The Regulation of Securities Markets in China

This chapter sets the background for this volume and outlines the questions to be discussed, describes the methodology used, and provides a roadmap of the content.

This chapter reviews the theory of securities markets regulation through a consideration of the academic literature and debate. Although built around the framework of Western economic and political traditions, the theory has been influential in China as it represents the globally dominant paradigm. Many of China’s regulatory provisions and much of the institutional structure can be traced to this source. The chapter surveys opinions about the general nature of securities regulation: the ‘why’ of regulation, the common objectives of securities regulation, as well as the ‘what’ of regulation. The chapter also discusses the regulatory institutional structures normally used to achieve regulatory objectives.

This chapter provides an overview of China’s contemporary regulatory framework in relation to the securities markets. Emphasis is on the equity markets and the role of the CSRC as the centralized regulator. An historical conspectus is provided from the introduction of Deng’s open-up policy to the present day in order to explain the evolution of the system to its current state. The chapter contains a survey of entities regulated by the CSRC, including the Shanghai and Shenzhen stock exchanges, the National Small and Medium Company Equity Market, listed companies, non-listed public companies, securities companies, public fund management companies, private fund management companies, fund management companies with foreign equity interests, Qualified Foreign Institutional Investors (QFII), RMB Qualified Foreign Institutional Investors (RQFII), and various industry associations. Key regulations and rules are identified and discussed. The chapter provides readers with a general view of the structure of China’s securities regulatory system at the national level and how it functions.

This chapter explores how information disclosure is regulated in China’s securities markets in relation to issuers and listed companies. It also deals with regulation of representations by financial intermediaries. Disclosure requirements under legislation, CSRC regulations, and exchange rules are also reviewed. Three major areas of non-compliance identified by the CSRC are then examined: non-compliance with profit forecast disclosure requirements; where information disclosure is not timely, accurate, and complete; and, related to party transactions, false statements, major omissions, or failure to disclose at all or in a timely fashion. The role played by stock analysts in China is discussed. The chapter makes a case that retail investors in China are heavily influenced by information they receive from financial intermediaries. The sector is largely self-regulated by the China Securities Association—the chapter discusses the reasons for this and critiques its adequacy, drawing some conclusions as to regulatory priorities within the CSRC.

This chapter investigates the issue of insider trading and the broader concern of investor protection in China. Laws and regulations in relation to insider trading and the enforcement of these are reviewed. Quantitative and qualitative data drawing on the CSRC’s Administrative Penalty Decisions issued between 2010 and 2016 (inclusive) are analysed, as well as the results of interviews and a Survey conducted by the author, bearing on insider trading regulations and enforcement. The chapter argues that investor protection is incidental to the CSRC’s primary roles of ensuring market efficiency and mobilizing the markets in support of government economic policy, and that the resources that it allocates to investor protection and the areas of investor protection to which it allocates them are determined by that priority.

This chapter examines the One Bank–Three Commissions regulatory structure that supervises the broader financial system in China and the relationship between its parts. In 2003, China formally adopted a sector-based regulatory approach to its financial system, the so-called One Bank–Three Commissions structure, under which the People’s Bank of China and the China Banking Regulatory Commission regulate banking, while the CSRC regulates securities markets and trust assets management, and the China Insurance Regulatory Commission regulates insurance. The particular responsibilities and roles of these authorities and the nature of their interactions are scrutinized in this chapter. Additionally, the chapter considers the emergence of financial conglomerates which operate across all sectors, and the difficulty of regulating them under this model. The appropriateness of the One Bank–Three Commissions structure is also assessed in relation to asset-backed securitization and internet-based financial activities. The chapter assesses whether an effective coordinating mechanism is possible among the regulators.

This chapter discusses the decentralization of China’s securities markets and the regulatory roles and ambitions of local governments. Multi-level financial market regulation is an intrinsic part of the Chinese regulatory system, and the chapter looks at the effects and implications of decentralization of financial markets regulation. The powers of local governments to regulate credit companies, financing guarantor companies, private capital management companies, and regional markets are reviewed, as are the economic and political tensions between local and central government objectives, and the possible distorting effects of local government competition for financial services business and private local investment.

This chapter consists of a synthesis of the discussions of Chaps. 2, 3, 4, 5, 6, and 7. Likely future developments are considered for regulatory institutions, their organization and processes, and the substantive content of regulations. The underlying, and often conflicting, forces at work influencing the direction of financial markets’ regulation in China are threefold: the usual concern for market stability, avoidance of market failure, and maintenance of investor confidence; the need to develop private investment markets in order to mobilize private capital within the framework of a ‘socialist market economy’; and the avoidance of too great a degree of inequality in regional development and prosperity.