留學生金融學畢業dissertation需求：Chinese local governme
4.3.1 Regulatory Framework
Chinese local governments were primarily involved in the early regulation of the stock market. Prior to 1992, local governments had promulgated a series of municipal 留學生dissertation網rules. The People s Bank of China was closely involved in the regional regulations through its branch offices.
In Shanghai, there were (Administrative Measuresof Securities Transactions in Shanghai) 3 06 and
(Administrative Measures of RMB Special Shares in Shanghai),307 among others. In
Shenzhen, there were (Provisional Measuresof Issuing and Trading Shares in Shenzhen) 30 8 and(Business Rules of the Shenzhen Stock Exchange).309 Other cities, such as Guangzhou, Xiamen, Tianjin, Shenyang and Beijing, also promulgated similar regulations. These regional regulations not only formed the legal basis of the operation of the stock market for the time being, but also provided valuable experience for the later national securities regulations.
The rapid development of the stock market called for a more powerful regulative regime. With the efforts of Chinese regulators, there has emerged a four-level national regulatory framework for the stock market step by step: the national laws, the administrative regulations, the department rules, and the self-disciplinerules.3 10 These laws and regulations cover areas ranging from issuing shares to trading shares, from listed companies takeovers to information disclosure, from disciplines of securities intermediaries to legal liabilities of relevant securities activities. Such an elaborate legal framework deserves a closer look.
On the level of national laws, there are the Securities Law of the PRC, the Company Law of the PRC and the Criminal Law of the PRC:
(1). The Securities Law of the PRC: This law was promulgated on December 29, 1998 and effective from July 1, 1999. It is the primary regulation on stock market
oversight and operation, governing registration and public issuance of shares, secondary market transactions, disclosure, insider trading, takeovers, as well as the behavior of stock exchanges and securities firms. This law by and large completes the national legal framework for the regulation of China s stock market. It is an important regulative milestone to promote well-regulated, transparent stockmarkets in China.3 11 On October 27, 2005, the Securities Law of the PRC was further http://www.mythingswp7.com/dissertation_writing/Finance/revised by the Standing Committee of the NPC, which will become effective on January 1, 2006. The revision has provided a number of newsupervison rules.312
(2). The Company Law of the PRC: Effective from July 1, 1994. With the purpose of meeting the needs of establishing a modern enterprise system, this law aims to
regulate the organization and conduct of limited liability companies and joint stockcompanies established in China.313 In terms of securities regulations, it covers the #p#分頁標題#e#
rights and obligations of shareholders, powers and responsibilities of directors,
financial and accounting requirements for companies, as well as corporate
termination and liquidation. On October 27, 2005, the Company Law of the PRC
was further revised by the Standing Committee of the NPC, which will become
effective on January 1, 2006.3 14
(3). The Criminal Law of the PRC: promulgated on July 1, 1979, as amended from time
to time.315 It was the first time that criminal sanctions have been adopted to punish
securities fraud, such as insider trading, fraudulent offerings of shares and bonds,
misrepresentation and dissemination of false information and market
manipulation.316
On the level of administrative regulations, the State Council issued a series of
regulations. For instance, (Interim Regulations on
the Administration of the Issuing and Trading of Stocks of 1993 (the 1993 Interim
Regulations), issued by the State Council on April 22, 1993, was the first nation-wide
rule to regulate the stock market.
On the level of departmental rules, these are mainly issued by the CSRC.
Examples are (Provisional Measures on Prohibiting
Securities Fraud),31 7
Contents and Format of Information Disclosure regarding Companies Issuing
Securities to the Public), 318
(Administrative Rules Regarding Information Disclosure of Shareholding Changes of
Listed Companies Shareholders).319
On the level of self-discipline rules, these are mainly issued by Chinese Self-
Regulatory Organizations (SROs), such as (Shanghai
Stock Exchange Listing Rules) by the Shanghai Stock Exchange and
(Shenzhen Stock Exchange Listing Rules) by the Shenzhen Stock
Exchange.
4.3.2 Disclosure Regulation
Disclosure regulation was born and developed with the growth of China s stock
market, systematized after the implementation of the Securities Law of the PRC, and
refined with the development of the whole regulatory regime of the stock market.
When China s stock markets opened in the early 1990s, little attention was paid
to the development and implementation of regulations and laws governing information
disclosure. In 1990, the annual report of eight listed companies on the Shanghai Stock
Exchange occupied merely one and a half pages of the Shanghai Securities Daily
newspaper on June 10, 1990. Before 1993, only regional regulations gave some
regulatory ideas of information disclosure. For example, some simple clauses were
contained in the Administrative Measures of Securities Transactions in Shanghai and
the Provisional Measures of Issuing and Trading Shares in Shenzhen. When numerous
illegal dealings and trading scandals emerged as a result of the rapid expansion of
China s stock market, Chinese regulators began to recognize the importance and #p#分頁標題#e#
urgency to regulate information disclosure so as to protect the investors. After the
promulgation of the 1993 Interim Regulations, rules of disclosure were unified with a
centralized regulatory regime and the content of disclosure system was enriched and
made more focused. More than 200 department regulations were enacted thereafter. In
1999, the enactment of the Securities Law of the PRC was a milestone that unified the
disclosure system.
Through a decade of development, especially in the recent a few years, the
CSRC has formulated a series of rules and regulations on information disclosure,
aiming at bringing into line with the international practice.320 Numerous measures by
Chinese regulators have confirmed developing healthy stock markets is a top priority,
demonstrating a policy commitment to improving disclosure regulation and protecting
investors. Relevant laws will be further discussed in the following chapters. 32 1
4.4 CHINA S WTO ACCESSION AND IMPLICATIONS FOR
ITS SECURITIES MARKET
4.4.1 Financial Integration in China s Securities Markets
After 15 years of arduous negotiation, on December 11, 2001, China became
the 143rd member of the World Trade Organization (WTO),322 which is deemed as the
second most important change in China s economic policy regime, following Deng
Xiaoping s reform and open door policy.323
When China accedes to the WTO, it is expected to be in conformance with the
full array of obligations contained in various WTO agreements,3 24 otherwise, other
members may access to the WTO dispute settlement mechanism to prosecute their
rights. 32 5 Regarding the financial service sector, China has made far-reaching
commitments to gradually remove the geographic and regulatory restrictions for
foreign financial institutions and liberalize their scopes of businesses.3 26
322 The World Trade Organization (WTO) is the only international organization dealing with
the global rules of trade between nations. Its main function is to ensure that trade flows as smoothly,
predictably and freely as possible. See
http://www.wto.org/english/thewto_e/whatis_e/inbrief_e/inbr00_e.htm. For a better understanding of
WTO rules and principals, please see Wang, Guiguo (2003), THE LAW OF WTO, Law Publishing
House.
323 See Lin, Justin Yifu (2001), WTO Accession and Financial Reform in China, 21 Cato
Journal 13, at 13.
324 China s WTO commitments are documented in its (1) Protocol on the Accession of the
People s Republic of China, which contains the terms of membership that China negotiated and affirms
China s adherence to the WTO agreements; (2) the Report of the Working Party on the Accession of
China, which contains additional commitments as well as provides a narrative on the results of China s #p#分頁標題#e#
negotiations; and (3) annexes containing market access commitments, which primarily cover individual
tariff lines for goods and schedules for various service sectors.
325 The WTO s procedure for resolving trade quarrels under the Dispute Settlement
Understanding is vital for enforcing the rules and therefore for ensuring that trade flows smoothly. See
http://www.wto.org/english/tratop_e/dispu_e/dispu_e.htm.
326 China s commitments in the financial service sector can be found in the Schedule of
Specific Commitments on Services in China s WTO accession documents. From this schedule, we get
to know how China opens up its services sectors, such as restrictions on foreign ownership and
117
With respect to the stock market, foreign investors can deal directly in B shares
and are eligible for special membership in Chinese stock exchanges upon accession.
Within 3 years after accession, they can establish securities joint ventures with up to
33% ownership to underwrite A shares, or to underwrite and trade B and H shares and
government and corporate bonds. In the area of funds management, foreign investors
will be allowed to establish fund management joint ventures with 33% ownership upon
accession, and up to 49% within 3 years after accession.3 27
So far, foreign investors have already managed to penetrate in a roundabout
way in China. As committed, during 2002-2005, the CSRC has already approved the
establishment such sino-foreign joint-venture fund management companies. For
example, China Euro Securities Ltd., a joint venture between China s Xiangcai
Securities and CLSA of France, and Changjiang BNP Paribas Peregrine Securities, a
joint venture between China s Changjiang Securities and BNP Paribas Prime Peregrine
Securities. Foreign investors in both joint ventures hold a 33 percent share. Germany s
Allianz AG and France s SG Asset Management won licenses for 33 percent stakes in
ventures with Guotai Jun an Securities Co., Ltd. and Huabao Trust and Investment Co.,
Ltd., respectively.
The globalization of financial services is eliminating discrimination in
treatment between foreign and domestic financial services providers. In the post-WTO
era, China allows more access of foreign investors and financial service providers to
its domestic market. No doubt, with an increasing growth of foreign participation,
financial integration of China s securities market has been accelerated. Meanwhile,
cooperation between various regulatory agencies on the supervision of financial
limitations on National Treatment that are sometimes granted to domestic companies only. This schedule
provides a standardized list of liberalization commitments in China s financial services sector.
327 Detail of this schedule concerning China s securities industry can be obtained from the #p#分頁標題#e#
CSRC s website: http://www.csrc.gov.cn/en/jsp/detail.jsp?infoid=1062637484100&type=CMS.STD.
118
service providers and more sharing of information on their cross-border transactions
has also increased, and many bilateral and multilateral efforts are underway. 328
Regulators are seeking much broader harmonization of their securities regulations.329
On the other hand, foreign investors who are engaging in securities investment
or trade may help to establish or improve the relevant rules, especially the rule of
disclosure. Foreign investors will require China s regulatory frameworks to be
improved so as to reduce their cost of financial intermediation entering into the
markets. As we previously discussed, countries with extensive securities regulation
and strong enforcement mechanisms exhibit lower levels of cost of capital than
countries with weak legal institutions.33 0 After the accession of WTO, foreign investors
will start to exert pressures on regulators to require robust and effective regulation
which may smooth differences across markets, such as the harmonization of accounting
standards, listing requirements, qualification of financial intermediaries. China is
impossible to restrain itself just to develop domestic standards. Foreign investors will
also obtain chance to voice their views in the CSRC s rule making process.3 31 In
particular, when regulators are in the process to formulate a rule regarding some kind of
new products and services, they will naturally refer to best practice in foreign
jurisdictions.
Furthermore, China s WTO accession not only provides market access to
foreign investors, but also provides Chinese companies with more opportunities to
328 For example, the IOSCO Multilateral Memorandum of Understanding ( the MMoU ),
adopted in 2002 provides a clear benchmark for international co-operation in securities regulation.
329 For example, regionally, in the EU, there is a movement toward broader harmonization of
entire securities regulation regimes. Also, please see 3.3.3 The Impact of Financial Globalization to
Emerging Markets, at 90.
330 Firms in countries with strong disclosure and securities regulation as well as effective legal
systems display a significantly lower cost of capital. See Hail, Luzi and Leuz, Christian (2004),
International Differences in the Cost of Equity Capital: Do Legal Institutions and Securities Regulation
Matter?, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=641981
331 See 4.4.2.1 Transparency, at 121.
119
develop overseas. They will share global natural resources, spark investment, learn
from foreign companies, which will ultimately impact their transaction behavior and in
turn, take the domestic industry to a higher level. Essentially, these domestic companies #p#分頁標題#e#
have internal needs and forces to urging domestic regulations meet international
standards.
No doubt, all these will have significant impact on China s mandatory
disclosure regulations. In my view, as a matter of fact, disclosure regulations are
primary concerns of foreign investors before they inject their funds into China s stock
market. Market force will require the CSRC formulate its rules in accordance with
international standards or best practice. Only with these efforts, it may attract more and
more foreign investors to its stock market, the growth of which is important for the
development of a whole nation.
4.4.2 China s Commitments to Deepen the Rule of Law
The lack of a strong legal foundation in China often impedes a healthy
development of China s capital markets. China must spend efforts to improve its
regulatory infrastructure. In fact, WTO accession has provided China with a platform to
review its laws.332 With the aspect of securities regulation, the CSRC, as the regulator
supervising China s securities market, is also entitled a new round of fresh think about
securities regulation. These new and revised laws shall in compliance with WTO rules
and agreements.
332 Wang Guiguo, a famous WTO scholar, said that National People s Congress should amend
as many as 1,000 individual laws to comply with the WTO. See BBC Monitoring Newsfile (Febuary 14,
2003),Legal reform to feature at China's National People's Congress.
120
4.4.2.1 Transparency
The General Agreement on Trade in Services (GATS) is the first ever set of
multilateral, legal-enforceable rules covering international trade in services, including
securities market, among all WTO agreements.333 Transparency is one of the major
pillars of the legal architecture of the GATS. 334 To a large extent, transparency
enhances investors trust in the stock market.
With respect to financial services area, China s commitment of transparency
have five facets: (1) China shall make public all relevant laws, regulations and other
measures pertaining to or affecting trade in services before they are implemented or
enforced; (2) China will only enforce those laws that are published and made readily
available to other WTO Members, individuals and enterprises; (3) China shall establish
or designate an official journal dedicated to the publication of all relevant laws
pertaining to or affecting trade in services which should be made readily available to the
public; (4) After publication of laws in such a journal, China shall provide a reasonable
period for comments to be made to the appropriate authorities before such measures are
implemented; and (5) China shall establish or designate an entry point where the #p#分頁標題#e#
published laws can be obtained and requests from the public can be replied in an
authoritative way.33 5
The issue of transparency is critical important to develop China s stock market.
Traditionally, China was not accustomed to open public procedures in administrative
333 It was negotiated during the Uruguay Round and entered into force on January 1, 1995.
The GATS agreement sets out basic rules GATS broadly covering all measures affecting trade in
services , applicable to all WTO members.See Article I:1 of GATS Agreement.
334 The Most-favored-Nation (MFN) , the National Treatment and the Transparency are
considered the three major pillars of the legal architecture of the GATS.
335 See Part I of PROTOCOL ON THE ACCESSION OF THE PEOPLE'S REPUBLIC OF
CHINA. Article III of GATS provides that each Member shall publish promptly all relevant domestic
measures of general application that pertain to or affect the operation of GATS as well as international
agreements pertaining to or affecting trade in services to which the Member is a signatory.
121
affairs, including the publication of regulations or laws by government agencies. Often,
its regulations were issued without provision of advance drafts, were made effective on
the day issued, and copies of regulations were not always easy to obtain. What s more,
the ministry or agency drafting a new or revised law or regulation normally consult with
and submit drafts to other ministries and agencies in an internal way. In a better case,
they will also consult with Chinese experts and affected Chinese companies. Rarely,
they will consult with selected foreign companies. As a result, public comment was a
strange word in China s rule making process.
This phenomenon should be changed to meet WTO rules. China s government
has been in the process of developing general regulations, which, of course, will cover
the legislation work in the securities area. 3 36 Transparency initiatives have recently
been found in the CSRC s rule-making process with the adoption of a consultation
phase. For instance, regarding the joint venture rules for securities firms, the CSRC has
posted its proposal on December 12, 2001 for public comments with a deadline on
December 31, 2001. These efforts will play an integral role in the development of deep,
liquid stock markets that, in turn, attract market participants, increase efficiency, and
spur economic growth.
From another point of view, together with a more transparent rule-making
process, regulators themselves are also in a process of transparency. Chinese
economists and the government itself claim that accession to the WTO was not pursued
for the benefit of economy, but to regulate the government s behavior. For instance, the
CSRC has made efforts to improve the transparency of its listing approval committee. #p#分頁標題#e#
The CSRC has reorganized the committee in 2003, which is made up of lawyers,
accountants, fund managers and scholars, representatives of other government
(The Legislation Law) adopted in 1999 provides generally for
336
legislative bodies and administrative agencies that are drafting legislation or rules to engage in
consultations with concerned citizens or organizations.
122
departments and securities businesses, including qualified foreign institutional
investors. The names of the members that review each stock or bond issue application
will be released on the CSRC s website every time to ensure transparency. Activities
try to communicate with members outside the office will be punished.
In a sense, after WTO accession, the rule-making and operation of the CSRC
will be under a wider supervision. With greater public scrutiny and more disclosure on
the policy-making and rule-drafting process, the behavior of the CSRC will be greatly
standardized. This will ultimately improve the disclosure regulation and enforcement.
4.4.2.2 Judicial review
Judicial review is the power of courts to review decisions of another
department or level of government .3 37 The issue of judicial review is paid special
attention to in the negotiations on China s accession to the WTO. WTO rules require a
judicial review mechanism of administrative decisions and China has committed itself
to the establishment of such a mechanism in accordance with WTO rules, which
includes: (1) to establish tribunals, contact points and procedures for the prompt
review of all administrative actions relating to the implementation of laws concerning
the WTO s subject areas. Such tribunals shall be impartial and independent of the
agency entrusted with administrative enforcement and shall not have any substantial
interest in the outcome of the matter; (2) Review procedures shall include the
opportunity for appeal, without penalty, by individuals or enterprises affected by any
administrative action subject to review. If the initial right of appeal is to an
administrative body, there shall in all cases be the opportunity to choose to appeal the
decision to a judicial body. Notice of the decision on appeal shall be given to the
337 See BLACK'S LAW DICTIONARY (1991), West Publishing.
123
appellant and the reasons for such decision shall be provided in writing. The appellant
shall also be informed of any right to further appeal.3 38
Judicial review of administrative actions in China is regulated by the
(Administrative Litigation Law of the PRC).339 In essence, the judicial review
serves to supervise administrative powers, ensure that activities of the government
agencies, including the CSRC, are conducted lawfully. With this kind of checks and #p#分頁標題#e#
balances, the government agencies are expected to discipline them much better.
However, in fact, judicial review system in China has many insufficiencies: firstly,
interference from administrative officials and communist party members occurs
during the entire course of handling an administrative case. In point of fact, some
administrative officials and communist party members do not have enough legal
knowledge and respect for law. They often influence judges to decide in favor of the
party that contributes significantly to the local economy. Moreover, courts heavy
reliance on local funds creates tremendous pressure on judges. Last but not least,
judicial corruption in the China s court system is serious and is eroding confidence in
the ruling regime and threatening to undermine efforts to establish rule of law.3 40
Legal reform in this aspect will be very time consuming and difficult, as
impediments to judicial independence are rooted in social and political conditions in
China. In my opinion, judicial review will be an evolutionary process in terms of
actual acceptance in China. At the same time, WTO accession is a strong impetus to
accelerate this process and gradually introduce the norm of rule of law . For example,
in 1999, China promulgated the (Administrative Review Law), in
338 See Article VI of the GATS
339 On April 4, 1989, the National People s Congress passed the Administrative Litigation
Law. This law allows PRC citizens to sue government officials who violate the law in the course of
administrative agency activity.
340 See Zou, Keyuan (2000), Judicial Reform versus Judicial Corruption: Recent
Developments in China, 11 Criminal Law Forum 323.
124
accordance with which the interested parties can put forward the application, asking
the administrative organs of the superior level to examine the validity and propriety of
the administrative decisions made by the lower level and asking for legal remedy.341
In August 2002, China s Supreme People s Court promulgated a judicial
interpretation to require, among other things, judicial review of WTO-related
administrative actions to be based on the Administrative Litigation Law of the PRC, a
basis for judges accurate application of law.342 The Supreme People s Court also
requires the first-instance trials of all WTO-related administrative cases to be handled
by intermediate courts or courts at upper levels.34 3 Additionally, a number of Chinese
laws are amended in order to provide the opportunity of appeal as required by the
WTO laws. 3 44 These developments present an improved legal framework in
connection with judicial review.
the process of training a number of qualified judges who are both well-versed in
jurisprudence and WTO rules.#p#分頁標題#e#
There is no doubt that with an improved judiciary system, the enforcement and
implementation of securities laws and rules will also be enhanced. Securities cases are
expected to be solved in an efficient and fair way. China s accession to the WTO has
not only exposed fundamental challenges to the Chinese judiciary, but it has also
afforded abundant opportunities for structural reform.
4.4.2.3 Uniform enforcement of legal measures
The major legal challenges confronting China s WTO accession may belong to
the uniform application and enforcement of the laws. China has agreed to apply WTO
rules to the entire customs territory of China , and administer in a uniform, impartial
and reasonable manner of all its laws of both the national and the sub-national
levels. 345 As a response to this commitment, the CSRC needs spend great efforts to
ensure uniform enforcement of securities regulation nationwide.
First of all, as we all know, China has lots of overlapping or contradictory
securities rules and regulations.3 46 The uniform enforcement requirement under WTO
accession will help the CSRC further examine and identify these unclear and vague
provisions in the process of implementation and improve the quality of legislation.
Secondly, as discussed, China s stock market is traditionally involved by
political interests and local governments often try every means to protect these bad
performance local based listed companies, thus uncoordinated enforcement among
local, provincial and national authorities often happens and becomes one of the biggest
345 See PROTOCOL ON THE ACCESSION OF THE PEOPLE'S REPUBLIC OF CHINA.
346 See 6.4 THE LAWS, at 196.
126
hindrances to build a strong regime of securities regulation in China. There is no
question, however, that joining the WTO left China with no choice but to strengthen the
CSRC s power to deal with local protectionism. The CSRC shall overcome local
protectionism through encouraging fair competition, setting detail process and
requirement of disclosure and enhancing implementation of laws to fight against local
protectionism.
Thirdly, WTO rules also bring challenge to the CSRC s regulatory capacity. In
a short term, the uniform enforcement of legal measures required increased
commitment of human and monetary resources from the CSRC. In this regard, the
CSRC needs to balance its regulatory cost. However, in long run, the CSRC s
regulatory work will become more efficient after a streamlined enforcement legal
framework is built.
4.4.3 WTO Accession and Possible Impact on the SOEs
4.4.3.1 Shifting to stock market for funding
Reforming SOEs has long been a priority of China s economy; however,
substantial improvement has not yet been achieved. China s policymakers have also#p#分頁標題#e#
sought to stock market to rescue these ailing SOEs,3 47 but the result is still not very
satisfying. It is well believed that China s WTO accession is an excellent channel for
restructuring the SOEs.
From the history point, it is well known that Chinese SOEs are highly
subsidized either by direct government subsidies or indirect subsidies from state-owned
banks with preferential loans. Since the government has always subsidized inefficient
SOEs, managers of SOEs frequently misused funds which are covered by the
347 See 4.1.2 How Have Political Interests Shaped the Key Features of Stock Markets?, at 99
127
government. As long as the government continues to subsidize the inefficient SOEs,
this sort of behavior is deemed to continue, if not worsen.
Nevertheless, both types of subsidies will be substantially reduced after China s
WTO accession. Regarding direct subsidies, China has signed the Agreement on
Subsidies and Countervailing Measures (SCM),348 which leads a substantial reduction
of the state level subsidies to the SOE sector. According to article 1 of the SCM
Agreement, SOE subsides are considered specific subsidies , which are actionable
under the agreement. SCM Agreement also stipulates that subsidies to cover operating
losses sustained by an industry or the forgiveness of debts to a loss-making enterprise
are considered a serious prejudice. The Chinese governments subsidies to
loss-making SOEs are, thus, vulnerable to disputes and potential countervailing
measures by the disputing WTO members. Regarding the indirect subsidies, with
China s gradually opening up its financial service sector, a mass influx of foreign banks
will present some fierce competition for state-owned banks.34 9 State-owned banks have
to become more profit oriented, which cause substantial deduction of financial support
to SOE in the form of low interest rates, automatic rollover of interests and principals,
and preferred access to credit.
Table 10 Subsidies by Central and Local Governments to SOEs
Unit: Rmb million
Local Central Total
1990 460.87 118.01 578.88
1991 365.55 144.69 510.24
1992 290.62 154.34 444.96
348 The WTO Agreement on Subsidies and Countervailing Measures disciplines the use of
subsidies. See http://www.wto.org/english/tratop_e/scm_e/scm_e.htm for further information.
349 See Article 6.1 (b) (c) (d) of the SCM agreement.
128
1993 306.76 104.53 411.29
1994 268.29 97.93 366.22
1995 281.01 46.76 327.77
1996 280.20 57.20 337.40
1997 272.75 95.74 368.49
1998 258.81 74.69 333.50
Source: China s WTO accession documents
From this table, we get the conclusion that the trend of government subsidies
to SOEs is declining with years. Then, SOEs have to seek other sources to fund #p#分頁標題#e#
themselves. Then, the question of where and how arises.
The answer is easily found. The stock market is recognizably one of the most
important funding sources, which is especially useful to developing countries including
China.3 50 However, as a matter of fact, compared with the banking sector, China s
stock market plays low role in the economy and low level of direct financing. With the
deduction of subsidies from the government, SOEs have to quickly switch to the stock
market for direct financing. The shift is creating a corresponding development of
China s stock market. These listed SOEs have to enhance its internal management and
raise the quality of disclosure so as to attract more investors and funds. As a result, the
overall quality of information disclosure of China s stock market will be improved.
4.4.3.2 Competition from private companies and foreign firms
WTO accession brings two ways to break through SOEs monopoly in China,
either through the participation of private companies and the introduction of foreign
firms, if Most-Favored-Nation (MFN) and National Treatment (NT) principals are
well executed.
350 See World Bank (2002), World Development Report 2002,
http://econ.worldbank.org/wdr/WDR2002/text-2394/.
129
In accordance with the MFN principal, members are required to accord
immediately and unconditionally to services and service suppliers of any other member
treatment no less favorable than that it accords to like services and service supplies.
351
The objective of this provision is to ensure that a WTO member treats other members
on a non-discriminatory basis. The National Treatment principle under GATS
agreement requires that [i]n the sectors inscribed in its schedule, and subject to any
conditions and qualifications set out therein, each member shall accord to services and
service supplies of any other Member, in respect of all measures affecting the supply of
services, treatment no less favorable than that it accords to its own like services and
service suppliers. 352 This principal is intended to prevent WTO members from
denying, nullifying, or impairing GATS benefits to other Members through the use of
onerous domestic administrative measures.
It is no doubt that if these principals are well adopted by Chinese laws and
implementations, the SOEs will face the possibility to lose their monopoly status and
face increasing competition both from domestic private companies and foreign
companies. Therefore, market force with WTO accession will force them to
restructure, which is very possible to better transparency and governance of SOEs.
Finally, quality of China s listed companies will be brought to a higher level.
4.4.4 Looking Forward
In accordance with foregoing introduction, we conclude that China s entry into #p#分頁標題#e#
the WTO has provided a much-needed outside impetus for it to adopt certain
universally accepted principles such as transparency, judicial review and uniform
enforcement of laws.
351 Article II:1 of GATS Agreement.
352 Article XVII:1 of GATS Agreement.
130
As of today, it has been three years since China obtained its official membership
of WTO on December 11, 2001. During these years, the CSRC has been very active in
terms of adopting and modifying its laws and regulations to bring them not only into
conformity with WTO agreements and international standards,353 but also to promote
the protection of investors interests and the development of the securities market,
including: a market-oriented public offering review and approval system; more
rigorous corporate governance initiatives for listed companies; introduction of
compulsory independent directors in listed companies; reforms on domestic accounting
standards and information disclosure in order to enhance market transparency;
measures to improve the performance of listed companies and measures to refine the
delisting mechanism. In large extent, the CSRC s rules now reflect the most developed
thinking of established systems.
Generally speaking, China has performed well since joining the WTO. During
three years, China has actively taken measures to tackle the challenges, vigorously
promoted the rapid, steady and sustainable growth of the national economy, which, to
some extend, removes people s worries that WTO entry will bring tremendous negative
impacts on some industries. At the meantime, it has attracted wide concerns for certain
remaining old problems, such as intervention and corruption, judicial incompetence
and regulatory transparency still remains problem and so on.3 54
353 See Chapter 4 and Chapter 5.
354 The U.S. Chamber of Commerce has issued research reports in connection with China s
progress in implementing its WTO commitments since China joined the WTO in December 2001. It
published "First Steps: a U.S. Chamber Report on China's WTO Progress," in 2002 and China s WTO
Progress: A Year Two Assessment in 2003, available at
http://www.uschamber.com/NR/rdonlyres/evnh5p3t3ukxq7abv5o2d46gfqfq3o3ugobrmsdwko5z7yv6jt
4zcb66b6pnzsk6hhty6de2ecmmubfrjsyyrjsucsg/091503Asiatestimony.pdf. The report of 2004, titled
of China's WTO Implementation: A Three-Year Assessment is available at:
http://www.uschamber.com/NR/rdonlyres/ecuxciacav7qfjgcaj7kroz2zkqsp3bowuytrdu6v6zj3jrav5ewk
m5t6uoppwo7s37cxg4enfptxodrbutk2t762if/040922_intl_wto.pdf. In these reports, the Chamber
highlighted both the progress and problems of China s WTO implementation. Additionally, Professor
Potter also discusses various concerns in connection with China s implementation of WTO commitments. #p#分頁標題#e#
See Potter, Pitman B. (2003), Globalization and Economic Regulation in China:Secective Adaptation of
Globalized Norms and Practices, Washington University Global Studies Law Review 119.
131
Given the fact that starting from 2005, China will step on the post transition
period of WTO and some sensitive fields will be further open and the impacts will be
strengthened, a whole array of new issues, together with old problems have to be faced.
It is therefore necessary to make new strategic considerations on the basis of the
features of the post-transitional period and the real situations of China s securities
sector. Among which, the CSRC needs to further amend and enforce laws and
regulations, such advances in rule-making must be matched by advances in their
implementation and enforcement. The CSRC needs further transform government
functions and raise the level of administration by law and further train professionals to
be familiar with WTO rules. Meanwhile, considering the needs of attracting foreign
capital, adherence to international standards will also certainly facilitate the
development of China s stock market.
132
CHAPTER V. DISCLOSURE
PRACTICE IN CHINA
5.1 INITIAL DISCLOSURE
5.1.1 Listing Procedure
With the aim to improve the quality of listed companies and securities firms,
the CSRC has recently introduced a sponsor system in the initial public offering
(IPO) process.355 According to the new measure, if a company would like to seek
listing at the Shanghai Stock Exchange or the Shenzhen Stock Exchange, it shall
firstly engage a qualified sponsor who will perform due diligence on the promoter, the
issuer, the majority shareholder(s) and de facto controller(s).356 In a word, the sponsor
shall firstly satisfy himself that the issuer is suitable for listing. After that, the sponsor
will, on behalf of the issuer, submit the listing application to the CSRC.357 After the
355 On December 28, 2003, the CSRC released
(Provisional
Rules of Sponsor System for Securities Issuing), which took effect on February 1, 2004. The sponsor
system was also absorbed into Article 11, the revised Securities Law of the PRC, which was issued on
October 27, 2005 and take effective on January 1, 2006.
356 To qualify as a sponsor, an underwriter must have a comprehensive business license and a
business record without irregularities over the previous two years. If a sponsor fails to meet fully
disclose information during the sponsoring period they will be banned for a period of 6 to 36 months
from practicing. #p#分頁標題#e#
357 After the first release of the names of sponsors and sponsor representatives, the CSRC will
only accept IPO applications presented by these sponsors. According to this rule, securities firms
planning to act as a sponsor entity, together with the individuals who will act as the sponsor
representatives, must first register with the CSRC and have their names included in the list of sponsor
entities and sponsor representatives. Registered sponsor entities and sponsor representatives may be
deleted from the List in certain circumstances, including: revocation of business license, breach of law
and material defect in the corporate governance structure. The first list of sponsors and sponsor
representatives was announced by the CSRC on April 30, 2004, which could be obtained from the
website of the CSRC:
http://www.mythingswp7.com/dissertation_writing/Finance/http://www.csrc.gov.cn/cn/jsp/detail.jsp?infoid=1084183453100&type=CMS.STD&path=ROOT%3EC
N%3E%D0%C2%CE%C5%B5%BC%B6%C1.
133
shares have been issued, the sponsor should continue reviewing the compliance,
fulfillment, commitment and adequacy of information disclosure for a period of time.358
This new measure is originally from the practice in the U.K. and Hong Kong, whose
regulatory models have defined the sponsor role for an intermediary to act between the
issuer and the regulator.35 9
Documentation requirement for IPO is specified by
9 ---- (The Standard No.9 on
the Contents and Format of Information Disclosure Regarding Companies Issuing
Securities to the Public: Document Requirements for Initial Public Offering
Application), as revised from time to time. Major documents are the prospectus
(application version), the prospectus abstract (application version), the listing
announcement, 360 the sponsor s recommendation letter, resolutions of shareholders
meetings, articles of association, company s business license, financial and accounting
reports verified by the qualified institutions and other relevant documents.
After the listing application is received, the CSRC will examine the eligibility
of the issuer. According to (Procedures Concerning the
Reviewing and Approving of Issuing of Shares of the CSRC),3 61 the CSRC should
decide within 5 days after the receipt of the listing application documents whether or
358 The length of period hasn t been specified by the CSRC yet.
359 The requirement for a sponsor can be found in the UKLA Listing Rules or the Listing
Rules of the HKEx. Hong Kong has also developed a separate code of conduct for sponsors-
(Code of Conduct for Sponsors and Independent Financial Advisers). Recently, the HKEx has
consulted public for the sponsor measures. The response from public greatly supported the maintenance #p#分頁標題#e#
of eligible sponsors. See Hong Kong Stock Exchange (2004), Consultation Conclusions On the
Regulation of Sponsors and Independent Financial Advisers,
http://www.hkex.com.hk/consul/conclusion/Final%20CCR(E)%20(14-10-04).pdf.
360 A Listing Announcement refers to the information disclosure documents of a listed
company on matters of its listing through a designated newspaper or magazine before listing, according
to the relevant laws, regulations, decrees, policies and the rules of the stock exchanges. See Article 101,
(Procedures of Management of Stock Exchanges), issued by the CSRC on
December 12, 2001.
361 It was issued by the CSRC on March 16, 2000.
134
not to accept the application. If the application is accepted, a preliminary review by the
CSRC will follow.
The preliminary review mainly examines the legality of the issuer. The
Company Law previously required that the issuer shall meet following minimum
standards for listing: (1) minimum operating history requirement: an issuer to offer
shares in China s stock markets should have at least 3 years operating history. If the
company has been converted from an SOE or the company has been reorganized and
established after the effective date of the Company Law with a large-or medium-sized
SOE as its major promoter, its operating history may be calculated continuously. (2)
minimum profits requirement: issuers are required to have profits in the previous three
years when they go listing. (3) minimum capital requirements: the minimum capital
requirements is at least RMB50 million. (4) minimum shares public float threshold:
The public float of shares must be at least 25% of a company s total shares and 15% for
companies with over RMB400 million shares capital. (5) minimum shareholder spread
requirement: The issuer should have at least 1,000 shareholders and each with the
shares value in excess of RMB1, 000. (6) In recent three years, there is no severe breach
of laws and regulations and no misrepresentation in the financial documents. Items to
examine the legality of an issuer is quite similar to other jurisdictions, but with a
favorable treatment to these SOEs. These standards have been recently revised by the
revised Company Law of the PRC and the revised Securities Law of the PRC. The
revised Company Law deletes the strict conditions (mainly, an equity capital of RMB
50 million, over three year s operating history and profit-making history for three
consecutive years) for the listing of a company s stocks on the stock exchanges and
stipulates that the listing and trading of a company s stocks on the stock exchanges
shall be in accordance with relevant laws, (primarily the revised Securities Law of the
PRC, as mentioned immediately below, which establishes less burdensome listing
135
criteria), regulations and the listing rules of stock exchanges.362 The revised Securities
Law of the PRC also lowers the capital requirement for listing of stocks from RMB 50
million to RMB 30 million and removes such restrictions as having more than three
year s operation history, profit-making history for three consecutive years and having
more than one thousand shareholders respectively holding more than RMB 1000 face
value shares. The listing standards have been lowered and provisions favoring SOEs
have been removed.
Within 30 days after the application is submitted, the CSRC should inform the
issuer and its sponsor of the result of the preliminary review. The issuer and its sponsor
should then respond within 10 days to such preliminary comments. Following the
completion of the preliminary review, application documents are submitted to the
Listing Review Committee of the CSRC,3 63 who should then vote to approve or
disapprove the listing application.3 64 As we mentioned before, China has adopted
merit-based disclosure system since the establishment of the stock markets, so during
the review process, Chinese regulators will also judge the merit of listing application.
For example, in some cases, the CSRC may consult with the State Economic and Trade
Commission (the SETC) on whether the applicant has complied with the national
industrial policy. Also, during the entirely review process, if deemed necessary, the
CSRC has the rights to retain a qualified accounting firm to conduct a special review on
financial documents presented by the applicant. In case that the application is not
362 Article 154, the Company Law of the PRC, as amended.
363 The Listing Review Committee has twenty-five members, five of whom are experts from
the CSRC and 20 invited experts from outside the CSRC. The Committee uses a voting mechanism to
decide whether a company should go public. See (Provisional
Measures of the Listing Review Committee), issued by the CSRC on December 5, 2003. Information of
current members in the Listing Review Committee of the CSRC is available from the website:
http://www.csrc.gov.cn/cn/jsp/detail.jsp?infoid=1072340460100&type=CMS.STD&path=ROOT%3EC
N%3E%D0%C2%CE%C5%B5%BC%B6%C1.
364 See
16 -
(Memo on Reviewing IPO Application No.16 (Newly Revised)-Special Review Required
for Issuers, issued by the CSRC on December 16, 2003.
136
approved, the issuer may appeal to the CSRC within 60 days after the receipt of the
CSRC s decision and the CSRC should make its response within 60 days after the
receipt of the appeal.
Once the approval of the CSRC is obtained, the issuer can submit its application
to the stock exchange for listing, together with relevant documents3 65 in accordance #p#分頁標題#e#
with the listing rules of the Shanghai Stock Exchange or the Shenzhen Stock Exchange.
All these documents must be truthful, accurate and complete .366 The issuer and the
stock exchange sign the listing agreement, decide the date for listing and then publish
the listing announcement.
5.1.2 Regulation of Initial Disclosure
Under China laws and rules, prospectus, prospectus abstract and a listing
announcement are basic documents in the IPO.
Like many other jurisdictions, the prospectus plays a central role for investors
to assess the issuer and its share in issue. Regulators from all over the world seek to
ensure that the prospectus contains material information on which investors can make
their investment decisions. The detail disclosure requirements are available from the
CSRC s rules, not from the national laws. Specified contents are regulated in the 1993
365 According to Article 3.1.3 of the Listing Rules of the Shanghai Stock Exchange (revised
on November 29,2004) and Article 3.1.3 of the Listing Rules of the Shenzhen Stock Exchange (revised
on November 29, 2004), these documents include: (1) Listing Application; (2) Documents from the
CSRC approving its share issue and files of issuing and listing; (3) Recommendation letter from a
sponsor; (4) Financial accounting materials of the issuer verified by a legal verification accounting firm
(including certification of the transferring of the tangible assets to the issuer); (5) Newly added financial
materials as required following the issuing of the shares; (6) All previous resolutions of shareholders
meetings; (7) A photocopy of the business license after the establishment or restructure of the issuer; (8)
Listing announcement; (9) Personal particulars of the secretary of the board of directors who will be or
has been employed by the issuer; (10) Reports regarding the shareholdings of the company directors,
supervisors and senior management of the company; (11) A circular determining the listing abbreviation
of the company shares; (12) Documentation showing the custody of all the company shares; and (13)
Other documents required by the Stock Exchange.
366 See Article 63, the Securities Law of the PRC, as amended; Article 3.1.4, the Listing Rules
of the Shanghai Stock Exchange and Article 3.1.4, the Listing Rules of the Shenzhen Stock Exchange.
137
(Implementary Rules
Interim Regulation367 ,
regarding Information Disclosure of Companies Issuing Securities to the Public)(1993
Implementary Rules)3 68 and in particular,
1 (The Standard No.1 on the Contents and Format of
Information Disclosure regarding Companies Issuing Securities to the Public: the
Prospectus), revised from time to time.
Contents of a prospectus are very broad such as issuer s business, history, #p#分頁標題#e#
investment risk, information related to the offering, information of issuer s
management, underwriters, financial and accounting information, litigation, how the
proceeds from the offering will be used and the issuer s development plan and so on.
After the prospectus has been reviewed and approved by the CSRC, the issuer must
disclose the information contained in the prospectus and the prospectus abstract within
2-5 days prior to the issuing period.
In recent years, the CSRC has adopted certain measures to enhance initial
public disclosure in the prospectus: Firstly, the CSRC has emphasized the disclosure
shall be based on a reasonable investor test , requiring disclosing all material
information that has substantial impact on investor s decision making.369 Secondly, the
CSRC imposes stricter disclosure requirements of risk factors as market risks,
operation risks, management risks, financial risks and technology risks. If certain
factors may have material adverse impact on an issuer s business, it shall state such
special risk factor on the front page of the prospectus and describe details in the Risk
Factor section. Thirdly, given widely false disclosure between related parties in
367 Article 15, 19 of the 1993 Interim Regulation.
368 It was issued by the CSRC on June 10, 1993. See article 6-8 of this rule.
369 Article 3, The Standard No.1 on the Contents and Format of Information Disclosure
regarding Companies Issuing Securities to the Public: the Prospectus.
138
China s stock market, 37 0 the CSRC newly required a justified opinion from
independent director and supervisory board. Fourthly, following the model set by the
U.S. Sarbanes Oxley Act, the CSRC newly required the Board directors make
guarantee that they have disclosed true, accurate and complete information.
The prospectus abstract is newly required under the CSRC rules,371 which
typically includes a description of the issuer s business; an overview of the offering;
and financial data. To prepare a prospectus abstract, the CSRC firstly requires the
conciseness which means the prospectus abstract does not need to include all parts of
the major contents of the prospectus, instead just give a brief introduction of the
offering; Secondly, the plain words requirement, which means the prospectus abstract
should avoid using professional and technical words which are not familiar to investors,
and should adopt graphs or other straightforward methods in pursuit of brief, simple,
plain and clear disclosure; Thirdly, the consistency requirement, which means the
prospectus abstract should be consistent with the contents of the prospectus and be
strictly loyal to the prospectus. The prospectus abstract should be published on the
newspapers and magazines designated by the CSRC, and which should be no more than #p#分頁標題#e#
one page. Without doubt, these requirements are consistent with mandatory disclosure
standards.37 2
The requirement for a prospectus abstract is similar to the practicing of the
U.K. and Germany. However, the SEC doesn t think the necessary for a separate
summary documentation. Instead, it required a summary section in the prospectus with
three components: business summary, offering summary and summary of financial 370 Please refer to 5.3 DISCLOSURE OF TRANSACTIONS WITH RELATED PARTIES,
at 154 for further discussion.
留學生畢業dissertation371 See article 13 of the Standard No.1 on the Contents and Format of Information Disclosure
regarding Companies Issuing Securities to the Public: the Prospectus, which specified the requirements
for formulation and disclosure of the prospectus abstract.
372 See CHAPTER III MANDATORY DISCLOSURE REGULATION, at 46.
