Chinese Securities Enforcement and Investor Protection

Chinese securities enforcement has undergone significant reform since the 2015 stock market crash and the 2019 revision of the Securities Law. The China Securities Regulatory Commission (CSRC) has been granted enhanced enforcement powers, and private securities litigation has been facilitated through the class action mechanism. The Kangmei Pharmaceutical case represents the largest securities fraud enforcement in Chinese history.

CSRC Enforcement Powers

The 2019 Securities Law substantially expanded the CSRC’s enforcement powers. The CSRC may now: conduct investigations without prior notice (dawn raids); require persons to appear for questioning; freeze assets up to RMB 500 million; suspend trading of securities; and impose administrative penalties up to RMB 20 million for illegal conduct.

The CSRC’s enforcement authority extends to: market participants (listed companies, securities firms, investment funds); market activities (issuance, trading, M&A); and market conduct (fraud, manipulation, insider trading). The CSRC operates through regional bureaus and specialized enforcement divisions.

Administrative Penalties

The 2019 Securities Law increased administrative penalties substantially. Maximum fines for fraudulent issuance increased from RMB 6 million to RMB 20 million. Maximum fines for insider trading increased from RMB 5 million to RMB 20 million. Maximum fines for market manipulation increased from RMB 3 million to RMB 10 million. Penalties for false disclosures by listed companies increased to RMB 10 million.

The CSRC imposes penalties through administrative decisions that may be appealed to the courts. The CSRC publishes enforcement decisions on its website, creating a deterrent effect. The 2019 Law also introduced a disgorgement mechanism, requiring violators to surrender illegal gains in addition to paying fines.

Market Access Ban

The 2019 Securities Law introduced the market access ban (shichang jinru jinling), which prohibits persons who have committed serious securities violations from serving as directors, supervisors, or senior managers of listed companies or securities firms. The ban may last from six months to ten years, or permanently for particularly serious violations.

The market access ban is a significant enforcement tool because it affects the careers of corporate executives. The CSRC has applied the ban in numerous cases, targeting executives involved in fraudulent financial reporting, insider trading, and market manipulation.

Criminal Liability

Securities crimes are punishable under the Criminal Law. The 2019 Securities Law and the 2020 Criminal Law amendment increased penalties for: fraudulent IPO (up to 10 years imprisonment); insider trading (up to 10 years); market manipulation (up to 10 years); and false disclosure (up to 5 years).

Criminal prosecution for securities violations requires referral by the CSRC to the public security authorities. The number of criminal securities prosecutions has increased in recent years, particularly for insider trading and market manipulation cases involving high-profile individuals.

Private Securities Litigation

Private securities litigation has been facilitated by the SPC’s Provisions on Securities Class Actions (2020), which established the representative action (daibiao susong) mechanism for securities fraud cases. The mechanism allows investors to sue collectively for damages arising from false disclosure, insider trading, or market manipulation.

The representative action is initiated by an investor or group of investors and may be joined by other investors through an opt-out procedure (investors are automatically included unless they opt out). The court may appoint a public interest organization (such as the China Securities Investor Service Center) as the representative. The SPC has encouraged the use of representative actions for securities fraud cases.

Kangmei Pharmaceutical Case

The Kangmei Pharmaceutical case (2021) was the largest securities fraud enforcement in Chinese history. Kangmei Pharmaceutical was found to have engaged in systematic financial fraud over multiple years, including: fictitious transactions; inflated revenue and profit; misappropriation of funds; and false disclosure. The fraud involved over RMB 89 billion in fabricated transactions.

The CSRC imposed penalties totaling RMB 5.9 billion on Kangmei and related parties. The company was fined RMB 600,000 (the maximum under the previous Securities Law); the former chairman was fined RMB 900,000 and given a lifetime market ban; and other executives received fines and bans. The court in the private securities class action ordered Kangmei to pay RMB 2.4 billion in damages to investors.

The Kangmei case had significant repercussions: it led to the resignation of the CSRC’s enforcement director; prompted reforms of auditing and accounting standards; increased scrutiny of listed company financial reporting; and demonstrated the capacity and willingness of Chinese authorities to pursue large-scale securities fraud.