.com.cn/cninfo-new/disclosure/fulltext/bulletin_detail/true/1203112410?announceTime=2017-02-28.