Company disclosure and information in China’s stock markets

Taking stock in China: Company disclosure and information in China’s stock markets

Anderson, Daniel M

INTRODUCTION

In an effort to bring law and order to its rough and tumble capital markets, China passed its first national Securities Law1 in the waning days of 1998. The law contains “detailed stipulations for preventing market risk and standardizing market operations to protect the interests of investors.”2 Provisions that require listed companies to disclose information that can influence the price of their shares form the foundation of the new Securities Law. According to reports from the Chinese press, company compliance with existing disclosure requirements increased in anticipation of the new law taking effect on July 1, 1999.3

This note argues that it is unlikely that the sunlight prescribed by Chinese securities regulation and the new Securities Law will be the best disinfectant of the Chinese stock markets, to paraphrase Louis Brandeis.4 The provisions may not ensure that all of the information that can influence a stock price is made public. More company information may not result in more company transparency. The persistence of illegal activities such as price manipulation and insider trading undermines the effectiveness of these laws and actually might increase risks to investors that rely on disclosed information. The State has a history of intervening in the securities market with new regulations or public pronouncements. These interventions limit the impact of public company information on the market price of stocks because investors, hardened by changes in the Chinese political winds, consider the prevailing State policies when valuing company information.

This note’s analysis of disclosure and China’s stock markets engenders a discussion of the development of economic law in China. While China has reformed itself into a quasi-market economy, the State has attempted to direct that economy through economic laws and policies.5 The State mainly has been concerned with macroeconomic policy tools such as controlling money supply, interest rates, bank reserves, and tax policy.6 However, the role of the State is changing as it addresses problems with market activity. Disclosure regulations exemplify the problems the Chinese State has with its new regulatory role. The State, following the lead of other countries, has attempted to protect investors by providing them with more information. However, information disclosure is inconsistent with a general condition of less transparency in China. Therefore, to implement a disclosure system, the government must forcefully open pockets of society that crave secrecy and police the market for disclosure violations by companies, their managers, and other market participants. In addition, excessive interference and control by the State have distorted the market and caused market actors to adapt to the State’s rules instead of adapting to non-State market forces. The State may have to open up its own practices for public inspection before a disclosure system may work.

Part II will explain the laws and regulations that require listed companies to disclose information. Current regulations are found in the new Securities Law and also in regulations promulgated by the China Securities Regulatory Commission. This part will also compare the current regime with past efforts at securities regulation in China. This portrait of the Chinese securities laws and regulations will depict a detailed regulatory regime. However, although these regulations mandating company disclosure resemble other tried-and-true regulatory regimes, this approach may not be effective in the Chinese context. Parts III and IV will flesh out this context.

Part III will discuss two recent scandals that involved information disclosure. The managers of the two companies used false and misleading disclosures to manipulate the price of the company’s shares and drive it higher. Price manipulation is rampant on the Chinese securities markets and threatens their stability. It is also closely related to another problem facing the stock markets-insider trading. The success of China’s disclosure requirements is closely related to ridding the markets of these two illegal activities. Although the Securities Law includes severe penalties for companies that do not comply with the disclosure requirements, inadequate enforcement suggests that those increased provisions may not succeed. Furthermore, mandatory disclosure does not overcome problems with corporate governance in China such as a lack of transparency and the ability of managers to use the enterprise for their own personal gains.

Part IV will focus on the State’s strict control over the market and its implications for disclosure. The State allowed the shareholding experiment to go forward as a means of raising capital for state enterprises that were on the verge of bankruptcy. This control over the market has meant that low quality companies issue shares on the market with the State’s blessing. State control over the media may limit the effectiveness of disclosure requirements because investors may not have access to disclosed information. Furthermore, frequent changes in State policy influence share prices and encourage investors to speculate on the direction of State policies instead of corporate earnings. Thus, requirements for corporate transparency might not be effective in light of a lack of lawmaking transparency.

I. DISCLOSURE IN CHINA’S SECURITIES REGULATION

A. DEVELOPMENT OF SECURITIES REGULATION IN CHINA

It is important to note one crucial distinction between securities regulation in China and securities regulation in the United States. In China, it was securities regulation that begot the securities industry whereas in the United States, it was problems in the securities industry that begot federal securities regulation.7 Thus, one theme that persists throughout an analysis of Chinese securities regulation is the tension between the State’s economic policy and the State’s regulation of market activity.

State decisionmakers in China allowed companies to begin issuing shares in the 1980s. A shareholding system could fulfill a number of policy objectives: 1) idle personal savings could be channeled into ailing state enterprises, 2) workers who purchased shares in their enterprise would have an incentive to work harder and respect enterprise property, 3) enterprises would have more financial autonomy and could cut through bureaucratic ties in order to respond to market changes, and 4) state-owned enterprises would be more efficiently restructured.g These policy reasons favoring securities were tempered against socialist ideological concerns such as limiting the capital gains of private investors and preserving state ownership of the enterprises.9 Despite these concerns, a State Council notice in 1983 permitted enterprises to issue shares to workers internally and stated that these shares would be redeemed by the company.10 The beginning of public equity issuance occurred in 1984 when a small joint stock company in Shanghai, Feile Audio, was permitted to make a public offering.11

The local governments were primarily involved in the early development of the securities industry and established its first regulatory framework. In 1986, Guangdong Province promulgated the Interim Procedures of Guangdong Province on the Administration of Stocks and Bonds.12 Xiamen, Tianjin, Shenyang, and Beijing followed by promulgating similar regulations.13 These regional regulations allowed the government to determine what type of enterprise can issue shares, under what conditions and procedures shares can be issued, and shareholders’ rights to interest or dividends.14 The regulatory authority over the securities industry was as fragmented as the rules that governed the stock markets. Although the People’s Bank of China (PBOC), the central bank of China, had jurisdiction over the securities industry, the head office delegated this responsibility to the local offices and the local regulations recognized the local branch of the PBOC as the local securities authority.15

A lively curb market developed in many Chinese cities along with these early experiments in issuing shares.16 For example, in Chengdu, a makeshift exchange for company shares developed on Red Temple Street. Dealers would set up tables along the street, and investors would trade face-to-face. The curb market was described as “irregular” (bu guifan) and was susceptible to illegally issued shares, wide price fluctuations, and speculative frenzy. The Shanghai and Shenzhen exchanges were established in 1990 and 1991 as a means of regularizing stock trading and eliminating the curb markets.17 While the central government-through the State Council-permitted the exchanges to be opened, both of the exchanges remained under local control and local rules.18

From 1981 until 1992, the PBOC had jurisdiction over the securities market. A national regulatory framework was established in 1992. The rapid development of the market and the resulting speculation and disorder that threatened to cause social instability required a more powerful regulatory body that could administer China’s unified securities markets.19 The State Council Securities Regulatory Committee (SSRC) and the China Securities Regulatory Commission (CSRC) were established in 1992 as a response to problems with the PBOC’s administration of the securities industry. In 1997, the State Council gave direct control of the Shanghai and Shenzhen markets, which had been under municipal control since their opening, to the CSRC.20 The State Council also merged its own securities commission with the CSRC that same year.21 In 1998, the PBOC gave the CSRC power to approve the appointments of the leading officials of brokerages.22

The 1993 Interim Regulations on the Administration of Issuing and Trading Shares23 and Provisional Measures on Eliminating Securities Fraudulent Activities24 were the precursors to the national Securities Law. The Interim Regulations contained provisions for the issuing process and instituted disclosure requirements.25 The Provisional Measures focused on insider trading and market manipulation. Securities regulation since the passage of the Interim Regulations and Provisional Measures has been mostly regulatory and ad hoc. The SSRC and the CSRC have issued more than 250 regulations, which clarified the Interim Regulations and Provisional Measures and responded to changes in the Chinese stock markets.26

Some recent national legislation by the National People’s Congress has had implications for listed companies. The national Company Law was promulgated in 1994(27) and provided rules for establishing and governing shareholding enterprises.28 When the Criminal Law was amended in 1997,29 one of the purposes was to address economic crimes, including crimes committed in the process of trading and issuing securities.30

In December 1998, the long awaited national Securities Law was promulgated. Two factors were instrumental in the Securities Law finally gaining passage. First, the question of which body should be the primary regulator of the securities industry was overcome by the CSRC’s increased power in recent years.31 The Securities Law gives power to regulate the securities markets to the State Council and allows the State Council to establish other regulatory groups, presumably the CSRC.32 Second, recent events underscored the urgency of a national securities law to Chinese leaders. Zhu Rongji, an economic specialist, was elevated to the premiership in March 1998 and reportedly told legislators that a market crash was a bigger risk to the Chinese Communist Party’s rule than rising unemployment.33 This warning was perhaps due to the enormous growth of the Chinese securities industry since 1996, when there were less than ten million investors. As of mid-October 1998, there were 37 million investor accounts, 827 listed companies, and a market capitalization of 2.04 trillion yuan (approximately $246 billion).34 The collapse of governments in Thailand, South Korea, and Indonesia brought home to Chinese leaders the political risks associated with a market collapse.35

The Securities Law is meant to unify the regulations for issuing and transferring shares. It consists of 214 articles under twelve chapters encompassing such issues as issuing securities, trading securities, takeover of listed companies, stock exchanges, securities firms, securities intermediaries, regulatory authorities, and stipulating legal liabilities for violating its provisions. Nodding to its own incompleteness, the Securities Law states that all matters not covered under the Securities Law will be governed by the Company Law, other laws, and administrative regulations.36 Finally, of particular importance for foreign investors, foreign-currency denominated shares (B-shares) and shares listed on the Hong Kong Stock Exchange are beyond the scope of the Securities Law.37

B. DISCLOSURE REQUIREMENTS IN CHINESE SECURITIES LAW

Disclosure regulations in China must be culled from a variety of sources: the Securities Law, the Company Law, and administrative regulations.38 While the Securities Law is intended to provide unified rules for securities regulation, the Securities Law should not be considered as a complete statement of the current law regarding information disclosure in China’s stock markets. Three categories of disclosure exist under Chinese securities law: listing documents, continuous disclosure after listing, and important events that may affect share prices. Below, the requirements for each category are explained. This section compares provisions in the new Securities Law with provisions in past regulations and analyzes disclosure requirements in the context of other relevant Chinese laws and local exchange laws in Shanghai and Shenzhen.

The primary form of disclosure requires companies to provide certain documents to regulating bodies and the public when registering to issue stock publicly. Companies must provide the following documents to the CSRC: a listing report, a resolution passed at the shareholders’ meeting concerning the listing application, the company’s articles of association, the company’s business license, financial reports from the previous three years or since establishment, a legal opinion and recommendation from a securities company, and the most recent prospectus.39 After the securities exchange agrees to list the company, the company must make documents related to the approved share listing available for public inspection five days prior to listing.40 In addition to those documents, the company must also publicly announce the following facts: the day trading will begin; the ten largest shareholders and the amount of their holdings; and the names of directors, advisors, managers, and other high officials, and whether these individuals hold stocks or bonds in the company.41 The Securities Law provisions with respect to disclosure during registration are meant to be consistent with the Company Law42 and generally mirror the Interim Regulations that they replace.43

The CSRC has passed regulations on disclosure requirements concerning the listing of shares.44 These regulations go beyond the requirements of the Securities Law and Company Law in their breadth and specificity. In particular, the Securities Law does not address the contents of the prospectus. CSRC regulations dictate the required content and form of the prospectus. They also specify numerous types of information to be included in the main text of the prospectus, for example: company background, information related to the public offering, financial statistics, the interpretation section, the names of relevant parties in the issue, the investment risks, an explanation of how the capital is to be utilized, the policies on the allocation of share interests, an abstract of the company articles, information regarding the issuer’s directors, advisors, and high-level managers, past company performance, an asset valuer’s report, financial and accounting information, litigation involving the company, verification of other investments, and the company plan for further development.45

The CSRC has also issued guidelines for the legal opinion that must be prepared by a company applying to issue shares. CSRC regulations stipulate the form and content of the lawyer’s opinion and report. Some of the matters a lawyer must investigate regarding a company’s issue and listing of shares include: the lawfulness of the enterprise, the articles of association, the completeness and truthfulness of the prospectus, ownership of main assets, environmental protection standards, the legality of the share issue, and financial matters.46 Legal opinions regarding the allocation of rights and interests are also subject to guidelines, and the opinions include much of the same information as an opinion on a company’s issue and listing of shares.47 Specific regulations for Chinese securities lawyers provide a necessary check on the uneven quality of China’s developing legal industry.

Under the Securities Law, a company must make a listing announcement prior to the public issue.48 Under CSRC regulations promulgated prior to the Securities Law, the listing announcement must include information about the offering; the offering company; the public distribution and underwriting of the shares; the shareholding of company directors, supervisors, and senior managerial staff; the affiliates of the company; the organization of the company’s shareholding; the financial and accounting situation; pledges by the directors to act truthfully and legally; important items that could influence the shares; and other documents connected with the share listing.49 The regulations also provide a particular format for the listing announcement.

Chinese securities regulations include provisions for continuous disclosure of company information through semiannual, annual, and material event reports. The requirements in the Interim Regulations have been modified to some extent by the Securities Law.50 Additionally, the CSRC has released general regulations for these reports and also responded to particular situations by requesting information for specific reports. The semiannual, annual, and material event reports are discussed in turn below.

Companies with publicly traded stocks must release semiannual reports within two months after the first half of every fiscal year, usually by the end of August.51 Information that companies should submit to the State Council regulators and the stock exchange includes: the financial reports and business situation, major litigation involving the company, the particulars of any changes in the shares or corporate bonds already issued, any major matters submitted for consideration by the shareholders’ general meeting, and other matters as required by the State Council’s regulatory authority.52 The CSRC has demanded other information from listed companies for particular semiannual reports. For example, after the CSRC released regulations prohibiting state-owned enterprises and listed companies from stock speculating, the CSRC required that the 1997 semiannual report include the results of internal investigations conducted by listed companies.53

Within four months of the end of the fiscal year, companies must submit an annual report to State Council regulators and the stock exchange, usually by the end of April.54 The annual report must include: a report of the company’s general circumstances; the company’s financial and accounting reports and business situation; the resumes and details of the shareholdings of the directors, advisors, managers, and other high-level officials; the stock situation including the ten largest shareholders and the amount of shares held by each; and other information as required by State Council regulatory authorities.55 The Securities Law streamlined the contents of the annual report as required by the Interim Regulations, reducing the number of items from fourteen to five, emphasizing financial data.56 Gone from the Securities Law are requirements to disclose such information as the company’s main products or services, a brief summary of the trade that the company engages in, a brief summary of major factories, mines, real estate, and other assets owned by the company, and a comparative financial report of the last two fiscal years.57

The CSRC has announced administrative regulations regarding annual reports in recent years, which, like the requirement for documents required to issue shares, are more detailed than provisions in the Securities Law. The CRSC rule stipulates the form and content of annual reports.58 Some of the required information includes: an introduction of the company; a summary of accounting and business statistics; changes in the shareholding of the company; a brief overview of shareholding; a report from the directors and advisors; a business report; a report on the company’s financial situation; a financial statement; a report on the use of capital; and major events.59 The CSRC also has released guidelines for reports of particular years. For example, with respect to the 1996 annual report, the CSRC instructed companies to clearly explain the conditions of issuing new shares to existing shareholders and other financial matters.60

As in the Interim Regulations, the Securities Law requires a company to disclose any material event that may affect the price of the stock.61 An explanation of the event must be given to the CSRC and the stock exchange. The law lists eleven types of material events: a major change in the business policies or scope of business of the company; any decisions regarding a major investment or capital purchase; an important contract signed by the company that may have a substantial impact on the assets, liability, rights, interests, and performance of the company; any incurrence by the company of a major debt or default on a major debt; any incurrence by the company of a major loss exceeding ten percent of the net capital of the company; any major change in the external production or business conditions of the company; any change in the chairman of the board, more than one third of the directors, or the manager of the company; any relatively major change in the shareholding of a shareholder who holds more than five percent of the company’s shares; any decisions by the company to reduce capital, merge, divide, dissolve the company, or file for bankruptcy; any major litigation involving the company or the court overturning decisions by shareholders or directors; and any other details as required by law.62 The Securities Law removes an exception that previously exempted a company from disclosure if in its own judgement the disclosure would be detrimental to the company and would not affect the market price and the stock exchange agrees to relax the disclosure requirement.63 One commentator suggested that companies were given broad discretion under the old rule and were able to take advantage of this provision by not disclosing major events.64 If there is honest and timely reporting, in this respect, investors will be better protected under the Securities Law than under the Interim Regulations.

By and large, the CSRC has not taken the additional step of specifying the content of the major events reports, and the result has been reports that do not fully inform the investor of the details of material events. CSRC requirements for reports of stock dividends provide one of only a few notable regulations of major events reports.65 In the absence of clear regulations, critics have charged that major events reports tend to be void of meaning. For example, on June 5, 1998, the Shanghai and Shenzhen exchanges amended their regulations to require companies to issue reports if their stocks rose or fell ten percent for three consecutive days, the maximum amount prices could fluctuate under price control rules. Six companies were soon suspended pending explanations of price movements.66 A major national financial newspaper criticized reports issued under these regulations for their lack of content, rosy picture, or nonspecific warnings to investors.67 The newspaper stated that such reports often create suspense (zhizao xuannian) and foster further speculation.68

In addition to the major events listed above, an investor who holds five percent of a listed company through trading at a stock exchange must submit a written report to the State Council’s regulatory authority.69 The report must contain the name and domicile of the shareholder, the description and quantity of the shares held, and the date on which the shareholding or the increase or decrease in the shareholding reached five percent.70 If an investor holds thirty percent of the issued shares of a listed company through trading on a stock exchange, the investor must make a tender offer to all the shareholders of the company.71 Before making the offer, the investor must make a report to the State Council’s regulatory authority.72

In short, Chinese securities regulations have rather strict provisions for company disclosures. The Securities Law does signify an improvement in some respects over the Interim Regulations. It is notable that there is an emphasis on financial information in the Securities Law that did not exist in the Interim Regulations. However, the Securities Law does not include the detailed requirements found in CSRC regulations. CSRC regulations that do not contradict the Securities Law will presumably remain in force. In addition, implementing regulations could be promulgated by a number of lawmaking bodies. It is perhaps most accurate simply to say that the passage of the Securities Law does not establish unified or settled legal guidelines for China’s stock markets.

Chinese securities regulations resemble U.S. regulations, and an investor familiar with the regimes in those two countries would likely recognize the similarities.73 However, the remainder of this note will discuss differences within the Chinese context that may limit the effectiveness of those regulations. Before turning to discussions of manipulation and the dominant role of the State in the stock markets, a few aspects of the Chinese regime should be discussed in order to demonstrate some of its internal deficiencies. First, the accounting and legal professions are not well developed and may not have the training to comply with the regulations.74 Strict regulations, like those discussed above, may simply encourage accountants and lawyers to fudge in the absence of other records.76 Second, the securities regulations specifically stipulate which information is required, thereby implying that no other information is required. However, it is impossible to formulate a list that includes all of the information that may be important for investors. One commentator has suggested that China should adopt a materiality standard that could encompass other forms of information that could affect a stock’s price but might not be included in the current list of required disclosures.76 In the absence of a standard, the CSRC will be forced continually to amend its regulations or issue new regulations that will hinder compliance.77 Third, the Securities Law only applies to shares denominated in yuan and sold to Chinese citizens.78 Distortions result from shares sold in different currencies and different exchanges around the world.79 The rights associated with owning these different types of shares are not well-defined. In this environment, financial disclosures may not adequately inform investors with different shareholding interests.

Given the considerations in the previous paragraph, there are some serious conceptual problems with disclosure requirements in Chinese securities regulation. Moreover, as will be demonstrated below, recent examples of disclosure fraud suggest that the disclosures may be of poor quality or may be used as tools of manipulation to the detriment of investors.

II. LISTED CompANIES AND DiscLosuRE

The previous part explained China’s disclosure laws as found in the national Securities Law, other national and regional legislation, and CSRC regulations. Although these laws seem relatively complete, this part and the next focus on problems with disclosure in the context of recent and current conditions in China’s stock markets. Ongoing problems with market manipulation and insider trading suggest that even if it were possible for companies to release accurate information, they might not do so because the incentives to cheat are so great. In the Hongguang and Minyuan scandals discussed below, company managers and directors utilized company disclosures to perpetrate fraud so they might gain listing or boost the stock’s price. Thus, disclosure was used to draw investors and manipulate the market for the benefit of company managers who can control the company message and remain largely unchecked. If disclosures are used in this manner, investors may not be properly informed through company disclosures and could be at greater risk if they rely on this information.

A. TWO CASES

1. Chengdu Hongguang Industrial Co.

Chengdu Hongguang Industrial Shareholding Company specialized in the production of electron vacuum devices such as black-and-white and color television tubes and glass bulbs.80 When Hongguang made its public offering in June 1997, investors had ample reason to be excited. The company had reported substantial profits for the previous three years.81 More importantly, the company was the main supplier to Changhong, one of the largest producers of television sets in China and the darling of the Shanghai Securities Exchange. At the time of Hongguang’s initial public offering, Changhong was the most profitable stock in China per share, and in the previous year, the price of the stock had more than quadrupled. Investors hoped that Hongguang would have similar success. In May 1997, the company issued seventy million A shares which raised 410.2 million yuan.82 Events soon after the IPO indicated that this optimism was unfounded.

Suspicion was generated by the great disparity between Hongguang’s projected profits in its prospectus and actual profits after its IPO. In its prospectus, Hongguang announced that it expected an after-tax profit of 0.37 yuan per share. However, in its 1997 annual report, the company reported a loss of 0.86 yuan per share. The main reason behind this astonishing change of fortune was a problem with a production line. An investigative report published in Sichuan Finance and Investment Newspaper uncovered that the production problems began prior to Hongguang’s public offering, a fact not disclosed by the company in the prospectus.83 The article quoted a report by the Chairman of the Board of Directors as explaining that the company needed to keep up the appearance of continuing production in order to secure a 230 million yuan bank loan.84 According to the author of the special report, the appearance of a normal production was also important for the public offering to go forward.85 Six directors, the chairman of the board, and the general manager resigned at the board meeting in April 1998. In early June, the company announced that it predicted a loss of 160 million yuan for 1998 and that its production lines had stopped.86 The new director announced that there would be an investigation in response to suspicion and criticism of the company.

The CSRC also took note of the huge losses reported by the company and began an investigation of its own. Hongguang was one of the first group of companies singled out as receiving “special treatment.”87 “Special treatment” applied to unprofitable companies and required that the letters “ST” be placed before the company symbol and that the stock’s price could only change five percent over or under the previous day’s closing price.88 On June 10, Hongguang was also one of six companies temporarily suspended by the Shanghai and Shenzhen exchanges after their shares had dropped the limit for three consecutive days.89

The results of the CSRC’s investigation were made public on November 20 and depicted one of the most flagrant cases of fraud to hit the Chinese market in its young history.90 The CSRC found that: 1) the company falsely reported its 1996 profits and fraudulently obtained qualification to publicly issue shares; 2) the company underreported its 1997 deficit, which defrauded investors; 3) the company concealed a major event when it did not disclose production problems; 4) the company used capital raised from the offering to pay back bank loans and make up for past losses, uses which were not in the company prospectus; 5) the company illegally used funds raised from the public offering to buy and sell its own securities in 217 individual securities accounts; and 6) the company was also under suspicion for bribery because 1.66 million yuan could not be accounted for.91 The CSRC fined Hongguang, its underwriter and accounting firm, and securities companies. Directors and other high-level officers were either banned from ever holding high-level positions in publicly traded companies or received warnings. The CSRC also informed Hongguang, the other companies, and responsible individuals that they were under suspicion for criminal activity and that an investigation was ongoing.

This scandal also demonstrates a situation where disclosure requirements may have put investors at more risk. Pressure to gain approval from authorities was an incentive for Hongguang insiders to authorize false disclosures. When the false disclosures were made public, Hongguang became an attractive stock for investors who thought that the company was on the rise. If the false profits had not been made public, investors might have treated Hongguang differently. They still might have speculated that Hongguang was a good investment but would not have been enticed by mandatory disclosures that included false information.

2. Hainan Minyuan Modern Agricultural Company

Hainan Minyuan Modern Agricultural Company made its public offering on April 30, 1993.92 In 1996 and 1997, a series of public disclosures pushed the price of Minyuan’s stock to new heights. The company’s 1995 yearly report indicated a profit of 0.001 yuan per share and a stock price around 3.65 yuan.93 The 1996 semiannual report reported a profit of 0.227 yuan per share, an improvement of 837 times the previous year’s report. Minyuan’s stock price was 6.92 yuan at the time the profits were announced.94 The company explained that an investment in Beijing had entered a profitable period. A month later the board of directors reported that a Beijing company expressed that Minyuan was improving itself in the area of high technology and was quickly progressing towards internationalization. Minyuan’s stock price rose to 12.98 yuan.95 Another announcement of a partnership with a Singapore company by the board on October 22, 1996 pushed the price of Minyuan’s shares to about 21 yuan.96 On January 22, 1997, the company announced a profit in 1996 of 0.867 yuan per share, an improvement of 1290.68 times over profits in 1995. Minyuan’s price again rose, reaching 26.18 yuan.

While Minyuan’s stock rose, the company could not escape doubts about the annual report. No one knew of any Minyuan project that could result in such high profits, and the company was suspected of trading its own shares.97 The company released a mysterious “supplemental report” on February 1, 1997.98 The report changed some of the company’s financial indicators.99 Shareholder doubt and regulators’ inquiries led Minyuan to request that trading of the company’s stock be suspended after trading closed on February 28, 1997.100 In March, five directors who approved the false reports resigned and disappeared.101

Responding to requests from investors, an investigation into Minyuan’s financial reports was launched on March 5, 1997.102 The investigation went on for more than a year and included five regulatory bodies, including the State Council Securities Committee, CSRC, State Auditing Administration, and PBOC.103 On April 29, 1998, the CSRC published findings of a year-long investigation. The CSRC found that the company had fraudulently inflated accounts by 1.2 billion yuan from illegal real estate transactions in Beijing. Criminal charges were filed against the chairman and five directors, marking the first time criminal charges were filed against senior officials of a listed company.104 A commentary in China Securities Newspaper labeled this scandal as “the most serious case of securities fraud” on China’s securities markets.105 Minyuan audaciously refused to help the CSRC find the five directors, and perhaps exposed the real weakness of the CSRC when the regulatory body later released a notice stating that it was searching for the five directors but that Minyuan was under “no obligation” to help.106

The timing of the investigation and the inability of the CSRC to pursue the five directors is suspect for political reasons. Two of the largest shareholders of Minyuan had ties to China’s late paramount leader, Deng Xiaoping, who died on February 17, 1997. Deng’s son, Deng Pufang, heads the China Welfare Fund, which owned 1.45% of the company’s shares. Another shareholder, Shenzhen Nonferrous Metals Finance, was linked to China Nonferrous Metals Corporation, which until 1998 was controlled by Deng’s son-in-law, Wu Jianchang. The CSRC fined Shenzhen Nonferrous two million yuan and seized all profits from insider trading.107 Considering the importance of personal connections in China, it is possible that such connections were at play here. First, one has to wonder whether such an investigation would have occurred if Deng had lived and whether his death expedited the investigation. Second, one has to wonder whether the fugitive directors had behind-the-scenes protectors that were able to stop the CSRC from compelling Minyuan’s help in the investigation.

B. DISCLOSURE AND MARKET MANIPULATION

Disclosure regulations “can be seen as a means to break the managers’ monopoly over corporate information.”108 The traditional pro-mandatory disclosure view is that managers lack sufficient incentives to disclose trustworthy information and may attempt to exploit the value of undisclosed information for their own private gains before public disclosure.109 The scandals described above are two of the most egregious examples of fraudulent disclosures to hit the Chinese stock markets. While they may be extraordinary in scale, the Hongguang and Minyuan cases provide insight into some of the problems with company compliance with disclosure regulations and some of the risks posed to investors. In particular, in both of these cases, managers were able to exploit their monopoly over information by disclosing false information, presumably for their own gain.

As indicated above, laws were broken in both the Hongguang and Minyuan cases. Both of these cases demonstrate how the managers were able to circumvent disclosure regulations, especially by expanding the group of persons who benefited from the false disclosures to include persons who were in a position to correct the false disclosures. Shareholders and investors may not need more laws to protect their interests. Instead, they need the CSRC to enforce existing laws effectively, but the CSRC may not be able to police disclosures for their accuracy. Shareholders of both Hongguang and Minyuan would agree that CSRC enforcement may not even be desirable because duped shareholders do not have significant legal recourse against the companies once they have been penalized, the truth is known, and prices of the shares tumble. This section will look closely at the problems raised by the illegal activities in the Hongguang and Minyuan cases in order to understand company disclosures, the manipulation of company information by managers, and the problems with enforcement in the larger context of the Chinese stock markets.

Price manipulation has been one of the most serious problems facing the Chinese stock markets. The Securities Law addresses manipulation and prohibits anyone from “carrying out combined or successive sales or purchases by building up an advantage in terms of funds or shareholdings or using one’s advantage in terms of information, thereby manipulating securities trading prices, whether independently or in collusion.”110 Manipulation carries both civil sanctions under the Securities Law and criminal penalties under the Criminal Law.”111 However, manipulation has been an illegal activity long addressed by earlier securities regulation.112 Despite the threat of sanctions, manipulation has been a continuing problem on the Chinese securities markets.

The Chinese stock prices are easy to manipulate because of the relatively small number of shares and the growing demand for those shares. Investors are aware that prices are affected by the trading of jigou, a term that literally means “organization” and that is used in this context to describe organizations with a lot of capital available for stock speculation.113 Small investors are aware of the power of the jigou, and short-term speculation on Chinese stocks involves prediction of which stocks will be the objects of the jigou’s efforts.114 Companies that rapidly buy and sell their own shares have also fueled manipulation.

In 1997, amidst a raging bull market, the State focused on curbing the effect of manipulation, which was driving up share prices and drawing more and more individuals to invest. In rapid succession, the CSRC released regulations in May and June 1997 that made it illegal for companies to buy and sell their own shares rapidly, stopped companies from opening accounts in the names of individuals, and prohibited banks from making loans for the purpose of investing on the stock markets.115 These regulations addressed some of the underlying causes of price manipulation. The success of disclosure requirements in the Securities Law is similarly contingent on the ability of the law to curb price manipulation. As long as the jigou can influence prices or companies can manipulate their prices through false and misleading disclosures, investors will not be able to rely on those disclosures when making investment decisions.

By providing more information to investors, Chinese regulators may also hope that investors would focus on profitable companies and would shy away from companies in financial trouble. Additionally, with more company information, investors might understand the risks of speculating on companies that have a poor financial record. However, mandatory disclosures are unlikely to accomplish those objectives unless investors can be assured of the truthfulness and accuracy of company reports. The Minyuan case, in particular, demonstrates the relationship between information and illegal manipulation in the Chinese market. Minyuan announced its high earnings, and as may have been expected, its price rose as more and more capital flooded to its shares.116 Investors that saw Minyuan as a good opportunity suffered financially when the truth became known.

At one time, the most significant problem was simply getting companies to issue the required disclosures.117 Now companies regularly issue the required reports, but there is reason to doubt the quality of the disclosures. According to a study of companies on the Shanghai Securities Exchange, nearly fourteen percent of the items in the annual reports were not acceptable.118 Some of the common problems deal with changes in financial position, consolidated financial statements, and accounts such as retained earnings with which Chinese accountants are not familiar.119

Problems with the accounting system are not the only reason to question the accuracy of company disclosures. Mandatory disclosure requirements have not successfully broken up the monopoly that managers enjoy over company information. Managers have numerous incentives to provide an inaccurate picture of their companies to investors. Managers in China-enjoy a great deal of autonomy in their positions and often operate outside the view of the central government.120 Accurate disclosures may reveal inefficiency and mismanagement, two problems that plague Chinese enterprises, and could result in a manager losing his or her position. In addition, managers have almost unfettered access to the company coffer and can use company money to increase their own private wealth and that of workers, as well as pay bribes to key officials.121 Accurate disclosures may reveal the extent to which company managers have taken funds and resources away from the company.122

Manipulation and insider trading are closely related activities. Both price manipulation and insider trading use asymmetries of knowledge to obtain greater profits. The Hongguang and Minyuan cases demonstrate that those engaged in price manipulation may also be insiders who profit personally from trading on the information asymmetry.123 The provisional Measures included detailed provisions against insider trading,124 and the Securities Law similarly prohibits insiders from trading.125 The Securities Law defines insiders126 and the types of information which qualify as inside information.127 The persistence of insider trading undermines mandatory disclosures because investors will overlook disclosed information in favor of a perceived “inside story.” Furthermore, as both of these cases indicate, one cannot be sure that company reports are not fabricated to enrich those who participate in the scheme.

Despite the power that managers have over company information, other persons have the responsibility to monitor the managers and ensure the truthfulness of company disclosures. Reports from accountants, lawyers, and intermediaries can act as gatekeepers and police the quality of information disclosures. All of these groups are subject to liability under the Securities Law for allowing fraud to occur.128 What is particularly stunning about these two cases is that the web of persons who profited from the false and misleading disclosures includes the gatekeepers. In the Hongguang case, intermediaries and accounting firms were fined and sanctioned. In the case of Minyuan, directors were suspected of criminal activity.

There is significant pressure on the CSRC to police the quality of the disclosures and hold offenders accountable. Absent such enforcement, investor confidence in the disclosed reports cannot exist. The Securities Law empowers the State Council’s securities regulatory authority-the CSRC-to “safeguard the order of the securities market and ensure [its] lawful operation.”129 The law also gives the regulatory body various investigatory powers130 and requires companies to comply with investigations.131 In reality, the two cases in this section bring to light some of the problems facing the CSRC as an enforcement body. Hongguang insiders traded on 217 different accounts. Using a large number of accounts or using accounts purchased on the black market makes tracking illegal trading practices difficult.132 The Minyuan scandal demonstrates that persons with connections to officials in high-level positions might make enforcement politically dangerous. The reluctance of the CSRC to pursue Minyuan’s directors with any vigilance demonstrates that offenders may have important protectors. These two cases were investigated primarily because of the obvious irregularities and concerns from shareholders. The CSRC does not have the manpower or resources to investigate every disclosure by every company.

Investors in United States capital markets have a private cause of action if they are misled or otherwise duped by a company’s disclosures. Although this tool has been an effective mechanism to monitor disclosures in the United States, it has not been embraced by either Chinese lawmakers or the courts. In December 1998, a Hongguang shareholder filed suit against the company for false statements in its prospectus.133 The plaintiff demanded compensation from both Hongguang and the brokerage firm involved in the public offering,134 According to lawyers involved in the case, the court declined to hear the suit in April 1999 and stated that it was within the authority of the CSRC to address illegal acts.135 The court also found no direct connection between the losses and the false disclosures.136 The Securities Law seems to provide a cause of action and states that the responsible persons can be jointly and severally liable for falsehoods, misleading statements, or a major omission in disclosed documents.137 However, the law suggests that damages are owed to the government and not the individual investor.138 Without a private right of action, individual shareholders are “without redress for egregious, even criminal, behavior on the part of [company] management.”139

III. THE ROLE OF THE CHINESE STATE AND THE DIMINISHED EFFECT OF DISCLOSURE REGULATIONS

A. CHINA’S MERIT SYSTEM

Historically in China, petty capitalist activities were embedded in a tributary mode “managed by state officials who put their own requirements for reliable revenues, stable class relations, and continued hegemony above any perceived need for economic expansion.”140 Ellen Hertz argues that this logic is found in policy reasons underlying the establishment of stock markets in China. In Hertz’s analysis, the Chinese experiment with stocks was meant to tap the savings of individual investors for enterprises that would remain largely under State control.141 Company disclosure during the listing process ensures that the company seeking to make a public offering meets the prevailing State plan. This objective contrasts sharply with investor protection, the goal of disclosure in United States securities regulation. In fact, as this section will show, public disclosure and state control over which companies can issue shares publicly are strange bedfellows in Chinese securities regulation. One consequence of their co-existence is less investor protection.

The Company Law sets out strict requirements for companies to list shares on the exchanges.142 Some of these requirements include: official approval for the public offering; a company value of no less than fifty million yuan, three consecutive profitable years, one thousand shareholders who each hold more than one thousand yuan in shares, the company has not seriously violated laws or issued false or misleading financial reports in three years, and other requirements of the State Council.143 Under the Securities Law, the CSRC will establish an “issuance examination commission” to undertake the examination of the application materials, and this commission will vote on the applications and state the opinion reached by the examiners.144 The State Council’s securities regulatory body will be responsible for the verification and approval of applications145 and shall make a decision within three months.146 After receiving government approval, the company can then apply to the Shanghai or Shenzhen exchange for listing.

In addition to the requirements in the Company Law, the State has maintained strict control over which companies have been allowed to issue stocks and trade on the Shenzhen and Shanghai markets. The registration process requires approval from the State Council.147 This approval process is significantly different than the approval system that was suggested for United States securities regulation in the early part of this century and implemented in many state blue-sky laws. Approval in the American system was meant to protect investors, but approval in the Chinese system is meant to keep publicly traded shares within the State’s economic plan. Until late 1997, only small and midsized enterprises were allowed to list on the market.148 Recently, the Company Law was amended to loosen listing restrictions so that more high-tech companies will be publicly traded.149 The entire process has also been criticized for its political nature and charges of corruption in the registration process.150

The Hongguang scandal above demonstrates that company managers, eager for the windfall of a public offering, may resort to making false or misleading disclosures.151 The Hongguang managers inflated profits and failed to report problems with the production line. One purpose of this deception was to ensure that the public offering would be approved. Investors were misled by the rosy-and false-picture of Hongguang in its disclosed documents and suffered when the truth came to light. Without the approval requirement, Hongguang’s managers might have simply told the truth in the hope that investors would see an opportunity in the company’s future.

The regulatory regimes of capital markets can be analyzed with respect to a merit-disclosure continuum.152 In a merit system, the regulatory authorities review the substantive merits of a proposed capital market issue to ensure that investors are protected and that the issue is compatible with the national development scheme.153 At the other end of this continuum, a “pure” disclosure regime relies on compliance with disclosure requirements to ensure that investors receive full and fair information about an enterprise and protection from fraudulent activities.154 Although China has disclosure requirements, it resembles a merit system because regulators are empowered to approve or block an enterprise from issuing shares or listing on an exchange. Therefore, Chinese investors have little incentive to examine company information relating to the stock issue because State regulators have already inspected the company and judged it fit for public investment.

While there may be sensible policy reasons for the existence of merit review of applications, this approval has had perverse effects on the types of companies that have been approved for listing. The approval system encourages decisionmakers to consider noneconomic information when reviewing a company’s fitness to list on the two stock exchanges. Because the State embraced stocks as a form of raising money for ailing state-owned enterprises, many of the early issues were companies on the verge of bankruptcy.155 Ideological concerns such as preserving State ownership and keeping the issuance of shares within the State’s economic plan led to the implementation of a quota system.156 National authorities formulate a yearly quota, and allocate it to provincial authorities and ministerial authorities at the central level.157 Provincial and ministerial authorities then choose and approve candidate issuers, whose applications are then submitted to the CSRC for approval.158 The quota system has been criticized for being political and resulting in approval of low-quality issues.159

Approval of low-quality issues may have the ironic consequence of more investor risk than if investors reviewed the merits of issues on their own. When the State undertakes merit review, investors may ignore company information and simply conclude that approval by the State indicates that a company is a sound investment. Investors may also assume that the State is encouraging investment in this approved company and is guaranteeing its future success-or will at least keep the company out of bankruptcy. Alternately, investors who do look at company information may conclude that approval indicates an opportunity for short-term gain. In such cases, disclosure may actually lead to more speculation and encourage investors to avoid a buy-and-hold strategy.

Merit review of companies does not end after the company issues shares. Since the Company Law, the government has taken the additional step of allowing the temporary de-listing of an issuer if the company experiences losses for three straight years.160 Exchange regulations require “special treatment” for companies that have suffered continual losses or a single substantial loss.161 The ongoing review and the threat of sanctions against a company may encourage investors to pay more attention to company earnings for fear of owning shares in a de-listed company. However, it may have other more perverse effects. An investor may be drawn to a company that has suffered losses for two years in anticipation of reports of increased earnings-achieved through State subsidies, better management in response to sanctions, or just fudging-to avoid sanctions.

B. SECURITIES REGULATION AS MARKET INTERVENTION

Any explication of securities regulation will set out the legal rules by which a market operates. However, securities rules and regulations may have a profound effect on investor confidence in the market. In China, the State has shown little confidence in the stock market processes and has intervened over the years in order to ensure that stock market activity conforms with its economic and political interests. Investors tailor their strategies in response to State policies, exemplifying the Chinese expression shang you zhengce, xia you duice (above is policy, below is strategy).

To constrain speculative investing and limit capital gains income, the State has imposed price ceilings that limit the movement of a stock’s price in a single day of trading.162 The price controls were implemented by the exchanges and local governments and not by the central authorities. The exchanges used price controls more extensively when they first opened in 1991.163 The most recent market-wide price controls were implemented by the exchanges in December 1996 on the same day a People’s Daily editorial was published reminding investors of speculative risks.164 The purpose of the price controls was to limit the effectiveness of speculation.165 During late 1996, it was not uncommon for prices to double, triple, or increase even more dramatically in a single day if a stock gained the fancy of speculators. These regulations stipulated that a stock’s price could only change ten percent over or under the previous day’s closing price in a single day. Stricter price controls were imposed for companies with poor financial records. On January l, 1998, it was announced that the CSRC had approved changes by the Shanghai and Shenzhen exchanges to their exchange regulations.166 These regulations included the establishment of “special treatment” for unprofitable companies, defined as companies that posted a deficit for two consecutive years, had less net capital per share than the face value of the share, or had an unusual event occur that would make it difficult to judge a company’s prospects. The stock exchanges publicize the company’s “special treatment” and restrict movement of that company’s shares to five percent over or under the previous day’s closing price. The purpose of “special treatment” is to give companies that are in danger of losing their listing because of poor performance a “new start” and let investors better understand the situation and make better choices.167

Price controls are an ineffective way to reduce speculation in the long-term. Price controls give rise to price inaccuracies that put investors at risk and distort stock prices much like speculation itself. The ceilings reflect State policy and the amount of risk the State wants to allow for investors. As prices are not left to the market, the disclosure regulations will not improve price accuracy. Furthermore, because of the decreased liquidity of a price control system, investors will not be able to withdraw funds when the market becomes risky.

While State policies and rules should be considered for their regulatory effect, the same policies and rules, along with other State pronouncements, should be considered for their rhetorical effect. As one Chinese official wrote,

Since the market force can hardly offset strong policy influence, and the making of policies is often unforeseeable and very much bent to willful thinking, one cannot but closely follow the ever-changing policies while taking part in market operation. Therefore, China’s stock market is known as a “market influenced by policies” and an “information-sensitive market.”168

In other words, prudent investors in the Chinese stock markets interpret the activities and statements of lawmaking bodies and officials in order to determine whether the State is supporting the market or not.169 State intervention in the market has encouraged speculation based on State policies. Investors all over the world likely give some consideration to government policies when making investment decisions, but the history of the Chinese securities industry indicates that State policy should be weighed more heavily by Chinese investors. Recall that the Chinese markets were created by State policy and could end because of State policy.170 The overheated markets of 1996 and 1997 provide a recent example of State interventions in the market.

Few expected the wild market of 1996 after the rather tame market of 1995.171 Two reductions in interest rates in May and September of 1996 spurred ordinary Chinese to move their savings from banks to the Shenzhen and Shanghai markets. A reduction in the savings interest rate is generally understood as a catalyst for investors to put their savings into capital markets that offer higher returns than an interest-bearing savings account. In China, however, where trading is often based on speculation on government policies, it signaled that the State was behind the securities industry so that the indexes would only go up. The number of investors more than doubled to twenty-one million, and eight million new accounts were opened in the last few months of 1996 after the second interest rate reduction.172 By their peak on December 11, the Shanghai index had more than doubled and the Shenzhen index had more than quadrupled for the year.173

The State was concerned about speculation by investors with little knowledge of securities trading and the potential for disaster if the market took a severe turn for the worse, because it could wipe out the savings of individual Chinese investors who only understood a rising market. The State intervened through an editorial in the People’s Daily that was published in newspapers around the country.174 This editorial followed a pattern of State interference where government pronouncements that comment on the market or threaten government action are used to influence the market.175 The editorial cited the high price/ earnings ratio, the moderate increase in corporate earnings, and large transaction volume as evidence of an “abnormal” and “illogical” rise in the market.176 It told Chinese investors to learn from the 1929 stock crash in America. Investors who speculated on stocks because they thought that the return of Hong Kong to the Mainland or the next People’s Congress would boost the economy and that the government would not let the market fall were called “muddled.”177 The tone of the editorial reminded some readers of the tone of Cultural Revolution-era editorials, and it chilled the market. Both markets dropped ten percent, the maximum allowed under new regulations, when trading opened on the day following the editorial. The market continued its dramatic drop for a few days before eventually going flat with very little trading into 1997.

After Deng Xiaoping’s death on February 17, 1997, the stock markets again heated up until regulators once again intervened and cooled the market. Many thought that Deng’s death would cause a crash on the market. On the day of Deng’s death, many watched the stock prices initially drop ten percent and then turn-around and reach the ten percent maximum gain over the previous day’s close in the course of a few hours. When it became clear that Deng’s death would have little effect on the markets, more investors joined the fray. Some even believed that the State injected money into the market or that money was being directed into the market from Hong Kong. The Shanghai Stock Exchange processed 1.3 million new accounts in April 1997 alone.178

Finally, the State had seen enough and again stepped in, this time effectively ending the 1996-97 bull market for good. A number of financial institutions were punished by the CSRC for illegal activities on May 12, 1997. The CSRC then suspended trading of four other companies on May 16 for abnormal price movements.179 The suspensions were reportedly prompted by investor manipulation of stock prices. The measures caused the Shenzhen A-Share Index to drop 9.33% and Shanghai A-Share Index to drop 7.23%.180 Some 382 shares and investment funds came close to losing the maximum price movement of ten percent.181 Regulating authorities then took aim at bank loans to state-owned enterprises that had been used to speculate on the market and made such activity illegal.182 A circular by the People’s Bank of China published in early June made it illegal for banks to use funds for the stock market in any way.183 Banks were given ten days to cease activities such as overdrafts for stock trading. The flight of funds from the market in June effectively ended the 1996-97 bull market.

The events of 1996 and 1997 illustrate the impact of State policies on the stock markets. When the State was concerned about particular market activities, it issued new regulations to circumscribe those activities. The State’s concerns were not limited to protecting investors or particular investments, but were instead directed at the entire market. Investors placed a heavy value on news or rumors of State policies that suggested whether it was or was not supporting the stock market when making their investment decisions. Investors may have looked at company earnings or relied on rumors about a company before purchasing a particular company stock, but this company-specific information was quickly overlooked when the next change in policy was announced.

Even if the regulations have a legitimate purpose, investors often believe there are behind-the-scenes dealings that benefit State officials or those with connections to officials. Furthermore, knowledge of sudden changes in State policies that may affect the market can be very valuable. A case from 1992 demonstrates the ability of officials to utilize their positions to gain profits through stock trading. A high-ranking official from Hubei province, Chen Shuiwen, was dismissed from his post for illegal trading and accepting bribes.184 He used public funds to purchase shares in his own name. He was able to gain inside information from the various positions he held concurrently as director of the provincial financial office, its Party secretary, a provincial standing committee member, provincial government Party group member, and vice-governor.185 Ellen Hertz reported that investors in Shanghai believed that government officials would trade on that type of inside information.186 Investors in Chengdu echoed a similar belief that government policies were meant to increase the profits of government officials and their friends. In such a climate, it is unlikely that the disclosure provisions will inspire investors to price a company’s stock accurately. The Securities Law does not appear to totally eliminate this problem. The definition of “insider” under the new law extends to “the working personnel of the securities regulatory authority” but may not include other officials, although State Council regulations could be promulgated to include other officials.187 A government official who learns of important company information may be prohibited from using this information under a broad provision that extends to “tippees.”188 More troubling is the notion that government information may not be included as inside information even though prior knowledge of government policies can provide government officials with a trading advantage.189 Further, the CSRC’s shoddy record on enforcement of insider trading provisions would probably render any such prohibition useless.

One solution to this problem would be to bring more transparency to regulatory authorities in their rulemaking. The Securities Law attempts to do this by requiring the rules and regulations to be made public.190 This provision, however, does not force the CSRC to act in a public manner when considering new regulations or otherwise hinder the CSRC from making sudden announcements that could affect market prices. The CSRC’s opaque rulemaking is consistent with a general trend in China. Individuals outside of the government suffer from a lack of access to the lawmaking of local congresses, governments, and administrative entities, which results in “poor quality and inconsistent legislation that frustrates the rational expectations of those subject to the law and undermines China’s own policy objectives.”191 perhaps the CSRC should implement a plan being considered for the new Legislation Law that requires publication of all or part of draft laws and opens hearings and conferences to the public.192

C. DELIVERY OF DISCLOSURE

Extensive disclosure regulations and widespread compliance will matter little if the information does not reach investors. While this point might seem rather obvious, it raises an important problem with China’s securities markets and China’s information control. The Chinese State has maintained strict control over the news and print media organizations, which are organized into an expansive propaganda and education system.193 The Securities Law includes provisions for the publication of disclosed information, but information that is required by law to be made public must first be published in newspapers designated by the State.194 The announcements must also be available for inspection “at the company’s domicile and the stock exchange.”195 These restrictive publication provisions echo recent efforts by the State to limit the development of the financial media industry in China. Regulations that hinder the growth of the financial news media also will hinder the growth of a healthy stock market.196

In recent years, publication of financial news has been a growing business. Throughout China, various magazines, newspapers, and tip sheets are sold on street corners around the city. Daily newspapers have increased their financial news reporting in order to attract readers. Analysts appear on television, radio, and in print to review and evaluate the day’s events and provide tips for investors. Ordinary investors rely heavily on this analysis. When the Shenzhen and Shanghai indexes dropped suddenly in December 1996 in response to State policies, one analyst in Chengdu was badly beaten by angry investors.

In April 1998, new regulations took effect to control the numerous stock analysts operating in China. A spokesman for the CSRC said that the absence of such rules gave rise to numerous unethical practices including insider trading, rumor-mongering, substandard investment advice, plagiarism of research work, unrealistic promises of high returns to investors, and the use of fortunetellers to mislead investors.197 Anyone calling herself an investment advisor must pass exams approved by the CSRC and, when offering advice in the media, must reveal her real name and the company for which she works. Industry sources estimate that there are more than 200 such persons regularly offering investment advice in the domestic media.198

State efforts to control financial news extend to foreign media services operating in China. Since 1996, foreign economic information providers, such as Reuters and Dow Jones, have been subject to supervision by Xinhua News Agency, the official news agency in China.199 Foreign news services had prospered in China along with the hot markets of 1993 and 1994.200 Foreign news organizations believe that Xinhua News Agency offers inferior economic news compared to its international rivals based on scope, timeliness, and quality.201 This information gatekeeper policy will inevitably decrease the efficiency of China’s stock market and the accuracy of its pricing.202

Restricting the financial media has consequences for the effectiveness of mandatory disclosure. Newspapers located in Shanghai, Shenzhen, or financial newspapers linked to the State such as China Securities are favored over local newspapers. By restricting publication, the designated sources are given prime status in the financial news market as company information must be published in those newspapers before other newspapers and broadsheets. These newspapers, however, may not be widely available or widely read. Furthermore, investigative reporters at local newspapers might have access to information before it is published in national newspapers.203 This suggests that a lag time exists between disclosure and publication, providing more opportunity for profits by those who first learn about the information. Furthermore, a closed market for foreign companies and a market skewed toward State-favored newspapers limit access to alternative analyses. For example, one reporter told a story about the Chengdu Propaganda Department stepping in when her analysis was too detailed.204 In another instance, when Deng Xiaoping died, reporters were not permitted to discuss the impact of his death on the market.205 Strict control on information by the State apparatus may reduce confidence in that information and in the markets.

The financial media is also exposed to various liabilities under the Securities Law and other relevant regulations in China which require caution. Anyone who reports false information and “disturbs the order of the securities market” can incur a fine of 30,000 to 200,000 yuan and a criminal investigation.206 Criminal punishment includes up to five years in prison and 10,000 to 100,000 yuan in fines for lesser crimes or five to ten years in prison and 20,000 to 200,000 yuan in fines for more severe crimes.207 Under the law on Guarding State Secrets, State secrets are broadly defined to include nonpublic financial and economic information.208 In 1994, a reporter for the Ming Pao newspaper in Hong Kong was sentenced under this law to ten to twelve years in prison for allegedly disclosing internal interest rate and gold policies of the PBOC.209 The potential liability for reporting undisclosed material may remove the incentive to investigate companies; therefore, company disclosures will remain unquestioned.

Trading centers, another important source of information for investors, have also been regulated by the government. Investors open accounts in trading centers through which they can buy and sell securities, similar to brokerage firms in the United States.210 Investors often will go to the trading center during trading hours and watch price movements on a computer screen or the “big board.” Many trading centers provide investors with news and rumors about listed companies and State policies.211 Theories about the direction of the market travel fast through the trading center. Financial advice from analysts at the trading centers is subject to the same rules as the media. In 1999, a number of trading centers in Henan Province had their operating licenses revoked for providing information to investors without the proper qualifications.212 Certainly, one could argue for some regulation because bad information could mislead investors or aid price manipulators. On the other hand, restricting the channels and types of information could also increase the risk to investors as the accurate information will remain in a smaller circle.

CONCLUSION

Chinese regulators have argued that company disclosure will protect Chinese investors in the Shanghai and Shenzhen markets. Perhaps the experience of Western capital markets suggests this is true. This note has taken issue with the proposition that more disclosure laws or laws based on the United States regulatory system will automatically protect Chinese investors. Even with the new Securities Law, compliance will be limited by a lack of technical expertise, payoffs for cheating, poor enforcement by the CSRC, and a meddling State. In short, one should expect more of the same on the Chinese securities markets despite this new law. This opinion is not a “glass-half-empty” view. The Chinese capital markets have raised a great deal of money for Chinese enterprises and will be increasingly important in China’s privatization efforts. Even with the events of 1996 and 1997 and rather tame price swings since, more and more investors are flocking to the Chinese markets. Investors should simply have a clear understanding that in China the buyer should beware and make his investment choices accordingly.

This note has been about more than the Chinese securities markets. By analyzing “taking stock” in China’s stock markets, this note hoped to take stock in China and its economic laws. Many of the issues that exist in the context of disclosure exist in the general context of economic law in China. While the State once concentrated its efforts on macro-issues or as a market participant, it must now be a market referee. This role is an unfamiliar one for the State since it can no longer rely on its vertical organization to simply direct people’s actions. Market participants are not as easily directed as workers and farmers who are a part of work units or production team. Furthermore, the State does not have the face-to-face contact-embodied in coworkers and work unit leaders-it once had that could add discipline to an individual’s behavior.

With respect to securities regulation, the State has followed the well-trodden path of providing investors with more information. This approach has also been taken in the analogous area of consumer protection. However, the promulgation of new laws may not be enough. The State must build an administrative apparatus to enforce those laws and pry open the closed world of Chinese enterprises. Without more enforcement, investors will have good reason to doubt the disclosures made by companies. In addition, the State may have to increase transparency of government processes that affect the market and allow more opinions to circulate.

I conducted field research on stock trading in Chengdu, China from June 1996 to July 1997 and from May 1998 to August 1998. During that time, I frequently visited a stock trading center and interviewed stock traders and persons in the securities industry. Many of my observations in this paper benefited from this experience. When appropriate in the text, I refer to Chengdu to provide practical examples of stock trading in China. In this regard, this note may differ from other scholarly legal writing on this topic. I am indebted to all of the people that I met in Chengdu. In particular, two friends opened up the world of Chinese securities to me and their tutelage made this note possible: it is only fitting that this note be dedicated to them.

1. Zhonghua Renmin Gongheguo Zhengquan Fa [Securities Law] (passed Dec. 29, 1998, effective July 1, 1999) [hereinafter Securities Law], translated in CHINA L. & PRAC., Feb. 1999, at 25.

2. China to Hold Securities Law Contest, XINHUA ENGLISH NEwsWIRE, Apr. 1, 1999, available in 1999 WL 7930771.

3. See Trish Saywell, Finance Coming Clean: Chinese Firms Open Their Books as Securities Law Looms, Fast E. EcoN. REV., Feb. 4, 1999, at 40 (reporting that the Securities Law has prompted an unprecedented surge of honesty among listed companies).

4. LOUIS D. BRANDEIS, OTHER PEOPLE’S MONEY AND HOW THE BANKERS USE IT 92 (A.M. Kelley 1986) (1914) (describing the need for disclosure in the banking industry); see also LOUIS LOSS & JOEL SELIGMAN, FUNDAMENTALS of SECURITIES REGULATION 25-26 (3d ed. 1995) (describing Brandeis’s importance to the acceptance of a disclosure philosophy in U.S. federal securities regulation).

5. See Donald C. Clarke, Regulation and Its Discontents: Understanding Economic Law in China, 28 STAN. J. INT’L. L. 283, 288-89(1992).

6. See id.

7. See Loss & SELIGMAN, supra note 4, at 25-26.

8. See Paul Bowles & Gordon White, The Dilemma of Market Socialism: Capital Reform in China-Part IL Shares, 28 J. DEV. STUD. 575, 576-77 (1992) (explaining the policy reasons behind issuing shares in China); see also ELLEN HERTZ, THE TRADING CROWD 45 (1998) (same).

9. See Bowles & White, supra note 8, at 579.

10. See Henry R. Zheng, Business Organization and Securities Laws of The People’s Republic of China, 43 Bus. Law. 549, 607 & n.403 (1988) (discussing Interim Provisions of the State Council on Several Policy Issues of Urban Collective Economy, promulgated Apr. 14, 1983).

11. See Yi-Chen Zhang & Da Yu, China’s Emerging Market, COLUM. J. WoRLD Bus., Summer 1994, at 112, 113.

12. See Henry R. Zheng, Securities Regulation in China: Development and Conflicts, E. ASIAN EXECUTIVE REP., May 15, 1987, at 7, 9.

13. See id. at 8-9 14. See id.

15. See id.; see also Jay Zhe Zhang, Comment, Securities Markets and Securities Regulation in China, 22 N.C. J. INT’L L. & CoM. REG. 557, 561-62 & nn.30-33 (1997).

16. See, e.g., Bowles & White, supra note 8, at 579 & n.9 (alluding to the development of curb markets in Shanghai).

17. See HERTZ, supra note 8, at 37.

18. See, e.g., Shanghai Shi Zhengquan Jiaoyi Banfa [Administrative Measures of Shanghai Municipality Governing Securities Trading] (1990), translated in 2 CHINA LAWS FOR FOREIGN BUSINESSES: SPEciAL ZONES & CrIES 1985-1994 91-038 (1995); Shenzhen Shi Gupiao Faxing Yu Jiaoyi Guanli Zhanshi Banfa [Provisional Measures of Shenzhen Municipality on Share Issuing and Trading] (1991),

translated in 1 CHNA LAWS FoR FoREIGN BuSINESSes: SPECIAL ZONES & CITIES 1985-1994 73-553 ( 1995).

19. See Lang & Yu, supra note 11, at 118.

20. See CHINA: Bourse Control Tightened, FAR E. EcoN. REV., Aug. 28, 1997, at 65, available in 1997 WL-FEER 11441629.

21. See id.

22. See Mark O’Neill, Securities Law: Long Awaited Legislation Due This Year, S. CHINA MORNING PosT, Nov. 12, 1998, Business News, at 6.

23. Gupiao Faxing Yu Jiaoyi Guanli Tiaoli [Interim Regulations on the Administration of Issuing and Trading of Shares] (1993) [hereinafter Interim Regulations], translated in LA. TOKLEY & Tin RAVN, COMPANY AND SECURITIES LAW iN CHINA 179-96 (1998). Tokley and Ravn translate the regulations as “Provisional,” but I follow other translations and use the word “Interim.”

24. Jinzhi Zhengquan Qizha Xingwei Zanxing Banfa [Provisional Measures on Eliminating Securities Fraudulent Activities] (1993) [hereinafter Provisional Measures], reprinted in Yu hweI, GUFENZHI JINGJIXUE Ga.n.urr [EcoNoMIC CONCEPTS IN STOCK SYSTEMS] 535-40 (3d ed. 1996).

25. Different aspects of the Interim Regulations and Provisional Measures have been the subject of numerous law review articles. See, e.g., Minkang Gu & Robert C. Art, Securitization of State Ownership: Chinese Securities Law, 18 MICH. J. INT’L L. 115, 122 (1996) (describing ideological principles in Interim Regulations); Fang Liufang, China’s Corporatization Experiment, 5 DUKE J. COMP. & INT’L L. 149, 181-85 (1995) (describing listing process under Interim Regulations); Benjamin R. Tarbutton, China A National Regulatory Framework Begins to Emerge, 24 Gn. J. INT’L & COMP. L. 411, 419-29 (1994); Zhang, supra note 15, at 595-606.

26. See China’s Securities Legislation Pressing Ahead, CHIA DAILY, April 21, 1998, available in LEXIS, News Library, China Daily File.

27. See Zhonghua Renmin Gongheguo Gongsi Fa [People’s Republic of China Company Law] (1994) [hereinafter Company Law], translated in TOKLEY & RAVN, supra note 23, at 133-75.

28. For the most thorough critique of the Company Law see generally Fang, supra note 25.

29. See Zhonghua Renmin Gongheguo Xing Fa [People’s Republic of China Criminal Law] (1997) [hereinafter Criminal Law], reprinted in ZHONGHUA RENMIN GONGHEGUO XING FA (Renmin Chubanshe 1997).

30, See id. at arts. 178-82, 197; see also Cai Dingjian, China’s Major Reform in Criminal Law, 11 COLUM. J. AsiAN L. 213, 215 (1997).

31. See O’Neill, supra note 22, Business News, at 6. 32. See Securities Law, supra note 1, art. 17.

33. See O’Neill, supra note 22, Business News, at 6. 34. See id. One U.S. dollar is approximately 8.3 yuan. 35. See id.

36. See Jackie Lo, New PRC Securities Law Fails to Fully Unify Regulations of Securities Issues in China, CHINA L. & PRAC., Feb. 1999, at 21.

37. See Securities Law, supra note 1, art. 213; see also Lo, supra note 36.

38. Cf. Jian Fu, Information Disclosure and Investor Protection in China’s Securities Markets 5, (visited Feb. 10, 1999) (describing disclosure requirements in China prior to Securities Law).

39. See Securities Law, supra note 1, art. 45.

40. See id. at art. 47. 41. See id. at art. 48.

42. See id at art. 11. Compare id. at art. 45, with Company Law, supra note 27, art. 153.

43. Compare Interim Regulations, supra note 23, art. 23, with Securities Law, supra note 1, arts. 45 & 48.

44. See Jian, supra note 38, at 5-6 (describing CSRC regulations on company disclosure with respect to listed companies).

45. Zhonguo Zhengquan Jiandu Guanli Weiyuanhui Guanyu Fabu Gongkai Faxing Gupiao Gongsi Xiaoxi Pilu de Neirong Yu Geshi Zhunze Di Yi Hao ; see also Jian, supra note 38, at 5-6.

46. See Zhonguo Zhengquan Jiandu Guanli Weiyuanhui Guanyu Fabu Gongkai Faxing Gupiao Gongsi Xiaoxi Pilu de Neirong Yu Geshi Zhunze Di Liu Hao De Tongzhi [Notice of the CSRC on Rule No. 6 on the Content and Form and of Information Disclosed by Companies Publicly Issuing Shares] (Oct. 28, 1996) [hereinafter CSRC Rule No. 6], translated in TOKLEY & RAvN, supra note 23, at 258-71; see also Jian, supra note 38, at 6.

47. See CSRC Rule No. 6, supra note 46; see also Jian, supra note 38, at 6. 48. See Securities Law, supra note 1, arts. 47-48.

49. See Zhonguo Zhengquan Jiandu Guanli Weiyuanhui Guanyu Fabu Gongkai Faxing Gupiao Gongsi Xiaoxi Pilu de Neirong Yu Geshi Zhunze Di Qi Hao ; see also Jian, supra note 38, at 6.

50. Compare Interim Regulations, supra note 23, arts. 57-59, with Securities Law, supra note 1, arts. 60-62.

51. See Securities Law, supra note 1, art. 60. 52. See id.

53. See Zhonguo Zhengquan Jindu Guanli Weiyuan Hui Guanyu .

54. See Securities Law, supra note 1, art. 61. 55. See id.

56. See id.

57. See Interim Regulations, supra note 23, art. 59.

58. See Zhonguo Zhengquan Jiandu Guanli Weiyuanhui Guanyu Yinfa Gongkai Facing Gupiao Gongsi Xiaoxi Pilu de Neirong Yu Geshi Zhunze Di Er Hao De Tongzhi [Notice of the CSRC on Rule No. 2 on the Content and Form of Information Disclosed by Companies Publicly Issuing Shares] (Dec. 17, 1997), available in CSRC Website (visited Feb. 12, 1999) .

59. See id.

60. See Zhongguo Zhengquan Jindu Guanli Weiyuanhui Guanyu 1996 Nian .

61. Compare Interim Regulations, supra note 23, art. 60, with Securities Law, supra note 1, art. 62.

62. See Securities Law, supra note 1, art. 62.

63. See Interim Regulations, supra note 23, art. 60; see also Lo, supra note 36, at 22. 64. See Zhang, supra note 15, at 599.

65. See Zhongguo Zhengjianhui Chu Tonggzhi Jinyibu Guifan (press release describing 1999 amendments to 1996 notice regarding problems with listed company’s stock dividends).

66. See Foo Choy Peng, Firms Fined Over Fund Rule Breach, S. CHINA MORNING PosT, June 11, 1998, at 5, available in 1998 WL 2982698.

67. See Huang Tingjun, Gujia Yidao, Bu Zai Wuli Kan Hua [Stock Prices Strangely Move, Do Not Again Look at Flowers in a Fog], ZHONGGUO ZHENQUAN BAO [CHINA SEC. NEws], June 13, 1998, at 1.

68. See id.

69. See Securities Law, supra note 1, art. 79.

70. See id. at art. 80. 71. See id. at art. 81. 72. See id. at art. 82.

73. See JAMES D. Cox Er ni.., SECURITIES REGULATION REGuLA.TON 4-9 (2d ed. 1997) (describing the development of mandatory disclosure in United States securities regulation and the mandatory disclosure provisions).

74. See YuN-WEI TANG sr nt.., ACCOUNTING AND FIANCE IN CHINA 143 (3d. ed. 1994) (discussing problems with accounting profession in China).

75. See Fang, supra note 25, at 183-84 (describing lawyers’ fabrication of reports during issuing process).

76. See Jian, supra note 38, at 11.

77. See id.

78. See Securities Law, supra note 1, art. 213.

79. See Matthew K. Wong, Note, Securities Regulations in China and Their Corporate Finance Implications on State Enterprise Reform, 65 FORDHAM L. REV. 1221, 1238-40 (1996).

80. See Lao Zhao, Hongguang to Pump Up Tube Output, Bus. WEEKLY, Jan. 18, 1993, available in 1993 WL 10860000.

81. According to Hongguang’s prospectus, the company’s profits for the three years before its public offering were:

YearTotal Profits(in yuan)Profit/Share(in yuan) 1994 60,000,000 0.38 1995 78,000,000 0.49 1996 54,000,000 0.339

82. See Tube Firm Shares, CHINA DAiLY, May 25, 1997, at 3, available in 1997 WL 8259991.

83. See Wu, supra note 81, at 6. The reporter discovered this information by interviewing a former worker on Hongguang’s production line. See id.

84. See id. 85. See id.

86. See Hongguang Shiye Yuji Kuisun 1.6 Yi Yuan [Hongguang Industrial Predicts Loss of 160 Million Yuan), ZHONGGUO ZHENQUAN Bno [CHINA SEC. NEWSPAPER), June 3, 1998, available in China Securities Newspaper Website (visited Oct. 28, 1998) .

87. See China: Nine More Companies Become “Special Treatment Shares, ” Dow JoNES INT’L News SERVICE, Apr. 30, 1998, available in WL 4/30/98 DJINS 06:10:00.

88. See Hu Shen Zhengjiaosuo Banbu Gupiao 1998) .

89. Foo Choy Peng, Firms Fined Over Fund Rule Breach, S. CHINA MORNING PosT, June 11, 1998, at 5, available in 1998 WL 2982698.

90. See Zhongguo Zhengjianhui Guanyu Chengdu Hongguang Shiye Gufen Youxian Gongsi Yanzhong Weifa Weigui Anjian De Tongbao [CSRC Announcement About Chengdu Hongguang Industrial Limited-stock Company’s Serious Violations of Law and Regulations], ZHONGGUO ZHENGQUAN BAo [CHINA SEC. NEWSPAPER], Nov. 20, 1998, at 1, available in China Securities Newspaper Website (last modified Nov. 20, 1998) .

91. See id.

92. See Zhu Jun, Shei Wei Qiongminyuan Fuze? [Who Is Responsible for Hainan Minyuan?], MONEY ZAZHI [MONEY MAGAZINE], Apr. 1998, at 12-21.

93. See id. at 15.

94. See id.

95. See id.

96. See id.

97. See id.

98. See id.

99. See id, at 17.

100. See id, at 19.

101. Foo Choy Peng, Infamous Five Stay Free as Hainan Minyuan Exposes Regulator’s Limits, S. CHINA MORNING PosT, May 1, 1998, Business Post, at 6.

102. See Zhu, supra note 92, at 20.

103. See Foo Choy Peng, Deng’s Son Linked to Securities Fraud Case, S. CHINA MoRNING PosT, Apr. 30, 1998, Business Post, at I.

104. See Foo Choy Peng, CSRC to Punish Fraud Directors, S. Canon MORNING PosT, May l, 1998, Business Post, at 6.

105. Foo, supra note 103, at 1. 106. Foo, supra note 101, at 6. 107. See Foo, supra note 104, at 6. 108. Cox Er nc,., supra note 73, at 43. 109. See id.

110. Securities Law, supra note 1, art. 71(1). Article 71 prohibits anyone from obtaining improper benefits or transferring risks to others in certain enumerated ways, including manipulation. See id.

111. See id. aft. 184.

112. See, e.Q., Provisional Measures, supra note 24, art. 8.

113. These organizations are reminiscent of institutional traders in the United States. A key difference is that these organizations may be linked with the State apparatus and may serve as a conduit for State funds. See HETZ, supra note 8, at 191.

114. Individual speculators taught me to watch the volume of shares traded in order to guess the actions of the jigou.

115. See infra notes 179-83 and accompanying text.

116. Certainly, one could argue that the market worked in this case. Investors bought the shares of a company that was performing well. One could also argue, given the rampant manipulation on the market, that it did not matter what the earnings were in the annual report. It only mattered that the price was being driven upwards by investors flocking to buy shares. In other words, deciding to buy may have involved an analysis of the annual report, but the other factor is whether the shares were trading at a volume that drove up their price.

117. See, e.g., TANG ET av., supra note 74, at 142 (citing study of companies listed on the Shanghai Stock Exchange).

118. See id. 119. See id.

120. See, e.g., Joaquim F. Matias, From Work-Units to Corporations: The Role of Chinese Corporate Governance in a Transitional Market Economy, 12 N.Y. INT’L L. REV. 1, 10-22 (1999) (describing the reform of Chinese enterprises that resulted in economic decisionmaking being shifted from the central government to local governments and the enterprises themselves).

121. See Clarke, supra note 5, at 289 (explaining the need for the State to monitor managers who direct the use of assets bought with the State’s money); see also JULIA KWONG, THE POLITICAL ECONOMY OF CORRUPTION IN CHINA 58 (1997) (describing the opportunities that exist for managers to divert resources for their own benefit in the Chinese system).

122. See Cox eT nL., supra note 73, at 44 (describing how accounting and financial reports can monitor management).

123. Reports have not indicated whether Hongguang or Minyuan managers or directors used their own accounts to trade their company’s shares. Because of the high degree of autonomy enjoyed by Chinese managers and their ability to use the company coffer for their own purposes, it may not matter whether they used their own accounts or not.

124. See Provisional Measures, supra note 24, arts. 3-7. 125. See Securities Law, supra note 1, arts. 68-69.

126. See id. at art. 68. According to the Securities Law, the following groups of persons are considered “informed” persons with inside information: 1 ) the directors, supervisors, managers, deputy managers, and relevant senior management personnel of a listed company; 2) shareholders who hold more than five percent of the shares in a company; 3) the senior management personnel of the holding company that has issued shares; 4) persons who are able to obtain relevant company information concerning the trading of its securities by virtue of their positions in the company; 5) the working personnel of the securities regulatory authority and other persons that administrate securities trading pursuant to their statutory authority; 6) the relevant personnel of social intermediary organizations that participate in securities trading pursuant to their statutory duties and the relevant personnel of securities registration and clearing institutions and securities trading service organizations; and 7) other persons specified by the State Council’s securities regulatory authority. See id.

127. See id. at art. 69. “Insider information is information that, in the course of securities trading, has not yet been disclosed and concerns the company’s business or financial affairs or may have a major effect on the market price of the company’s securities.” Id. The article lists eight types of inside information. See id.

128. See id. at art. 202. 129. Id. at art. 166. 130. See id. at art. 168. 131. See id at art. 171.

132. False accounts are widely used in Chengdu and can be purchased on a black market. The accounts on the Shanghai and Shenzhen exchanges are legitimately opened with a government-issued status card. Both the status card and the account cards are sold, and the purchaser can use them to open trading accounts in securities brokerage houses. The use of these false accounts makes it difficult to track the persons who are actually orchestrating the trades.

133. See Trish Saywell, Law: Demanding Action: Ordinary Chinese Are Starting to Take Their Grievances to Court as They Become Increasingly Aware of Their Legal Rights, FAR E. ECON. REV., May 13, 1999, at 42; Chinese Investor Sues Hongguang Over Share Issue, AsiAN WALL ST. 1., Dec. 16, 1998. at 3.

134. See Chinese Investor Sues Hongguang Over Share Issue, supra note 133, at 3.

135. See Henry Sender, In Hong Kong: China Court Ruling Shows Market Reforms’ Slow Pace; Shareholder-Rights Case Points Up CSRC’s Power, ASIAN WALL ST. J., July 23, 1999, at 13.

136. See id.

137. See Securities Law, supra note 1, art. 63.

138. See Sender, supra note 135 (reporting comments by Nicholas Howson of Paul, Weiss, Rifkind, Wharton & Garrison in Beijing).

139. Gordon Chang, China Is Not Yet Ready for Privatization, ASIAN.rr WALL ST. J., July 7, 1999, at 8. 140. HERTZ, supra note 8, at 13 (citing HILL GATES, CHINA’S MOTOR: A THOUSAND YEARS of PETTY CAPITALISM S (1996)).

141. See id. at 14-15.

142. See Securities Law, supra note 1, art. 11. 143. See Company Law, supra note 27, art. 152. 144. See Securities Law, supra note 1, at 14. 145. See id. at art. 15.

146. See id. at art. 16. 147. See id. at art. 153.

148. In November 1997, China Eastern Airlines, Anshan Iron and Steel, and Shanghai Automobile all listed 300 million shares over a two-week span. See Chinese Market Taking On Large State Firms, XINHUA NEws AGENcY, Nav. 27, 1997, available in 1997 WL 13733466.

149. See NPC Resolution to Amend the PRC Company Law, CHINA ONLINE (visited Mar. 14, 2000) . 150. See infra note 159 and accompanying text.

151. See supra notes 83-85 and accompanying text.

152. See Nancy L. Wong, Easing Down the Merit-Disclosure Continuum: A Case Study of Malaysia and Taiwan, 28 Law & POLY INT’L Bus. 49, 49 (1996).

153. See id at 49 n.2. 154. See id.

155. See HERTZ, supra note 8, at 47. Hertz points out that this might not be a technical determination of “bankrupt” since the new bankruptcy law had not yet come into effect. In this context, the term means that companies were faced with “increasingly demanding creditors and no one willing to lend them more money.” Id. at 47 n.7.

156. See Fang, supra note 25, at 178.

157. See William D. Holmes, China’s Financial Reforms in the Global Markets, 28 LAW & PoL’Y INT’L Bus. 715, 751 (1996).

158. See id.

159. See id. Holmes also criticizes the quota process for its lack of predictability as quotas are often announced at irregular times and are subject to change midyear based on market conditions. See id

160. See Nicholas C. Howson, China’s Company Law: One Step Forward, Two Steps Back? A Modest Complaint, 11 COLuM. J. ASIAN L. 127, 157 (1997) (describing the requirement as “most extraordinary, and unprecedented in any local listing regulations or the [Interim] Regulations”).

161. See Shanghai, Shenzhen Exchanges Promulgate “Rules for Publicly Traded Stocks,” supra note 88.

162. See Bowles & White, supra note 8, at 579.

163. See HERI-Z, supra note 8, at 175 n.1. In 1991, the Shanghai exchange allowed price movements of one percent per day of 31000 of total shares issued. When the political winds began to support the market in 1992, the Shanghai exchange provided for some new shares to fluctuate within a five percent margin and price ceilings were not imposed for other new shares. The result was an unwieldy system of

three different regimes operating at the same time. Eventually, all shares were allowed to fluctuate at the five percent limit, and finally, all price ceilings were lifted on May 21, 1992. See id, at 175.

164. See Party Newspaper Article Warns of Overheated Stock Markets, BBC SUMMARY of WORLD BROADCASTS, FE/D2799/G, Dec. 19, 1996, available in LEXIS, News Library, BBC Summary of World Broadcast-Asian Pacific Stories File.

165. See News Analysis: China’s Stock Market Expected to Grow Stably, XINHUA NEws AGENcY, Sep. 30, 1997, available in 1997 WL 13731837.

166. See Shanghai, Shenzhen Exchanges Promulgate “Rules for Publicly Traded Stocks,” supra note 88.

167. See Zou Bing, Gupiao Tebie Chuli Dui Touzhi Linian De Yingxiang [The Influence of Stock Special Treatment on Investment Logic), ZHONGGUO ZHENQUAN BAO [CHINA SEC. NEWSPAPER), June 3, 1998, available in China Securities Newspaper Website (last modified June 3, 1998) .

168. Wang Guowang, PRC: Theoretical Discussion on China’s Capital Market, CAIMAO JINGJI [FiNANCE AND Tf,ArE ECONOMICS], Apr. 11, 1996, at 11, available in FBIS-CHI-96-138.

169. An example from another context serves to demonstrate this point: it is well-known that the roster of attendees at State meetings is a clue as to which leaders are at the center of power.

170. See supra notes 7-9 and accompanying text.

171. Stock prices in 1995 were stable, as opposed to the volatile market of 1994. In 1995, the Shanghai A-Share Index fluctuated between 600 and 800 points. In 1994, the Shanghai A-Share Index had reached a high of more than 1500 points and a low of 300 points. The Shenzhen A-Share Index fluctuated between 1030 and 1300 points in 1995. See China’s Stock Market Stable Amid Standardization, XiNHUA NEWS AGENCY, Jan. 9, 1996, available in 1996 WL 3774291. In January 1996, the Shanghai A-Share Index was less than 560 points, and the Shenzhen A-Share Index was less than 1000. See Lao Fei, Gaobie Xiongshi, Zuo Xiang Guifan [Goodbye Bear Market, Moving Towards Regularization], ZHENGQUAN SHICHANG ZHOUKAN [SEC. MARKET WKLY.], Feb. 2, 1997, at 2.

172. See Chinese Stocks Extend Plunge; Officials Cite Speculation, N.Y Tins, Dec. 16, 1996, at D 10.

173. See Lao, supra note 171. The Shanghai A-Share Index rose from less than 560 points to 1258 points, and the Shenzhen A-Share Index rose from less than 100 points to 4523 points. See id.

174. See Party Newspaper Article Warns of Overheated Stock Markets, supra note 164. 175. See HER-rL, supra note 8, at 66 (referring to Shanghai investors).

176. Party Newspaper Article Warns of Overheated Stock Markets, supra note 164. 177. See id.

178. See CHINA: Push for More Listings, FAR E. ECON. REV., Sep. 18, 1997, at 69, available in 1997

WL-FEER 11441742.

179. See Foo Choy Peng & Christine Chan, CSRC in Share Price Crackdown, S. CHINA MORNING PosT, May 17, 1997, Business News, at 1, available in 1997 WL 2263541. The suspension was authorized under article 57 of the Regulations Governing Securities Exchanges published in August 1996 by the State Council Securities Committee. See id

180. See id.

181. See id.

182. See Stock Speculation by State Enterprises, Listed Companies Banned, XINHUA NEws AGENCY, May 22, 1997, available in 1997 WL 8995894.

183. See Chinese Banks Banned From Stock Market, XiNHUA NEws AGENCY, June 6, 1997, available in 1997 WI. 8996381.

184. See Solomon M. Karmel, Securities Markets and China’s International Economic Integration, COLUM. J. INT’L AFFAIRS, Winter 1996, available in Columbia Journal of International Affairs Website (visited Feb. 19, 1999) .

185. See id.

186. See HERTZ, supra note 8, at 66.

187. See Securities Law, supra note 1, art. 68.

188. See id, at art. 70 (“No informed person with knowledge of inside information on securities trading or other person who has illegally obtained inside information may purchase or sell securities of the company on which he has inside information, divulge such information or counsel another person to purchase or sell such securities.”).

189. See id. at art. 69. 190. See id. at art. 172.

191. Randy Peerenboom, Ruling the Country in Accordance with Law: Reflections on the Rule and Role of law in Contemporary China, 11 L”ut.’CULTURAL DYNAMICS 315, 333 (1999).

192. See id. (describing the draft Legislation Law).

193. See KENNETH LIEBERTHAL., GOVERNING CHINA 197-99 (1995) (describing the apparatus of state control over the media).

194. See Securities Law, supra note 1, art. 64. 195. Id.

196. “The dissemination of price and product information was crucial to the development of national markets in Britain and America from the 17th through the 19th century.” DOUG HENWOOD, WALL STREET 102 (1998) (citing WAYNE PARSONS, THE PowER of THE FINANCIAL PRESS 27, 41(1990)).

197. See Foo Choy Peng, Securities Body Launches Blitz on Cowboy Investment Advisers, S. CHINA MORNING PosT, Jan. 1, 1998, Business News, at 3, available in 1998 WL 2962533.

198. See id.

199. See Seth Faison, Citing Security, China will Curb Foreign Financial News Agencies, N>Y> TIMES, Jan. 17, 1996, at A1.

200. See id.

201. See Ann P Vandevelde, Note, Realizing the Re-Emergence of the Chinese Stock Market: Fact or Fiction?, 30 V.arm. J. TRANSNAT’L L. 579, 613 (1997).

202. See id. at 614.

203. One reporter for a Chengdu financial newspaper told me that the local newspapers are often privy to news about companies before it is published in the designated newspapers. See Interview with Reporter A, in Chengdu (Summer 1998) (name withheld to protect the identity of the reporter).

204. See id. 205. See id.

206. Securities Law, supra note 1, art. 188. 207. See Criminal Law, supra note 29, art. 181.

208. See Mitchell A. Silk, Cracking Down on Economic Crime: Will China’s Latest Anti-Corruption Campaign Have Any Impact?, CHINA Bus. REV., May 1, 1994, available in 1994 WL 11291268.

209. See id.

210. The best analogy is “day trading” in the U.S.

211. One Center where I conducted research provided investors with daily summaries of stock news. 212. See China Revokes Securities Licenses, ASIAN WALL ST. 1., Apr. 7, 1999, at 18, available in 1999 WL-WSJA 5431163.

DANIEL M. ANDERSON*

* J.D., Georgetown University Law Center, 2000; M.A. (Anthropology), The University of Iowa, 1994; B.A. with Honors in Anthropology, The University of Iowa, 1992. This note was originally written for the Asian Law and Policy Seminar at the Georgetown University Law Center, 1998-99 academic year. I am grateful to Professors James V. Feinerman and Viet D. Dinh for their guidance and thoughtful comments on earlier drafts. I also appreciate the insights of my classmates and seminar colleagues. I would especially like to acknowledge Emily Mei-hwa Lee, with whom I conducted research in Chengdu, China, and engaged in innumerable discussions on this topic, from which this note benefited greatly. Of course, I am solely responsible for the shortcomings of this note.

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