General Overview
In the People's Bank of China (PBC) 2005 Financial Stability Report, the authors acknowledge that, according to the categories formulated by the International Organization of Securities Commission (IOSCO), market risk, credit risk, liquidity risk, operational risk, legal risk and systemic risk deserve great attention and tight control. (PBC 2005, p. 100) However, there is insufficient publicly available information regarding China's level of compliance with IOSCO's Objectives and Principles of Securities Regulation.
The team conducting the International Monetary Fund's 2006 Article IV Consultations with China emphasized the benefits of early participation in a Financial Sector Assessment Program (FSAP), which would help take stock of the recent significant progress in financial sector reforms and identify priorities for further reforms. While the decision to participate was formally reached last year, the authorities are still deciding on the appropriate time to launch the process. (IMF 2006, p. 25)
In a 2006 report issued by the Institute of International Finance (IIF), the authors note that oversight and regulatory responsibilities rest primarily with the China Securities Regulatory Commission (CSRC). The CSRC, as a centralized supervisory agency of securities markets, is responsible for promulgating regulations/rules concerning regulation of the securities market and monitoring companies' compliance with relevant regulations. The Ministry of Finance (MoF) is responsible for promulgating the relevant financial and accounting regulations/ rules. (IIF 2006, p. 18)
The CSRC was created in October 1992 as the executive branch of the State Council Securities Commission (SCSC) to conduct supervision and regulation of the securities markets. The scope of its authority was subsequently expanded. In 1998, in accordance with the State Council Reform Plan, the SCSC and the CSRC were consolidated to form a unified supervisory agency under the direct control of the State Council. As of 2006, major functions and responsibilities of the CSRC include: supervising securities and futures markets; overseeing the issuance, trading, custodial services, and settlement of securities; monitoring the behavior of listed companies; governing the stock exchanges; regulating securities and futures companies, investment fund managers, and investment consulting firms; and penalizing activities that violate relevant laws and regulations. (IIF 2006, p. 18)
According to the IIF, unlike in some other countries, China does not appear to suffer from potential regulatory inconsistencies. The MoF, CSRC, the China Banking Regulatory Commission (CBRC), and the China Insurance Regulatory Commission (CIRC) are closely consulted and coordinate regulation to avoid conflicting guidelines for banks and insurance companies following their IPOs. (IIF 2006, p. 18)
In the PBC's 2005 Financial Stability Report, the authors claim that, since the reform and opening up, with the constant deepening of financial restructuring, China's financial legal development has embarked on a fast track and made tremendous achievements. The Law on the People's Bank of China, the Law on Commercial Banks, the Law on Banking Regulation, the Securities Law and the Insurance Law were promulgated, and a basic financial legal system has been set up to mainly regulate financial practitioners, operating activities, and financial supervision and regulation. Based on these basis financial laws, the State Council and other related agencies have formulated corresponding administrative regulations, rules, or regulatory documents. What is worthy of special mentioning is the newly revised Law on the PBC in 2003, which bestowed the responsibility of maintaining financial stability directly on the PBC. (PBC 2005, p. 130)
The newly revised Securities Law has also streamlined and reduced the financial requirements for listing on the stock exchange (making it easier for firms with less capital to list) while strengthening the disclosure requirements for firms. In September 2005, the China Securities Investor Protection Fund Company was also set up to monitor the risks and liquidation of securities firms that go bankrupt. (IMF 2006, p. 25)
China has two stock exchanges in Shanghai and Shenzhen. The Shanghai Stock Exchange is playing a more prominent role in terms of the number of listed companies/shares and total market capitalization. The stock exchange is a nonprofit membership organization directly governed by the CSRC. The stock exchange is performing a variety of functions such as providing facilities and a marketplace for securities trading, approving and arranging listing/delisting, monitoring securities transactions, overseeing listed companies, and disseminating market information. The stock exchange's listing requirements set out several criteria on the company's total share capital, profit history, and the number of shareholders. Although the stock exchange is given some degree of discretion, the enforcement and punitive authorities fall primarily within the purview of the CSRC. For instance, the stock exchange is engaged in market surveillance activities to detect manipulative transactions, but it is the CSRC that has the administrative power to penalize a company involved in such malpractices. The recent revision to the Securities Law has granted more powers to the stock exchange which allow it to directly approve the listing of shares and corporate bonds and make decisions on suspension and termination of listing. (IIF 2006, pp. 18-19)
According to the 2006 IMF Article IV Consultations with China, the limited role of capital markets in China at present reflects the dominance of the state banks in intermediation, but these markets are also plagued with regulatory and governance problems. Developing bond and equity markets is important for improving intermediation and increasing incentives for banks to seek out small and medium-size enterprises. These reforms will help in increasing consumption by encouraging greater direct and indirect household participation in the equity and bond markets, which would allow households to diversify their portfolios and raise returns on them. As a result, consumption decisions would not be narrowly based on wage developments, but on more diversified sources of income. Expanding the bond market also would help in lowering corporate savings by reducing the need for enterprises to rely on internal savings to fund investment. (IMF 2006, p. 23)
The IMF team reports that the authorities have made progress in reviving the equity markets. A critical step in this direction has been the reforms to convert the nontraded shares of state-owned companies listed on the stock market to tradable shares, which is expected to be largely completed by end-year. As a result, stock prices have significantly rebounded and interest in new IPOs and secondary placement offers has soared. Nevertheless, more needs to be done to ease access to the market and allow stocks to be publicly issued based on firms' disclosure of financial data and prospects. (IMF 2006, p. 23)
The non-tradable share reform program was a key initiative taken by the authorities to boost the development of China's equity market. China's equity market languished over the last several years reflecting uncertainty over how the government might choose to sell off its large holdings of non-tradable shares, representing some two-thirds of total stock market capitalization. To deal with this situation, the government initiated in April 2005 a reform program to convert state-owned shares to tradable shares in listed companies. This reform program has moved rapidly--out of some 1,350 listed companies, nearly 900 companies, which account for 70 percent of the stock market capitalization, had completed the reform program by April 2006. (IMF 2006, p. 25)
The PBC notes in its 2005 Financial Stability Report that, as a result of the weak performance of China's securities market, problems with securities companies have been substantially exposed. Given the relatively small scale of their assets, China's securities companies have not triggered systemic crisis in the financial system; however, the authors acknowledge that they should pay close attention to the causes of those risks. First, some securities companies have not yet improved their corporate governance structure, their risk management capacity, and internal control mechanisms need to be strengthened. In addition, there are no external audits or requirements regarding information disclosure for securities companies. Second, securities companies suffer from their low profitability, underdeveloped agency business, and absence of an environment for innovative development. Third, such services as custodian of client deposits, treasury bond repo, and asset management are not well designed, which provides room for securities companies to operate illegally. Fourth, the legal system and regulation of the securities sector must be further strengthened. (PBC 2005, pp. 100-101)
The Principles
1. The responsibilities of the regulator should be clear and objectively stated. |
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There is insufficient publicly available information that as to China's compliance with this principle.
According to a 2006 Institute of International Finance report, oversight and regulatory responsibilities rest primarily with the China Securities Regulatory Commission (CSRC). The CSRC, as a centralized supervisory agency of securities markets, is responsible for promulgating regulations/rules concerning regulation of the securities market and monitoring companies' compliance with relevant regulations. The Ministry of Finance (MoF) is responsible for promulgating the relevant financial and accounting regulations/ rules. (IIF 2006, p. 18)
The CSRC was created in October 1992 as the executive branch of the State Council Securities Commission (SCSC) to conduct supervision and regulation of the securities market. The scope of its authority was subsequently expanded. In 1998, in accordance with the State Council Reform Plan, the SCSC and the CSRC were consolidated to form a unified supervisory agency under the direct control of the State Council. Currently, major functions and responsibilities of the CSRC include: supervising securities and futures market; overseeing the issuance, trading, custodial services and settlement of securities; monitoring the behavior of listed companies; governing the stock exchanges; regulating securities and futures companies, investment fund managers, and investment consulting firms; and penalizing activities violating relevant laws and regulations. Unlike in some other countries, China does not appear to suffer from potential regulatory inconsistencies. The MoF, CSRC, China Banking Regulatory Commission (CBRC), and China Insurance Regulatory Commission (CIRC) are closely consulted and coordinate regulation to avoid conflicting guidelines for banks and insurance companies following their IPOs. (IIF 2006, p. 18)
2. The regulator should be operationally independent and accountable in the exercise of its functions and powers. |
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There is insufficient publicly available information that as to China's compliance with this principle.
The Institute of International Finance reports that the China Securities Regulatory Commission (CSRC) was created in October 1992 as the executive branch of the State Council Securities Commission (SCSC) to conduct supervision and regulation of the securities market. The scope of its authority was subsequently expanded. In 1998, in accordance with the State Council Reform Plan, the SCSC and the CSRC were consolidated to form a unified supervisory agency under the direct control of the State Council. (IIF 2006, p. 18)
3. The regulator should have adequate powers, proper resources and the capacity to perform its functions and exercise its powers. |
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There is insufficient publicly available information that as to China's compliance with this principle.
The U.S. Department of Commerce has mentioned that the China Securities Regulatory Commission (CSRC) lacks experienced personnel and has turned to the United Kingdom and other countries for more training. (U.S. DoC 2005, p. 142)
In the People's Bank of China's 2005 Financial Stability Report, the authors remark that it is important to continue to strengthen risk monitoring and supervision over securities companies, adopt forceful measures to ensure investors' rights and interests and restore market confidence. These measures must be designed: (1) to carry out comprehensive monitoring based on different categories of the firms and put in place an effective day-to-day supervisory system; (2) to reinforce supervision over senior executives and shareholders in securities companies and regulate their behavior; (3) to improve the internal and external monitoring mechanism for the proprietary trading of securities companies; (4) to push securities companies to practice the third-party custodian system for clients' securities transaction and settlement funds and establish an effective and self-sustained system for the operation and management of such funds. (PBC 2005, p. 102)
4. The regulator should adopt clear and consistent regulatory processes. |
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There is insufficient publicly available information as to China's compliance with this principle.
5. The staff of the regulator should observe the highest professional standards, including appropriate standards of confidentiality. |
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There is insufficient publicly available information as to China's compliance with this principle.
6. The regulatory regime should make appropriate use of Self-Regulatory Organizations (SROs) that exercise some direct oversight responsibility for their respective areas of competence, to the extent appropriate to the size and complexity of the markets. |
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There is insufficient publicly available information as to China's compliance with this principle.
China has two stock exchanges in Shanghai and Shenzhen. The Shanghai Stock Exchange (SSE) is playing a more prominent role in terms of the number of listed companies/shares and total market capitalization. The SSE is a nonprofit membership organization directly governed by the Chinese Securities Regulation Commission (CSRC). The SSE is performing a variety of functions such as providing facilities and a marketplace for the securities trading, arranging listing/delisting, monitoring securities transactions, overseeing listed companies, and disseminating market information. The SSE listing requirements set out several criteria on the company's total share capital, profit history, the number of shareholders and so forth. Although the SSE is given some degree of discretion, the enforcement and punitive authorities fall primarily within the purview of the CSRC. For instance, the SSE is engaged in market surveillance activities to detect manipulative transactions, but it is the CSRC that has the administrative power to fine or de-list the company involved in such malpractices. (IIF 2006, pp. 18-19)
In addition, the Securities Association of China is a self-regulating organization for the securities industry established in accordance with the pertinent regulations of Securities Law of the People's Republic of China and Administrative Regulations on Registration of Public Organizations. It is a non-profit public organization with the status of a legal person under the professional guidance, supervision and management of China Securities Regulatory Commission and the Ministry of Civil Affairs of the People's Republic of China. (SAC website)
The Securities Association of China was established on August 28, 1991. [...] In 1999, the Association was restructured in accordance with the requirements of Securities Law of the People's Republic of China, and it began its exploration in self-regulation of the industry. In July 2002, the third members' general assembly was held to adapt to the requirements of development of the market and the securities industry, at which new leaders of the Association were elected. In order to bring into full play the multi-functions of self-regulation, transmission and service of the Association and promote normal development of the securities industry, the Association revised and improved its charter and a series of self-regulating rules, primarily establishing a self-regulating framework for the industry. (SAC website)
The highest organ of authority of the Securities Association is the members' general assembly composed of all of the members and the board of governors is its executive body. The Association adopts the system of overall responsibility by the chairman. The Association shall have one full-time chairman, nominated by China Securities Regulatory Commission and elected by the board of governors of the Association. Members of the Association are managed in four classes: securities companies, securities investment fund management companies, securities investment consulting agencies and special members. A member has to be registered to get a membership. By March 31 2004, there are 284 members in the Association, of which 127 are securities companies, 27 securities investment fund management companies, 87 securities investment consulting agencies and 40 special members. (SAC website)
The purposes of the Association are: to effect the self-regulation of the securities industry subject to the centralized governmental supervision and administration; to bridge the government with the securities industry; to serve the members and safeguard their legitimate rights and interests; to maintain a proper competition order in securities industry; promote openness, fairness and equitability; and to enhance a sound and healthy development of the securities market. (SAC website)
7. SROs should be subject to the oversight of the regulator and should observe standards of fairness and confidentiality when exercising powers and delegated responsibilities. |
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There is insufficient publicly available information as to China's compliance with this principle.
China has two stock exchanges in Shanghai and Shenzhen. The Shanghai Stock Exchange (SSE) is playing a more prominent role in terms of the number of listed companies/shares and total market capitalization. The SSE is a nonprofit membership organization directly governed by the Chinese Securities Regulation Commission (CSRC). The SSE is performing a variety of functions such as providing facilities and a marketplace for the securities trading, arranging listing/delisting, monitoring securities transactions, overseeing listed companies, and disseminating market information. The SSE listing requirements set out several criteria on the company's total share capital, profit history, the number of shareholders and so forth. Although the SSE is given some degree of discretion, the enforcement and punitive authorities fall primarily within the purview of the CSRC. For instance, the SSE is engaged in market surveillance activities to detect manipulative transactions, but it is the CSRC that has the administrative power to fine or de-list the company involved in such malpractices. (IIF 2006, pp. 18-19)
In addition, the Securities Association of China is a self-regulating organization for the securities industry established in accordance with the pertinent regulations of Securities Law of the People's Republic of China and Administrative Regulations on Registration of Public Organizations. It is a non-profit public organization with the status of a legal person under the professional guidance, supervision and management of China Securities Regulatory Commission and the Ministry of Civil Affairs of the People's Republic of China. (SAC website)
The purposes of the Association are: to effect the self-regulation of the securities industry subject to the centralized governmental supervision and administration; to bridge the government with the securities industry; to serve the members and safeguard their legitimate rights and interests; to maintain a proper competition order in securities industry; promote openness, fairness and equitability; and to enhance a sound and healthy development of the securities market. (SAC website)
8. The regulator should have comprehensive inspection, investigation and surveillance powers. |
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There is insufficient publicly available information as to China's compliance with this principle.
In 1998, in accordance with the State Council Reform Plan, the State Council Securities Commission (SCSC) and the China Securities Regulatory Commission (CSRC) were consolidated to form a unified supervisory agency under the direct control of the State Council. Currently, major functions and responsibilities of the CSRC include: supervising securities and futures market; overseeing the issuance, trading, custodial services and settlement of securities; monitoring the behavior of listed companies; governing the stock exchanges; regulating securities and futures companies, investment fund managers, and investment consulting firms; and penalizing activities violating relevant laws and regulations. Unlike in some other countries, China does not appear to suffer from potential regulatory inconsistencies. The Ministry of Finance (MoF), CSRC, China Banking Regulatory Commission (CBRC), and China Insurance Regulatory Commission (CIRC) are closely consulted and coordinate regulation to avoid conflicting guidelines for banks and insurance companies following their IPOs. (IIF 2006, p. 18)
9. The regulator should have comprehensive enforcement powers. |
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There is insufficient publicly available information as to China's compliance with this principle.
In 1998, in accordance with the State Council Reform Plan, the State Council Securities Commission (SCSC) and the China Securities Regulatory Commission (CSRC) were consolidated to form a unified supervisory agency under the direct control of the State Council. Currently, major functions and responsibilities of the CSRC include: supervising securities and futures market; overseeing the issuance, trading, custodial services and settlement of securities; monitoring the behavior of listed companies; governing the stock exchanges; regulating securities and futures companies, investment fund managers, and investment consulting firms; and penalizing activities violating relevant laws and regulations. Unlike in some other countries, China does not appear to suffer from potential regulatory inconsistencies. The Ministry of Finance (MoF), CSRC, China Banking Regulatory Commission (CBRC), and China Insurance Regulatory Commission (CIRC) are closely consulted and coordinate regulation to avoid conflicting guidelines for banks and insurance companies following their IPOs. (IIF 2006, p. 18)
10. The regulatory system should ensure an effective and credible use of inspection, investigation, surveillance and enforcement powers and implementation of an effective compliance program. |
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There is insufficient publicly available information as to China's compliance with this principle.
11. The regulator should have authority to share both public and non-public information with domestic and foreign counterparts. |
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There is insufficient publicly available information as to China's compliance with this principle.
12. Regulators should establish information sharing mechanisms that set out when and how they will share both public and non-public information with their domestic and foreign counterparts. |
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There is insufficient publicly available information as to China's compliance with this principle.
13. The regulatory system should allow for assistance to be provided to foreign regulators who need to make inquiries in the discharge of their functions and exercise of their powers. |
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There is insufficient publicly available information as to China's compliance with this principle.
14. There should be full, timely and accurate disclosure of financial results and other information that is material to investors’ decisions. |
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There is insufficient publicly available information as to China's compliance with this principle.
The Chinese authorities acknowledge in their 2005 Financial Stability Report that, except for a small number of listed firms, there are no external audits or requirements regarding information disclosure for securities companies. Therefore, it is difficult to determine the business performance of securities companies. (PBC 2005, p. 100)
The authors of the PBC's 2005 Financial Stability Report also remark that securities companies should adopt a standardized and compulsory information disclosure system, and a dynamic information inquiry system established with increase in both contents and scope of information disclosure to enable a shift from post-event discovery and action to ex-event real-time discovery and action. (PBC 2005, p. 104)
In a report issued by the Institute of International Finance (IIF), the authors note that the China Securities Regulatory Commission (CSRC) Code of Corporate Governance in Listed Companies unambiguously states that information disclosure is an ongoing responsibility of listed companies. In addition to disclosing mandatory information, companies should also voluntarily and on a timely basis disclose all other information that may have a material effect on the decisions of shareholders and stakeholders. This includes information on performance assessment and compensation of directors, independent directors' opinions on related-party transactions, and controlling shareholders' interests. Disclosure among listed companies in China has improved, especially for more recent listings due to the CSRC's requirement that companies prepare financial statements for three years ahead of an IPO. (IIF 2006, pp. 14-15)
With respect to the annual report, the CSRC rule, "Implementation guidelines on information disclosure for companies seeking public offering of stock," requires companies to release the audited annual report within four months of the end of each fiscal year and the audited interim report within two months of the end of the sixth month in each fiscal year. Since 2002, companies have also been required to release un-audited quarterly reports as well. These reports should be available in their entirety on the Internet. (IIF 2006, p. 15)
To support implementation of corporate governance practices, all listed companies in China are called on by the CSRC Code to disclose the gap between their practices and the recommendations in the Code and the reasons for the existing gap (the so-called "comply or explain" rule). (IIF 2006, p. 15)
The IIF also recommends requiring a limited liability company (LLC) to have its financial and accounting reports audited by an accounting firm (requirement previously limited only to joint stock companies); stipulating terms of engagement and dismissal of the external auditor; establishing procedures for entering into related-party transactions - a resolution approved in the shareholders' meeting is required before a company can provide security to a shareholder or to the actual controlling person/entity. Under the new procedures, the relevant shareholders or the shareholders controlled by the actual controlling person cannot participate in voting with respect to related matters. Such resolutions must be passed by a majority of the votes held by other shareholders present in the meeting. (IIF 2006, pp. 5-6)
15. Holders of securities in a company should be treated in a fair and equitable manner. |
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In a report issued by the Institute of International Finance (IIF), the authors state that positive changes in the corporate governance framework have been made through revisions to the Company Law and Securities Law. These changes, which came into effect on January 1, 2006, strengthen minority shareholder rights. (IIF 2006, p. 2)
According to the IIF, revisions to the Company Law and Securities Law include: granting shareholders the right to make motions, learn the truth, convene and preside over shareholders' meetings and bring a derivative suit or direct suit against directors, supervisors and senior management; allowing a cumulative voting system in electing directors and supervisors - the general shareholders' meeting of a joint stock company may adopt a cumulative voting system in electing directors and supervisors in accordance with a company's articles of association or shareholders' meeting resolution; enlarging the scope of information disclosure to shareholders - companies are now required to disclose the following information to shareholders: articles of association, minutes of shareholders' meetings, resolutions adopted by the board of directors and the supervisory board, financial reports, and the accounting books. (IIF 2006, p. 5)
Proxy voting is permitted in both the Code of Corporate Governance in Listed Companies issued by the CSRC (the "CSRC Code") and Company Law. For instance, the CSRC Code mentions, "shareholders can either be present at the shareholder meetings in person or they may appoint a proxy to vote on their behalf, and both means of voting possess the same legal effect." The CSRC Code states that listed companies should make every effort, including utilizing modern information technology, to increase the number of shareholders attending shareholders' meetings. (IIF 2006, p. 11)
Company Law endorses the one-share one-vote principle by clearly stipulating "when a shareholder attends the shareholders meeting, each share he holds is entitled to one vote." (IIF 2006, p. 11)
Cumulative voting is also encouraged in the CSRC Code as a means of fully reflecting the opinions of minority shareholders. The CSRC Code articulates that "a cumulative voting system should be earnestly advanced in shareholders' meetings for the election of directors" and that "listed companies that are more than 30 percent owned by controlling shareholders should adopt a cumulative voting system." Provisions for cumulative voting, which were previously in the CSRC Code, have now been codified in the Company Law through recent revisions, giving it the legal backing required for better enforcement. (IIF 2006, p. 11)
Among other recommendations, the authors of the IIF report suggest aligning management interests with the interests of minority shareholders; in particular, better aligning executive remuneration with overall company performance. (IIF 2006, p. 9)
16. Accounting and auditing standards should be of a high and internationally acceptable quality. |
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In a report issued by the Institute of International Finance (IIF), the authors state that positive changes in the corporate governance framework have been made through revisions to the Company Law and Securities Law. These changes, which came into effect on January 1, 2006, strengthen minority shareholder rights. (IIF 2006, p. 2)
According to the IIF, revisions to the Company Law and Securities Law include: granting shareholders the right to make motions, learn the truth, convene and preside over shareholders' meetings and bring a derivative suit or direct suit against directors, supervisors and senior management; allowing a cumulative voting system in electing directors and supervisors - the general shareholders' meeting of a joint stock company may adopt a cumulative voting system in electing directors and supervisors in accordance with a company's articles of association or shareholders' meeting resolution; enlarging the scope of information disclosure to shareholders - companies are now required to disclose the following information to shareholders: articles of association, minutes of shareholders' meetings, resolutions adopted by the board of directors and the supervisory board, financial reports, and the accounting books. (IIF 2006, p. 5)
Proxy voting is permitted in both the Code of Corporate Governance in Listed Companies issued by the CSRC (the "CSRC Code") and Company Law. For instance, the CSRC Code mentions, "shareholders can either be present at the shareholder meetings in person or they may appoint a proxy to vote on their behalf, and both means of voting possess the same legal effect." The CSRC Code states that listed companies should make every effort, including utilizing modern information technology, to increase the number of shareholders attending shareholders' meetings. (IIF 2006, p. 11)
Company Law endorses the one-share one-vote principle by clearly stipulating "when a shareholder attends the shareholders meeting, each share he holds is entitled to one vote." (IIF 2006, p. 11)
Cumulative voting is also encouraged in the CSRC Code as a means of fully reflecting the opinions of minority shareholders. The CSRC Code articulates that "a cumulative voting system should be earnestly advanced in shareholders' meetings for the election of directors" and that "listed companies that are more than 30 percent owned by controlling shareholders should adopt a cumulative voting system." Provisions for cumulative voting, which were previously in the CSRC Code, have now been codified in the Company Law through recent revisions, giving it the legal backing required for better enforcement. (IIF 2006, p. 11)
Among other recommendations, the authors of the IIF report suggest aligning management interests with the interests of minority shareholders; in particular, better aligning executive remuneration with overall company performance. (IIF 2006, p. 9)
17. The regulatory system should set standards for the eligibility and the regulation of those who wish to market or operate a collective investment scheme. |
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There is insufficient publicly available information as to China's compliance with this principle.
18. The regulatory system should provide for rules governing the legal form and structure of collective investment schemes and the segregation and protection of client assets. |
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There is insufficient publicly available information as to China's compliance with this principle.
19. Regulation should require disclosure, as set forth under the principles for issuers, which is necessary to evaluate the suitability of a collective investment scheme for a particular investor and the value of the investor’s interest in the scheme. |
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There is insufficient publicly available information as to China's compliance with this principle.
20. Regulation should ensure that there is a proper and disclosed basis for asset valuation and the pricing and the redemption of units in a collective investment scheme. |
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There is insufficient publicly available information as to China's compliance with this principle.
21. Regulation should provide for minimum entry standards for market intermediaries. |
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There is insufficient publicly available information as to China's compliance with this principle.
22. There should be initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake. |
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There is insufficient publicly available information as to China's compliance with this principle.
23. Market intermediaries should be required to comply with standards for internal organization and operational conduct that aim to protect the interests of clients, ensure proper management of risk, and under which management of the intermediary accepts primary responsibility for these matters. |
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There is insufficient publicly available information as to China's compliance with this principle.
24. There should be procedures for dealing with the failure of a market intermediary in order to minimize damage and loss to investors and to contain systemic risk. |
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There is insufficient publicly available information as to China's compliance with this principle.
According to a 2006 report issued by the Institute of International Finance (IIF), a side effect of the moribund capital market is the lack of investment opportunities for China's broker-dealer community. Falling share prices, the dearth of new issues, and bad management has the country's 130-odd securities companies struggling to make enough money to match the returns they guarantee their customers. Many of these companies are technically insolvent. This environment combined with the CSRC and stock exchanges' limited ability to identify and prevent insider trading has done little to discourage the practice. The China Aviation Oil scandal and the recent sentencing of three of its senior executives by a Singaporean court for insider trading activities illustrate the problem that exists among Chinese firms. Civil liabilities have now been codified in the revised Securities Law, which should help to deter insider trading. Nevertheless, better surveillance by the stock exchanges is required to identify and prosecute offenders. (IIF 2006, p. 8)
25. The establishment of trading systems including securities exchanges should be subject to regulatory authorization and oversight. |
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China has two stock exchanges in Shanghai and Shenzhen. The Shanghai Stock Exchange (SSE) is playing a more prominent role in terms of the number of listed companies/shares and total market capitalization. The SSE is a nonprofit membership organization directly governed by the Chinese Securities Regulation Commission (CSRC). The SSE is performing a variety of functions such as providing facilities and a marketplace for the securities trading, arranging listing/delisting, monitoring securities transactions, overseeing listed companies, and disseminating market information. The SSE listing requirements set out several criteria on the company's total share capital, profit history, the number of shareholders and so forth. Although the SSE is given some degree of discretion, the enforcement and punitive authorities fall primarily within the purview of the CSRC. For instance, the SSE is engaged in market surveillance activities to detect manipulative transactions, but it is the CSRC that has the administrative power to fine or de-list the company involved in such malpractices. (IIF 2006, pp. 18-19)
26. There should be ongoing regulatory supervision of exchanges and trading systems which should aim to ensure that the integrity of trading is maintained through fair and equitable rules that strike an appropriate balance between the demands of different market participants. |
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There is insufficient publicly available information as to China's compliance with this principle.
China has two stock exchanges in Shanghai and Shenzhen. The Shanghai Stock Exchange (SSE) is playing a more prominent role in terms of the number of listed companies/shares and total market capitalization. The SSE is a nonprofit membership organization directly governed by the Chinese Securities Regulation Commission (CSRC). The SSE is performing a variety of functions such as providing facilities and a marketplace for the securities trading, arranging listing/delisting, monitoring securities transactions, overseeing listed companies, and disseminating market information. The SSE listing requirements set out several criteria on the company's total share capital, profit history, the number of shareholders and so forth. Although the SSE is given some degree of discretion, the enforcement and punitive authorities fall primarily within the purview of the CSRC. For instance, the SSE is engaged in market surveillance activities to detect manipulative transactions, but it is the CSRC that has the administrative power to fine or de-list the company involved in such malpractices. (IIF 2006, pp. 18-19)
27. Regulation should promote transparency of trading. |
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There is insufficient publicly available information as to China's compliance with this principle.
28. Regulation should be designed to detect and deter manipulation and other unfair trading practices. |
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There is insufficient publicly available information as to China's compliance with this principle.
According to a 2006 report issued by the Institute of International Finance (IIF), a side effect of the moribund capital market is the lack of investment opportunities for China's broker-dealer community. Falling share prices, the dearth of new issues, and bad management has the country's 130-odd securities companies struggling to make enough money to match the returns they guarantee their customers. Many of these companies are technically insolvent. This environment combined with the CSRC and stock exchanges' limited ability to identify and prevent insider trading has done little to discourage the practice. The China Aviation Oil scandal and the recent sentencing of three of its senior executives by a Singaporean court for insider trading activities illustrate the problem that exists among Chinese firms. Civil liabilities have now been codified in the revised Securities Law, which should help to deter insider trading. Nevertheless, better surveillance by the stock exchanges is required to identify and prosecute offenders. (IIF 2006, p. 8)
29. Regulation should aim to ensure the proper management of large exposures, default risk and market disruption. |
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There is insufficient publicly available information as to China's compliance with this principle.
30. Systems for clearing and settlement of securities transactions should be subject to regulatory oversight, and designed to ensure that they are fair, effective and efficient and that they reduce systemic risk. |
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There is insufficient publicly available information as to China's compliance with this principle.
In a report issued by the Japanese Ministry of Finance, the authors note that China's securities markets are roughly divided into stock exchanges and bond markets. China's settlement organizations include China Securities Depository and Clearing Corporation (SD&C), a central organization for clearing stocks, trust fund, and convertible bonds, also government bonds and corporate bonds which are listed in the stock exchanges; and China Government Securities Depository and Clearing Co., Ltd. (CDC), a central organization for clearing government bonds, financial debentures, and corporate bonds. All investors must open securities accounts with SD&C. (MoF Japan 2004, pp. 29, 32)
In addition to such major services as registration, settlement, and consignment custody, and such contingent services as opening customer accounts, balance control services, SD&C performs such services as preparation of shareholders lists accompanying the issue of stocks, establishment of hypothec, and other services. Risk management is also performed jointly with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance. (MoF Japan 2004, p. 33)
The safety net for liquidity risks consists of two stages. The first stage is the Settlement Risk Fund of RMB3 billion, composed of initial investments from the Ministry of Finance, contributions from SD&C's pretax profits (20 percent of operating net profits is deposited every year), and trading-volume based contributions15 by member securities companies. For the latter two, it is not necessary to contribute amounts once this fund reaches RMB3 billion. In the second stage there is settlement guarantee money, where a member makes deposits to an account with a securities exchange. (MoF Japan 2004, pp. 33-34)
Although SD&C is Central Counter Party (CCP), it has no legal basis to become a CCP. SD&C facilitates CCP voluntarily, and detailed management rules are being formulated. Although all settlements must be conducted through SD&C's securities settlement account exclusively for CCP, debit and credit entry are actually conducted directly between member securities companies' accounts. (MoF Japan 2004, p. 34)
The CDC was established in December 1996, and is wholly-owned by the state. By the Ministry of Finance, it is assigned as the only physical-certificate bond custodian and CSD for all government bonds. It is also authorized by PBC as registering, depositary and clearing agency of inter-bank market. The CDC is under the control of the People's Bank of China (PBC) and the Ministry of Finance, and personnel management and supervision is under the China Bank Regulation Commission (CBRC). The CDC has the following functions: nationwide consignment and management of government bonds, financial debentures, corporate bonds, and other fixed-income securities; settlement services for participants in securities markets; issuing services for securities issuers (Ministry of Finance, Central Bank, policy banks, state-owned companies, and other qualified issuers); technical services for open-market operations; services for concentrated consignment, management, and registration of bond funds and money market funds; and services for providing market information and other intermediary services via publications and the Internet; performing cross-border settlement. The CDC is also responsible for periodically reporting trading status to PBC. (MoF Japan 2004, p. 38)
CDC direct participants must comply with relevant regulations and provisions formulated by the PBC, business rules set by the CDC, and must sign a "master contract for bonds repo" with the CDC. The CDC shall report to the PBC regularly on statistical data or relevant information of bond transactions. Bond trading in the stock exchanges shall comply with all regulations set by the stock exchanges, and is monitored by the Chinese Securities Regulatory Commission (CSRC). (EMEAP 2002, p. 78)
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