chapter
8 Pages

Introduction

The Chinese securities market has gained significant developments in the last few years. Information disclosure, as one of the central issues in the securities market, has been established gradually. It directly influences the trading price of securities and subsequently imposes an impact on the distribution of profits. At the same time, it is also one of the principal approaches for the effective regulation and supervision of the securities market. Moreover, the global financial market is in the forefront of evolution. Whilst the creation and application of complex financial products and new technology are more frequent, the occurrence of cross border financial activity is increasing. Many financial crimes, such as insider dealing and market manipulation, are related to the failure to disclose information. Much has been said, much has been written and much has been researched regarding transparency and disclosure in the recent financial crisis, all of these comments suggest an enhanced regulatory regime for information disclosure. China’s securities market has been established and remarkably improved in a relatively short period since the economic reforms. However, the Chinese securities market still remains at an early stage with a supervisory mechanism on information disclosure which needs to be further enhanced. The securities market in China has been affected by malpractices of violation of the information disclosure regulations. Many incidents, such as the Guangxia (Yinchuan) Industrial Co., Ltd case and the Zhejiang Hangxiao Steel Structure Co., Ltd case have caused significantly negative impacts on the market.1 Facing the challenges internationally and nationally, the quality of information disclosure and its regulatory structure need to be improved. Therefore, the study of the nature and effectiveness of the information disclosure regime will have both theoretical and practical resonance for China. This book, taking the information disclosure regime as an example, examines the development of the Chinese securities market, transparency of the securities market, and the legislative techniques of information disclosure. Since the establishment of the Chinese securities market, the introduction of best practices into the domestic market has been sought. This book conducts a comparative study between Mainland China, the United Kingdom and the Hong Kong Special Administrative Region (SAR).2 To examine the regulatory

approaches in the developed markets and find suitable models for China this book seeks to further improve the structure of the Chinese regulatory framework. Relatively comprehensive information disclosure regimes have been established in the mature markets. Although some scandals happened in the UK, the legal control of corporate disclosure can still be seen as one of the effective models in the world. Hong Kong, as one of the major financial centres in the world, is well-known for its sophisticated financial regulatory environment. Also, as the ‘gateway’ for inward and outward investments in China, Hong Kong has significant interaction with Mainland China. There were 148 Mainland companies listed on the Hong Kong stock exchanges (Main Board) at the end of April 2013.3 Moreover, the dual listing has enabled a number of Hong Kong listed companies to announce their intention to raise funds via the Chinese markets. One explanation for the lack of effective control may be the inadequacy of international cooperation. Facing the challenges from the global financial crisis, it is important for China to adopt disclosure requirements in line with international standards. Primarily, this book focuses on the study of legislation. Regulating the securities market is a complex issue; therefore, the study is based on detailed discussion and analysis of the law, regulation and rules. It must be accepted that the Chinese securities market is undergoing continuing reform. Hence, the regulating system for corporate disclosure is improving constantly. In this book, only the most important and relevant legal documents have been chosen for examination. The following laws and regulations, particularly with special regard to information disclosure, form part of the examples discussed in this book: relevant parts of Chinese Company Law, Securities Law, General Principle of Civil Law and Criminal Law; from the UK perspective, Companies Act 2006, Financial Services and Markets Act 2000, Financial Services Authority (FSA) Regulatory Handbook, Financial Conduct Authority (FCA) Regulatory Handbook; from the Hong Kong jurisdiction Company Ordinance, Securities and Futures Ordinance, Securities and Future Commission (SFC) Regulatory Handbook. Another important aspect is the international public law and ‘soft’ law, such as the international and regional treaties and agreements, for instance: International Organization of Securities Commissions (IOSCO) documents; International Financial Reporting Standard; Organization for Economic Cooperation and Development (OECD) Principles of Corporate Governance; United Nations Conference on Trade and Development (UNCTAD) International Standards of Accounting and Reporting. Case study is an essential approach in this research. Civil litigation arising from false or misleading statements made by Chinese listed companies on the securities market has affected a large number of shareholders and investors. A series of cases have been analysed with the aim of finding how to improve the regulation of information disclosure and thereby reduce market malpractice. This book includes typical cases which have had tremendous impacts on the secu rities market, for instance: Guangxia (Yinchuan) Industrial Co., Ltd case, Zhejiang Hangxiao Steel Structure Co., Ltd case and Securities & Futures Commission v Cheung, Yeung,

Li, Chan and Styland Holdings.4 On the basis of the examination and discussion on these cases, further possible improvements have been suggested. Due to the comparative approach of this book, the sources are both Chinese and English. As for the discussion about China, the materials are mainly in Chinese, including books, articles, news reports, newspapers and commentaries from Chinese officials, scholars and practitioners. Furthermore, the websites of the regulatory bodies, stock exchanges and listed companies have provided essential contents. English sources are important components. In particular, the arguments of Chinese and western scholars have been analysed. The literature in English is the source for the UK and Hong Kong perspectives, and at the international or EU level. Data collected through field work in Mainland China, UK and Hong Kong has been included in the book. I have interviewed government officials, financial regulators, legal scholars, practitioners and the senior management of listed companies. Furthermore, my own working experience in Mainland China, UK and Hong Kong enabled me to re-think and re-examine the topic from a more practical approach. Libraries in China, UK and Hong Kong were visited in order to collect data and information from relevant materials. The libraries of the School of Oriental and African Studies (University of London), Institute of Advanced Legal Studies (University of London) and University of Hong Kong were particularly helpful. Lastly, personal visits to the stock exchanges and securities companies in Mainland China and Hong Kong enabled me to understand the securities markets on a new level. Moreover, some of the English translations of Chinese law are referenced from bilingual websites.5 Discussion and analysis of the law and regulations, and their inclusion in this book, is mainly addressed in chronological order. The current situation can be seen as tightly linked to problems in the past; therefore, conducting an investigation into the past regulatory regime may help to examine present issues. Based on the study of the emerging stage, earlier regulatory phases, the current situation of the disclosure regime has been analysed in sequence. However, while the key focus of this book is financial regulation, less attention has been given to theoretical issues. Notably, the information disclosure regime itself contains vast detailed legal requirements. The process is mainly being illustrated in a mode which combines the concepts, overview, theory review, problem investigation, factor analysis, consequence exploration and comparative study. More particularly this book is not only focusing on the disclosure requirements, but observes the regime as a whole. Systemically, it examines the theoretical and practical issues, listed companies and stock exchanges, securities companies, financial intermediaries, financial regulators and investor protection regarding information disclosure. Being one of the world’s fastest and largest growing economies, China obviously deserves great attention. However, the risks and challenges faced by the Chinese economy, and particularly for the purpose of this book, the Chinese securities market, cannot be overlooked. A rising China will find the

environment more resistant if she is not able to discover and subsequently correct the existing and potential problems ahead. The global market is putting more stress on the financial and economic aspects of the Chinese financial system regardless of their political backgrounds; for instance, the appreciation of the Chinese currency, the degree that the securities market is being opened up and the extent of the foreign exchange control. The pressure is inhibiting global economic recovery after the economic crisis, as well as the healthy growth of the Chinese securities market. As for the problems of the information disclosure system, existing literature has examined the conflicts of the fast growing economic phenomenon and obstacles inside China from several different perspectives, for instance, motivation, firm performance, share structure and corporate governance. But more often, the literature is restricted to the corporate level and ignores the overall influences of the historic background, legal framework, financial intermediaries, financial regulator and investor education as a whole; in particular, under a globalized and cross-border business environment. The Chinese securities market is complicated by the high degree of socio-political and socio-economic pressure. Therefore, this book tries to look at the securities markets by means of a systemic study. This book will address the issue from the following aspects:

1 The reliability of disclosure, historical problems and the current situation 2 The dissemination of financial information by companies 3 The processing of information by financial intermediaries 4 The overseeing of the disclosure regime by the financial regulators 5 What are the consequences of information asymmetry, and in particular,

how can investor protection be improved? 6 The effectiveness of the laws and regulations concerning disclosure in the

light of promoting a modern securities market

The theory and practice What are the basic theories in the aspect of information disclosure? To examine the questions addressed in this book, an understanding of the various methodological mechanisms historically and currently employed in the research of the information disclosure regime is needed. The hypotheses and methods provided by the earlier researchers are particularly helpful. Furthermore, to what extent do these hypotheses and theories apply to the Chinese securities market? What are the real reasons for the problems inside the Chinese securities market? An extra question arising is, what is the contribution of these hypotheses and theories to the development of the Chinese securities market? To address the above issues in this book, the past and present structure of the information disclosure regime in China has been examined. First of all the definition of information disclosure is examined. Relevant theories are introduced from both an international and national level; for instance, the information

asymmetry, and Efficient Market Hypothesis. Moreover, based on the literature reviewed, the actuality of the Chinese information disclosure regime has been analysed. Following this the regulatory regime in the UK, Hong Kong and some selected international standards are discussed.