China is drastically intensifying a crackdown on financial fraud in the capital market to ensure its high-quality development, according to the latest circular drafted by six government agencies, including the China Securities Regulatory Commission (CSRC), the Ministry of Public Security (MPS) and the People's Bank of China (PBOC). The government guideline, which includes 17 concrete measures, called for a strict crackdown on financial fraud in accordance with the law, the strengthening of supervision, and improving the quality and efficiency of law enforcement and judicial work.
The CSRC plans to drastically raise the punishment cap for violations in information disclosure from CNY600,000 to CNY10 million for companies, and from CNY300,000 to CNY5 million for individuals. The upper limit of punishment for IPO frauds is to be raised from 5% of the raised funds to 100%. Observers said the release of the circular is a “turning point” for the supervision of the capital market and introduced penalties far tougher than current ones. “Although there had been various safeguards and regulations in place before, the severity of punishment lacks enough deterrence, leading to the emergence of illegal behavior,” Xi Junyang, Professor at the Shanghai University of Finance and Economics, told the Global Times. “The new regulation significantly increased the costs of crimes.” This is extremely positive news for the capital market as it reiterated the principle of a capital market governed by rules, Xi said. He added that the move will lead to better investor protection. “Without these rules, the capital market cannot retain its attractiveness to investors, especially individual and small investors who are often at the disadvantageous end of the market.” Severe punishment will be imposed for IPO fraud, false information disclosure, embezzlement of raised capital, and evasion of financial obligations, according to the circular.
Both culprits and accomplices will be held accountable, and those responsible for counterfeiting and cooperating with counterfeiting, including third-party organizations such as intermediaries and financial institutions, will be prosecuted by law enforcement, according to the circular. The fabrication of false financial statements by professional criminal gangs should be resolutely smashed, the circular said. To ensure a comprehensive crackdown, encouraging whistleblowers and the coordination with criminal prosecution agencies, as well as between the central and local governments will be improved, according to the circular.
The CSRC recently handed out a combined penalty of CNY68.3 million to three listed firms over financial misstatement and embezzlement by major shareholders. Another two listed firms will be fined a combined CNY52.7 million. In May, the CSRC fined Evergrande Group CNY4.175 billion for fraudulent bond issuance and information disclosure violations, while imposing a lifetime ban on Hui Ka Yan, also known as Xu Jiayin, the founder of the real estate developer, from the securities market together with a fine of CNY47 million, the Global Times reports.
The South China Morning Post adds that China plans to cap the annual salaries of financial workers at around CNY3 million to eradicate extravagance and narrow the wealth gap. The limit will be applied to all state-backed brokerages, mutual fund firms and banks, except financial institutions backed by private investors, sources said, adding that the information is not meant to be made public. The measure will be applied retroactively, meaning those who earned more than CNY3 million over the past few years will probably have to return the surplus to their companies. The move is the latest in a series of steps in President Xi Jinping’s initiative of common prosperity. The financial industry, which is seen as elite in China, has come in the cross hairs of top policymakers since a young trader at China International Capital Corp (CICC) in 2022 flaunted his salary on social media, drawing the ire of the public. This was swiftly followed by investigations into corruption cases involving senior regulators and executives.
“The financial industry hasn’t done much to contribute to the real economy in recent years and the industry’s image isn’t that good among the public,” said Dai Ming, Fund Manager at Huichen Asset Management in Shanghai. The pay cap may also have something to do with the fiscal stress facing the government, which is seeking to diversify revenue sources amid a decline in tax collections and land sales, Dai added. Some Chinese listed companies said last month that they may have to make tax payments dating back three decades ago, with the State Administration of Taxation subsequently denying that it was taking retroactive action. Some big financial companies, including top mutual-fund firms, have stepped up scrutiny of expense reimbursements as these are used as a covert form of salary payments to circumvent regulatory oversight, according to one source. Some big brokerages have already worked out measures to implement the salary cap, while the rest have no plans in place yet, said another source.
While President Xi has stressed the significance of the financial industry, which he wants to build into a global powerhouse, the sector has come under increased regulatory surveillance in recent years as part of the Communist Party’s anti-corruption drive. More than 30 officials from the industry have been placed under investigation this year, with the Director of the Jiangsu Provincial Branch of the stock market regulator being the latest. In 2023, at least 101 officials were investigated, including Liu Liange, former Chairman of Bank of China (BOC), and Li Xiaopeng, former Chairman of China Everbright Group.
Apart from the government crackdown, the shrinking profitability of the financial industry, which has been battered by a three-year bear market and a slumping property market, has also prompted companies to tighten their budgets and refrain from doling out hefty pay increases and bonuses, the South China Morning Post reports.
