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The Securities Law of the People's Republic of China: An Overview

Roman Tomasic* and Jian Fu**

The first Securities Law of the People's Republic of China came into effect on 1 July 1999.
After over six years of debate, the PRC at last has in place a detailed Securities Law which
seeks to create greater uniformity in the rapidly expanding securities market in China. The
12 Chapters and 214 Articles of this law demonstrate a commitment upon the part of
China's government to move closer to the adoption of a national securities law regime
which is both suited to Chinese conditions and which draws upon ideas from a range of
foreign sources. The law supplements an extensive body of existing securities market
rules and regulations which emerged over the last decade. While the new law is not without its blemishes, it reflects a genuine commitment to move closer to a rule of law approach to securities market regulation in the People's Republic of China. This article critically examines some of the key features of this law.
Introduction1
The new Securities Law of the People's Republic of China was enacted at the end of December 1998 and came into effect on 1 July 1999. This is the first national law of its kind to
be passed by the PRC and as such is of considerable importance in the development of a
market economy in China. Interestingly, this law has been enacted almost a decade after
the establishment of China's first stock exchange, the Shanghai Stock Exchange (established in 1990). There have however been numerous securities rules and regulations
which have filled the gap created by the absence of a single securities statute during this
intervening period. The Securities Law supplements the 1993 Company Law and will itself
be supplemented by a forthcoming investment fund law.2
About 850 companies are listed on the two stock exchanges in Shanghai and Shenzhen;
these companies have a market capitalisation of over US $240 billion (or 2 trillion yuan).3
China has some 37 million investors holding listed company shares.4 Also, China currently
has over 8000 joint-stock (or public) companies.5
The ongoing Asian financial crisis has no doubt hastened the process of law making in relation to this long debated area of law reform in China. The first draft of this law appeared
in 1992 and was discussed officially in 1993. Further debate on the terms of the law and
the convening of numerous meetings to resolve a number of outstanding issues have
slowed the process of reform which came to a head in 1998. No doubt the process of reform was hastened by the strong political support for change which came from the new
Premier of China, Mr Zhu Rongji,6 as well as from the former Premier and current chair-

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man of the National People's Congress, Mr Li Peng.7 The development and growth of securities exchanges and securities market activity in China has also hastened the need for
the imposition of greater uniformity on the regulation of securities.8
At the same time, there have been repeated calls from senior PRC officials for a movement to the adoption of a system which accords with some rule of law ideas, albeit one
with "Chinese characteristics". Thus, Li Peng recently said that: "[a]n important fundamental strategy for administration is to rule the country by law. The people's will and the
[party's] will should be written into law through legal procedures for all the organisations in
the country, including the [party] itself, to observe." While this is more akin to rule by law
than rule of law, Mr Li went on to say that where there has been an abuse of power, such "
... cases will be dealt with according to law. Everybody is equal before the law ... there is
no exception given to anybody. Everyone, leaders, naturally included, shall obey the law".9
However, like Lee Kuan Yew in Singapore,10 this does not mean that China will uncritically adopt Western approaches to the implementation of rule of law ideas; law and legal
institutions are likely to be used primarily as an instrument or mechanism for the creation
of social order rather than primarily as devices for the protection of individual rights. As the
late paramount leader Deng Xiaoping argued, China will ensure that its economic and legal processes comply with the ideal of "socialism with Chinese characteristics".11
This is largely in keeping with the patriarchalism which characterises other Asian legal
systems, such as those in Japan, Hong Kong and Singapore.12 In any event, the new Securities Law, according to one of its principal architects, Peking University academic, Professor Li Yining, has been written in such a way as to suit the particular conditions in
China.13 However, as NPC Chairman Li Peng reportedly said on a tour of Shenzhen in
November 1998, there was a need for greater control of the securities market in China due
to the volatility of such markets.14
Senior securities law regulators in China have also called for the movement towards the
adoption of a rule of law approach to the regulations of the securities industry.15 However,
in recent years there has been a debate between Chinese legal scholars regarding the
degree to which regulatory authorities operate legally in China.16 The new Securities Law
has sought to allay some of these concerns and to place the China Securities Regulatory
Commission onto a firmer legal footing.
This article was originally based on the translation of the Securities Law by Jian Fu, one of
the authors of this article. An official translation of the Law has now become available and
is drawn upon here. The new Securities Law is sufficiently different from the draft Securities Law which was discussed in an earlier article to warrant separate treatment.17 The
new law is however often expressed in fairly general terms, in keeping with the Civil Law
drafting tradition found in the PRC. This will mean that more detailed provisions will need
to be developed to clarify uncertainties or to fill gaps. Nevertheless, it should be said that
the present discussion cannot deal with all of the 214 Articles of this law. Instead, a few
key areas will be explored. These are as follows:
(i)
(ii)
(iii)

the aims and principles underlying the Securities Law;

the ambit of the law and the definition of securities;
the China Securities Regulatory Commission (CSRC);

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(iv) the share trading provisions;

(v) the role of the stock exchanges;
(vi)
the role and control of securities companies; and
(vii) the provisions regarding securities misconduct.
A fuller treatment of the new legislation must be left to the writers of legal text books.

Aims and principles of the PRC Securities Law

Chinese legislation often opens with a statement of general principles and aims. Such a
statement can be found in Ch I of the Securities Law. In some ways this might be compared with principles found in other securities laws.18 The statement setting out the aims of
this law is to be found in Art 1 of the Securities Law, which is as follows:
Article 1:
This Law is enacted in order to standardize the issuing and
trading of securities, protect the lawful rights and interests of investors, safeguard the economic order and public interests of society and promote the development of the socialist market economy.
This provision resembles Art 1 of the PRC Company Law which was passed five years
earlier, namely on 29 December 1993. There are other parallels and links between the
new Securities Law and the Company Law.
Clearly, a major concern of those drafting the Securities Law was the standardisation of
securities trading and thereby the imposition of a national system of regulation. In recent
years there had been dangers that a number of different securities market regimes would
emerge with the proliferation of stock exchanges and the demands from local and provincial authorities for their own securities exchanges. Central government authorities have
instead assumed greater responsibilities and as a result the securities market powers of
local authorities in Shanghai, Shenzhen and elsewhere have been limited.
The legislation has a strong investor protection and legal rights orientation. This has become essential in view of a number of securities market frauds which have occurred in
China in recent years.19 These frauds have been of special concern in China due to the
fact that investors have not fully appreciated that losses as well as gains may be incurred
in securities trading. Where significant losses have been incurred by investors, this has
been seen to have the potential to create social unrest.20
An almost obligatory element found in recent Chinese legislation has been the further requirement that the law is intended to promote the development of a so-called "socialist
market economy" in China. Other principles or objectives of the Securities Law are to be
found in Arts 3 and 4 of the law which provide as follows:
Article 3:
Securities shall be issued and traded in line with the principles of
openness, fairness and equitability.

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Article 4:
The parties involved in the issuing and trading of securities shall
have equal legal status and adhere to the principles of voluntariness, compensation and good faith.
These two articles provide for the application of the principles of legal equality, voluntariness, compensation and bona fides in share issues and in share trading. These values are
of course ones that most legal systems would seek to reflect, although how these values
will be applied in practice is not always clear. Presumably, the PRC securities regulator will
seek to ensure compliance with these values in its role as market regulator.21 Apart from
this broad regulatory oversight, it is necessary to look to more specific provisions elsewhere in the Securities Law. However, apart from the inherent vagueness and the unwieldy nature of these principles, some are inherently uncertain, such as the principle of
"good faith" which appears in Art 4.
Unstated in Ch 1 is what might be called the "nationality" principle. Thus we find in Art 138
that before a securities company can open an account for a client wishing to trade in securities in China, the client must be a Chinese citizen or be a Chinese legal person. This policy is furthered by the division of shares into different classes, A shares, B shares and H
shares. A shares can only be traded by Chinese citizens; while B shares are to be sold to
purchasers outside China and are priced in US dollar amounts. In contrast, H shares are
issued for the purposes of foreign capital raising in Hong Kong. While B shares are technically reserved for foreigners, the bulk of trading in these shares is undertaken by local
Chinese citizens.22
Article 213 states that "... [s]pecific measures in respect of shares of companies in China
which are to be subscribed and traded in foreign currencies by persons and organizations
outside of China shall be formulated separately by the State Council". In the meantime,
foreigners will continue to be excluded from the purchase of A shares. This is because the
A shares market is still considered to be too fragile to be opened up to foreign investors.23
More pointedly, the restriction placed on foreigners being able to trade in the A shares
market seems to be motivated by a fear of international speculative trading of the kind
sometimes associated in Asia with funds managers such as George Soros.24
As Qiao Xiaoyang, the vice-chairman of the Legislative Affairs Commission of the Standing
Committee of the NPC noted, the restriction on foreigners trading in A shares is aimed at
"sheltering the stock market from foreign speculative capital raids".25 A complicating factor
here is that Chinese law makers seem to have linked the issue of opening up A shares to
foreigners to a move to the full convertibility of PRC currency,26 something which China is
seeking to avoid for the moment.27 Since 1991, the equivalent of almost US$57 billion was
raised through the issue of A shares; US$4.66 billion was raised through the issue of B
shares and US$10.08 billion was raised through the issue of H shares in Hong Kong.28
However, the B share market has fluctuated greatly and has been subject to thin trading.29
Trading on the A share market has also been lacklustre. In late January 1999, for example,
it was also reported that the Shanghai securities market had fallen by 21%, while the
Shenzhen stock market had fallen by 31%.30 Weak markets for both A shares and B
shares have led to a slowdown in the listing of new companies as a result of the failure of
central authorities to approve additional listings under the quota system that exists for this

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purpose. This has been attributed to the oversupply of state owned enterprises seeking
new capital from the market.31 In this context it may however be noted that Art 44 of the
Securities Law provides that "[t]he state encourages the listing of company shares which is
in compliance with the industrial policy and requirements for listing".

Securities and the PRC four pillars policy

One surprising omission from the new Securities Law is a clear definition of the subject
matter of regulation, namely, the term "securities". An earlier draft of this law did contain
such a basic definition, but even this has been removed so that now only Art 2 of the Securities Law provides an idea of the scope of the area to be regulated. The approach
adopted to the classification of securities has been constrained by the conception of securities found in the 1994 PRC Companies Law. Article 2 of the Securities Law is as follows:
This Law is applicable to the issuing and trading in China of shares, corporate
bonds and such other securities as are lawfully recognized by the State Council. Where their issuing and trading are not covered by this Law, the provisions
of the Company Law and other laws and administrative regulations shall apply.
The issuing and trading of government bonds shall be separately provided for
in laws and administrative regulations.
Thus we can assume that shares and bonds are to be regarded as securities. These are to
be supplemented by other securities which are recognised by the State Council. Government bonds are excluded and are to be regulated by other laws. The Company Law is left
to deal with any remaining securities which are not included within these narrow groups.
This reflects an extremely cautious approach to defining the area of regulation to be covered by the legislation. For example, excluded from the current range of securities are options, futures, collective investments and perhaps debt securities such as debentures
(these may however come within the concept of company "bonds").
This narrow approach to the concept of securities is linked to the dependence of the Securities Law on concepts drawn from the Company Law. In this regard, the Company Law
only refers to the issue and transfer of shares and bonds by joint stock limited companies.32 This is somewhat problematic as it could be argued that the PRC Company Law
follows German models of company law, while the 1998 Securities Law is more akin to
North American derived models of securities law. This creates a tension between these
two bodies of law. This tension seems to have been resolved for the time being in favour of
the approach found in the Company Law. The Company law is therefore often found in the
background when provisions in the new Securities Law are considered. This means that it
will be necessary to wait for a major overhaul of the Company Law before the Securities
Law is itself broadened in scope. Such a review of the Company Law is now underway
following the provision of funding from the Asian Development Bank.

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The Securities Law seeks to separate four areas of commercial activity in China. Thus, Art
6 of the law proclaims that the securities industry is to be administered and is to operate
separately from the banking, insurance and trust industries. This Article provides that:
Securities business shall be engaged in and administered as a business
separate from the banking business, trust business and insurance business.
Securities companies shall be established separately from banks, trust companies and insurance companies.
This provision is presumably aimed at preventing conflicts of interest, such as those which
might arise where banking and insurance companies act as securities traders. Indeed, Art
133 specifically bans banks from unlawfully entering the securities market. The origins of
this compartmentalisation are unclear, although it does resemble the approach which was
adopted in the Glass Steagal Law in the United States after the Great Crash of 1929. This
US law is, however, of little practical significance in the current securities environment. As
Poser observed in 1991, "[t]oday, American commercial banks, like those of the United
Kingdom and other countries, conduct a wide variety of securities activities, while investment banks and securities companies are major providers of banking services".33
Much the same can also be said of attempts to impose a similar demarcation in Australia.
In the course of discussing the handling of conflict of interest problems in multi-service
securities firms, Poser also notes that in the US, "the SEC has consistently held the position that separation of functions is undesirable because it would damage the ability of the
securities industry to raise capital".34
Prior to the passage of the PRC Securities Law, NPC Chairman, Li Peng, thought that
banks should be excluded from trading on the securities market as this would create unfair
competition. As he explained: "[t]here will be unfair competition if banks participate in trading on the securities market because banks have large amounts of money while retail investors' funds are limited."35 The purpose here seems to be to protect small shareholders. However, this has not stopped the recent merger of the securities arms of the trust
firms of the PRC's four biggest banks with the securities arm of China's largest insurance
firm into China's largest brokerage house.36
In any event PRC laws relating to the other three sectors of activity are either evolving or
are still in an embryonic stage of development. Banking laws, for example, are in a state of
some flux in the light of the banking crisis and the overhaul which is taking place in the role
of the People's Bank of China. The new China Insurance Regulatory Commission (CIRC)
was established in November 1998 and took over responsibilities from the People's Bank
of China.37 Also, a trustee law is currently being drafted.
This compartmentalisation is probably quite rational in the Chinese context as it serves to
eliminate the problem of a multiplicity of agencies and ministries having a role in regard to
individual areas of social and economic life. For example, under the Company Law a
number of different agencies play a part in the establishment and operation of companies;
this may sometimes be unwieldy. In regard to the securities industry, the new Securities
Law has given the China Securities Regulatory Commission (CSRC) much greater powers

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and thereby taken away functions from other bodies (such as the People's Bank of China)
which previously had significant roles in regard to the regulation of the securities industry.

The China Securities Regulatory Commission (CSRC)

For some years there has been a debate in China and abroad concerning the precise legal
status and authority of the CSRC, a body originally established by the State Council. This
debate is evident from the exchange between Professor Fang Liufang of the China University of Politics and Law and the former Chief Counsel of the CSRC, Professor Gao Xi Qing,
published in an American law journal.38 If there were any serious deficiencies in the former
mandate of the CSRC, these have now been resolved by the passage of the Securities
Law which places the commission in a de jure central position in the regulation of the securities market in China. This formalises the de facto position which was in place in recent years. In any event, Art 7 provides the commission with its legal mandate when it proclaims that:
The securities regulatory authority under the State Council shall, in accordance with law, implement centralized and unified regulation of the securities
market nationwide.
The securities regulatory authority under the State Council may, where necessary, establish offices which shall perform the regulatory functions as authorized.
Thus, the commission is granted sole authority to supervise the whole securities market
across China. This means that not only are other agencies, such as the People's Bank of
China, now relegated to a subordinate role in regard to this area, but regional and city authorities and the Shanghai and Shenzhen Stock Exchanges are also now clearly to be
subject to this national authority. This is made clearer in later provisions of the law. With
the passage of the Securities Law, the securities related powers of the People's Bank of
China have been limited and many of these have now been transferred to the CSRC.39 A
limited role is however given by Art 8 to industry associations to regulate their members.40
Also, in Art 9, state auditing institutions are empowered to conduct audits and supervise
various bodies such as stock exchanges and securities companies.41 This role is presumably limited to financial auditing functions.
Chapter X of the Securities Law also deals specifically with these regulatory structures.
The role of the commission is directed to maintaining order and rule based conduct within
the securities industry. Thus, Art 166 provides that:
The securities regulatory authority under the State Council shall regulate the
securities market according to law, maintain order of the securities market and
ensure the lawful operation of the same.
The specific functions and powers of the commission are set out in Art 167 of the law.
This gives the commission a wide range of powers and functions, extending from the issue
of trading rules and administrative regulations, the supervision of the issue, trading and

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settlement of securities in the market,42 the regulation of industry bodies, regulating information disclosure practices,43 and the investigation of violations of the law.44 Given its
importance, it is useful to set out this long section in full:
The securities regulatory authority under the State Council shall perform the
following functions in regulating the securities market:
(1)

To formulate, according to law, rules and regulations concerning

regulation of the securities market and to lawfully exercise its
power of examination and approval or verification;
(2)
To regulate, according to law, the offering, trading, registration,
custody and clearing of securities;
(3)
To regulate, according to law, the securities business activities of
the issuers of securities, listed companies, stock exchanges, securities companies, securities registration and clearing institutions, securities investment fund management institutions, securities investment consulting organizations, credit-rating institutions, and
those law firms, public accounting firms and asset appraisal organizations that are engaged in securities business;
(4) To formulate, according to law, the qualification criteria and code of
conduct for persons engaged in securities business, and to see that
these are observed;
(5) To supervise and inspect, according to law, the disclosure of information in connection with securities offering and trading;
(6) To guide and supervise the activities of the Securities Industry Association according to law;
(7) According to law, to investigate and deal with violations of laws and
administrative regulations concerning the regulation of the securities
market; and
(8) Other functions prescribed in laws and administrative regulations.
Despite the breadth of these powers and functions, the staff of the commission are required to perform their duties in accordance with law, to be honest and not to make
unlawful profits from their positions.45 Staff of the commission also must not be employed
by any body (such as a securities firm or stock exchange) which is under the regulatory
authority of the commission.46 The commission is also required by the Securities Law to
publicise its promulgated rules, regulations and administrative procedures. Once the
commission concludes that unlawful securities market conduct has occurred in conjunction
with other crimes, it is obliged by Art 173 to transfer such a case to the relevant judicial institutions, such as the People's Procuraturate.47
The extent of the CSRC's specific powers and responsibilities under the Securities Law
may also be obtained from looking at some of the other provisions of the law. For example, before a securities company can be established in China, it must first obtain the approval of the CSRC. Thus, Art 117 of the law is as follows:

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The establishment of a securities company shall be subject to examination

and approval by the securities regulatory authority under the State Council. No
one may engage in securities business without approval of the said authority.
The commission is empowered to issue licences to companies which are so formed.48
The commission is also required to approve any changes which are made to the
branches of the securities company, its business scope, and the dissolution, merger, or
restructuring of such companies.49 The scope of the business of the securities company
(as provided for in Arts 129 and 130) must also be approved by the commission.50 Rigid
capital controls have been imposed by the law upon securities companies; thus, a
so-called comprehensive securities company must have a minimum paid up capital of
RMB500 million yuan (about AUD$100 million), while the narrower brokerage securities
companies must have a minimum paid up capital of RMB50 million yuan (about AUD$10
million).
These are very high barriers to entry and will no doubt lead to mergers between existing
securities companies which find it difficult to meet these capital requirements. This is because the commission is obliged by Art 136 to revoke a securities company's authorisation
to conduct its approved scope of business where its capital is below the level required by
the law. Thus Art 136 provides that: "[w]here the registered capital of a securities company falls below the amount required to engage in the relevant business as prescribed in
this Law, the securities regulatory authority under the State Council shall revoke its verification of the relevant scope of business."
Stock Exchanges are also closely regulated by the CSRC, although in time the exchanges
will most likely become more independent. In the meantime, under Art 100, the general
manager of an approved stock exchange (there are only two in mainland China) is to be
appointed and dismissed by the commission and not, as was previously the case, by local
authorities. Abnormal trading on the stock exchange must be reported by the exchange
to the commission.51 As in most other jurisdictions, stock exchanges are required to establish a guarantee fund and do so in consultation with the commission.52 Stock exchanges are required by Art 113 to promulgate trading rules and administrative regulations
and to report these to the commission.53 However, before an application can be made to
the stock exchange for the listing of shares, an application must first be made to the commission.54The same requirement applies to the listing of company bonds, although the
commission may delegate to the stock exchange the commission's powers of verifying
listing applications.55
Similarly, the approval of the CSRC must also be obtained in the establishment of a securities registration and settlement institution, as provided for in Ch VII.56 The dissolution of
such a body will also require the approval of the commission.57 Such securities registration
and settlement institutions must be administered in a national and centralised fashion.58
The establishment of securities trading service institutions also requires the approval of the
commission; the commission is also empowered to lay down standards or qualifications for
the personnel of such bodies.59 Finally, securities industry associations (dealt with in Ch
IX) are also subject to regulation by the commission. For example, Art 163 requires that
the articles of association of such an industry association must be made available to the

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commission, while Art 164 (para viii) provides that the commission may provide for additional duties and functions to be performed by these industry associations.
Takeovers of listed companies are regulated by the commission under Ch IV of the Securities Law.60 This is not a very detailed takeover regulation regime and may therefore need
to be supplemented by further regulations or rules issued by the commission.61 The PRC
Company Law also deals with the merger and reorganisation of limited liability and joint
stock companies and that law will sometimes be relevant in regard to the takeover of listed
companies.62 Two methods of takeover are provided for under the Securities Law; what
are described as takeover offers and takeovers by way of contract.63 Shareholders who
hold 30% of the shares in a company are obliged by Art 81 to make a takeover offer for the
remaining shares, unless the commission exempts the shareholder from having to do so.64
A takeover by way of contract allows an offeror to reach an agreement with shareholders
for the acquisition of their shares in accordance with laws and administrative regulations.65 Once 75% or more of the shares in a company have been acquired by an offeror, trading of those shares on the stock exchange must be terminated.66

The issue and trading of securities in China

The rules regarding the issue and trading of securities are to be found in Chapters II and III
of the Securities Law. Chapter IV of the PRC Company Law also deals with the issue and
transfer of shares in a joint stock company. As we shall see below, the Securities Law
relies upon these Company Law provisions to some degree. One major improvement
which has come about with the passage of the new Securities Law is that it is no longer
necessary to obtain the approval of the regulatory department under the State Council (ie
the commission) for the issue of new shares to the public. All that is now required is that an
application be made for verification of the matters set out in the application. Thus, Art 11
of the Securities Law provides as follows:
Public offers of shares shall, in compliance with the conditions provided for in
the Company Law, be reported to the securities regulatory authority under the
State Council for verification. The issuer shall submit to the said authority the
application documents prescribed in the Company Law and the relevant documents specified by the authority.
The issuing of corporate bonds shall, in compliance with the conditions provided for in the Company Law, be reported to the department authorized by the
State Council for examination and approval. The issuer shall submit to the department authorized by the State Council the application documents prescribed
in the Company Law and the relevant documents specified by the said department.
A verification commission consisting of officers of the CSRC and outside experts is to be
established to make decisions on applications for the issue of new securities.67 Conse-

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quential upon the work of such a verification commission, the CSRC is required to verify an
application for the issue of shares. Thus, Art 15, in part, provides that:
The securities regulatory authority under the State Council shall, in accordance
with the statutory conditions, be responsible for verification of applications for
issuance of shares. The verification procedures shall be made public and shall
be subject to supervision according to law.
The persons involved in the verification of an application for issuance of shares
may not have any interests to share with or accept gifts from the applicant, or
hold shares the application for the issuance of which they have verified, or have
any private contact with the applicant.
The department authorized by the State Council shall examine and approve
applications for issuance of corporate bonds by reference to the provisions in
the preceding two paragraphs.
After verification and prior to the issue of shares, an issuer is required to publicise the
proposed issue.68 Professionals who prepare documentation for the issue of securities
are required to comply with a duty to prepare documents which are "truthful, accurate and
complete".69 Where there is an underwriter, the underwriter is required to ensure the
"truthfulness, accuracy and completeness of the public issue documents".70 The company
is also required to use the capital raised by a share issue for the purposes stated in the
prospectus, although a change in purpose may occur if this is ratified by the shareholders'
meeting.71
Shares may be issued in two ways under the law; first, by offering them to the public
through securities companies who act as underwriters or, second, by issuing them to existing shareholders.72 Of the shares to be issued to the public, the law provides for two
methods of underwriting; first, securities companies may underwrite the issue of such
shares to the public by the securities company acting as an agent of the company; second,
the securities company may underwrite the securities by way of contract. In the former
situation, the underwriter may return unsold shares to the company at the end of the underwriting period while in the latter case, the underwriter must itself purchase all unsold
shares at the end of the underwriting period.73 In the event of the value of the securities
being issued having a face value of more than RMB50 million (or about AUD$10 million),
an underwriting group must underwrite the issue.74
Turning to the trading in securities, only securities which have been issued in compliance
with the legal requirements for the issue of securities may be traded.75 Securities trading
on a stock exchange must take place by way of public bidding for the shares, giving priority
to highest bids and bids which are first in time. As Art 33 states:
Securities that are quoted and traded on stock exchanges shall be traded in the
manner of public, centralized trading at competing prices.
Centralized competitive pricing for securities trading shall follow the principle of
price precedence and time precedence.

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Trading can be by way of paper transactions or by other forms, such as paperless trading.76 As we have seen, short selling is prohibited77 and the fees charged by securities
companies are required to be "reasonable".78
Under the Securities Law various persons are excluded from trading in securities. For
example, employees of stock exchanges, employees of securities companies and employees of the commission are prohibited by Art 37 from participating in securities trading
while they are in these positions and for a period of time after ceasing to hold office. Also
professionals who have produced audit reports, asset appraisal reports or legal opinions
for the issue of securities are prohibited from trading in securities where these professionals produced reports or opinions in connection with the issue of securities or the listing of
the company for six months after the end of the underwriting period or five days after the
publicising of the listing.79
Where a shareholder acquires 5% of the shares of a joint stock company, the shareholder
is required to report this holding to the company within three days of acquiring these
shares.80 This must then be reported within three days to the commission. In an effort to
maintain some stability in the share registers of joint stock companies, where a shareholder sells shares within six months of acquiring them, any profits made by the shareholder are to belong to the company and the company's board of directors is required to
take back such profits. Where the directors fail to do so, other shareholders are entitled to
demand that the directors undertake such actions.81 This is likely to be a difficult provision
to implement.

The organisation of stock exchanges

Some mention has already been made of the provisions relating to PRC stock exchanges
and their regulation. As we have seen, the commission enjoys significant powers in relation to the operations of stock exchanges and the listing of securities on those exchanges.
Chapter 5 of the Securities Law contains 21 articles dealing with stock exchanges. While
we have seen a movement towards the demutualisation or privatisation of stock exchanges in other parts of the world,82 the PRC Securities Law provides that a stock exchange is a "non-profit making legal person ...".83
However, the savings or profits of the stock exchange are stated as belonging to its members, although these are not to be distributed to the members during the period of the existence of the exchange.84 The exchange must have articles of association which have
been approved by the commission.85 It must also have a council,86 although the role of this
council is somewhat limited, especially as the general manager of the exchange is to be
appointed by the commission. Concentrated trading on the stock exchange is limited to
securities companies which are members of that exchange.87
The exchange is empowered to promulgate trading or listing rules and business rules, although the terms of these rules need to be reported to the commission.88 Where there has
been a breach of these trading rules, offenders may be disciplined by the exchange and in
serious cases, may be disqualified under Art 116. A stock exchange is also empowered to
suspend, terminate and to allow the resumption of trading in shares and company bonds.

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This power is however subject to procedures laid down by the CSRC.89 In situations of
urgency, the exchange is empowered to adopt an "on the spot" system of supervision of
securities trading, so long as abnormal trading is reported to the commission.90 As mentioned earlier, stock exchanges are also required to establish a guarantee or risk fund
based on a proportion of trading fees, membership fees and trading seat fees. This fund
is to be managed by the council of the stock exchange.91

Securities companies: a two tiered system

In China, at the end of 1998 there were 88 securities firms with 79 subsidiaries. With the
recent crisis facing China's International Trust and Investment Companies (ITIC's) following the collapse of GITIC in Guangdong, it is likely that the securities arms of these institutions will be taken over by existing securities firms. The funding of securities firms will be a
major problem, especially as banks have been forbidden from allowing their funds to be
used in the stock market and from using their clients' deposits for the firms own trading.
The securities law has introduced a far stricter regime for the regulation of securities companies than existed previously. This is likely to see the merger of some existing securities
companies and the closure of other companies.
In Art 118, the new law provides that "[a] securities company refers to a limited liability
company or a joint stock company which trades securities". The law introduces a two
tiered system of securities companies; securities companies must all be incorporated under the 1993 PRC Company law, either as limited liability company (a private company) or
as a joint stock company (a public company). They will either be what are described in
Art 119 as "comprehensive securities companies" or "brokerage securities companies".
Brokerage securities companies are required to have the word "brokerage" in their firm
names. The establishment of a securities company requires the approval of the commission, which must approve the scope of its business.92 It has been suggested that only
about 20 of the existing 90 brokerages and 240 stock trading entities which are under the
control of trust and investment corporations will be able to satisfy the requirements for a
comprehensive securities company.93
There are major differences between these two types of companies; these differences relate to the capital requirements for the establishment of such companies and their respective scope of business. As we have seen, a comprehensive securities company must
have a minimum paid up capital of RMB500 million (or about AUD$100 million in capital).
In contrast the narrower brokerage securities companies must have a minimum paid up
capital of RMB50 million (or about AUD$10 million in capital). The failure to maintain
these capital levels will lead to the revocation of a securities company's scope of business
licence.94 The heavy capital requirements imposed on securities companies is likely to
lead to the merger of many existing such firms.
Comprehensive securities firms must ensure that their key business personnel are qualified for the purposes of securities trading and their securities trading business must be
separated from their broking business.95The range of the business which may be conducted by a comprehensive securities company extends beyond the conduct of a brokerage business, as is provided by Art 129, which states:

Page 14

A comprehensive securities company may engage in the following business:

(i)
(ii)
(iii)
(iv)

securities brokerage business;

securities business of its own;
securities underwriting business; and
other business ratified by the department in charge of securities under
the State Council.

In contrast, Art 130 provides that a brokerage securities company may only engage in a
brokerage business and therefore may not engage in underwriting securities or engage in
securities trading on its own account. There has been concern in recent years about securities firms using client monies for their own trading. The new Securities Law seeks to
remedy this situation.
The scope of the business of a brokerage securities company is set out in Art 138 which
(in part) provides that: "[to] engage in brokerage business a securities company shall open
separate securities accounts and capital accounts for its clients, manage the securities and
capital provided by its clients in separate accounts, and keep the true trading records
without forgery." Where a comprehensive securities company conducts securities transactions on its own account, it is required by Art 133 to use its own capital but not client funds.
Also, this section potentially restricts banks from using their own capital for the purposes of
securities trading where a law so provides. This is a somewhat unsatisfactory provision.
As existing securities firms also depend heavily for their liquidity upon trading on their own
account, the barring of brokerage companies from such trading will affect them greatly.96
This will potentially also severely constrain the market. The market is already constrained
by the barring of insurance companies and pension funds from direct involvement in the
securities market, even though such entities are said to be flush with funds.97 A further
constraint on the market is provided by Art 76, which prohibits state owned enterprises
from speculating in listed shares; however, trading by state owned enterprises in such securities does not seem to be prohibited, although it is unclear what is intended by the term
"speculate". It might be noted that Art 75 prohibits any person from diverting public funds
for the purposes of securities trading.
The notion of speculation as used in Art 76 is unclear and has therefore been the subject
of some controversy in the press.98 One problem here is that most enterprises are to
some degree state owned. The Report on the Securities Law by the NPC's Law Committee notes that the interests of the state and of medium and small investors are likely to be
damaged where the securities market is manipulated by speculation upon the part of state
owned enterprises using operational capital and bank loans for securities trading. This
uncertainty will need to be clarified.
The Securities Law also requires that firms which engage in the brokerage business open
separate securities accounts and capital accounts for their clients and it also requires them
to deposit in a separate account the securities and the funds provided to them by their clients. They are also required by Art 138 to keep accurate trading records of securities
trading upon behalf of clients. This and other provisions are intended to provide a measure of consumer protection to clients of securities companies.

Page 15

For example, the law contains a provision prohibiting short selling and requires that brokers only sell securities which are actually held.99 Securities firms are also prohibited from
extending credit to clients for the purposes of securities trading. Thus, Art 141, in part,
provides that: "[a] securities company under entrustment shall buy the securities which
shall be paid for with the capital actually held on the clients' capital accounts. It shall not
provide capital for its clients' securities trading." However, securities companies are liable
for violations of trading rules which are committed by any professional staff of the firm.100

Securities misconduct
Space precludes a detailed discussion of the provisions regarding securities misconduct
found in the Securities Law. Mention has already been made of the prohibition against
speculative trading in listed shares by state owned enterprises and enterprises with state
shareholdings.101
As one might expect, the Securities Law also prohibits insider trading (Art 67); the making
of illegal profits from price manipulation (Art 71) and securities market fraud (Art 73). The
law also prohibits the diversion of public funds for the purposes of securities trading (Art
76). Article 185 imposes a range of penalties for such conduct and provides:
Where a person violates this law by trading in securities by diverting public
funds, his illegal proceeds shall be confiscated, and he shall be fined from one
to five times of his illegal proceeds; if he is a public servant he shall also be
given an administrative disciplinary sanction; if he commits a crime criminal liability shall also be imposed on him.
Where any prohibited act is found to have occurred, an obligation to report such conduct to
relevant authorities is imposed on stock exchanges, securities companies and other institutions involved in the securities industry.102
On the whole these are fairly narrow provisions which will need to be refined as they are
applied to real life situations. It should also be noted that Ch XI (Arts 175-210) imposes a
series of legal liabilities for breaches of provisions of the law. For example, Art 183 deals
with insider trading and provides for the divesting of illegally acquired securities and illegally obtained proceeds of the insider trading, and it also provides for the imposition of a
fine of from one to five times the amount of the illegal proceed or of the value of the securities illegally traded. Where a crime has been committed, a criminal sanction is also provided for. Heavier sanctions are to be imposed upon staff of the commission and regulatory bodies who engage in insider trading.103 Spreading false information about securities
is also punishable under Art 188 by fines of between RMB30,000 and RMB200,000.
Criminal penalties may also be imposed under this provision.
In the case of market manipulation and related conduct, similar liabilities are imposed by
Art 184 which provides:
Where anyone violates Article 71 of this law by manipulating securities trading
prices, or by forging the trading prices or the trading amount to make undue
profits or transfer risks, his illegal proceeds shall be confiscated, and he shall

Page 16

be fined from one to five times the illegal proceeds; if he commits a crime
criminal liability shall also be imposed on him.
It is necessary to look to the PRC Criminal Law and supplementary regulations which remain to be issued to find penalties for criminal breaches of securities provisions.

Conclusions
The passage of the Securities Law of the Peoples' Republic of China is an important symbolic statement on the road to the further development of a market economy in China. In
one way it represents a major change from the past patterns of conduct in China, although
China has been moving towards the passage of this legislation for over a decade. In
many ways, the law brings order to the diverse number of securities related regulations
and rules which have been issued by a range of different authorities over the years.
However, the law is clearly a compromise which has been somewhat hurriedly passed in
the shadow of the Asian financial crisis. Many of its provisions will need to be refined or
supplemented by more detailed provisions in other rules. The Securities Law is often expressed in terms of broad statements of principle rather than detailed legal provisions. This
is unsatisfactory as it creates uncertainty.
Major gaps still exist in the law, such as the lack of a suitable definition of securities. This
will presumably be rectified once the PRC Company Law is itself further updated. This is
very much a transitional piece of legislation which adopts a relatively tough approach to
the securities industry, probably due to the excesses which have characterised this industry over the last decade and the dangers which China's financial system has faced in recent times. For example, the imposition upon securities firms of onerous capital requirements may lead to a considerable concentration in the industry as well as to the imposition
of significant barriers to entry of new participants in the industry.
The securities misconduct provisions need to be further enhanced and their effectiveness
will depend heavily upon the investigatory, enforcement and judicial environment in China.
The CSRC still occupies a very significant position in regard to the regulation of the securities market and, with the clarification and strengthening of the role of the commission,it is
likely that the CSRC will remain the key actor in ensuring that PRC securities legislation is
complied with. Ultimately, however, the securities law needs the support of all other actors, ranging from securities firms to investors. This may require a maturing of the culture
of the securities industry as many investors currently fail to fully appreciate the risks which
are inherent in the industry.
The legislation also needs to relate more to international securities law developments and
international securities institutions. To a large degree, this is very much a domestically
oriented piece of legislation as it goes to some effort to exclude foreigners from being able
to play an active role in the Chinese securities market. Perhaps this will change in due
course. It should however be noted that the Hong Kong securities market is closely linked
to international developments and PRC securities officials pay great attention to the opera-

Page 17

tions of this particular Chinese securities market.

Securities Law does not apply.

However, it is one to which the PRC

The Securities Law is to be welcomed as a major innovation in Chinese commercial law

jurisprudence. Yet, it is likely to change as market conditions change and it clearly needs
to be supplemented and sustained by further regulations and strong market institutions.
The new Securities Law is an important stepping stone towards the development of a rule
of law based approach to the handling of PRC securities matters and to this extent it is an
important advance.

*
MA LLB (Syd), SJD (Wisconsin), PhD (NSW), Professor and Dean, Faculty of
Business and Law, Victoria University, Melbourne, Australia.
**
LLB (Peking), LLM (Canberra), PhD Candidate (NSW); Adjunct Associate Professor
of Law, China University of Politics and Law, Beijing.
1
This article is a revised version of a paper originally presented at the 1999 annual conference of the Corporate Law Teachers' Association, held at Monash University, in February 1999.
2

See report in Lateline News, at http://lateline.muzi.net (23 January 1999).

3
Sun Shangwu, "Securities Law given overwhelming approval", China Daily, 30 December
1998. Also see Lateline News, "China Stock Markets said Expanding", http://lateline.muzi.net (21
January 1999).
4

Sun Shangwu, "Securities Law early passage is likely", China Daily, 25 December 1998.

5
Ma Chenguang, "Securities law to regulate booming sector", China Daily , 23 October 1998,
http://www.chinadaily.net/cndy/history.
6
M O'Neill, "Securities Law: Long-awaited legislation due this year", South China Morning
Post, 12 November 1998.
7
See for example, the interview with Li Peng reported by P Seidlitz and D Murphy, "No to
'Western' Democracy", South China Morning Post, 1 December 1999, p 17.
8
See further for a discussion of growth in the size of the securities market in China, R Tomasic, "An Overview and Assessment of the Draft Securities Law of the People's Republic of China"
(1998) 9 Aust Jnl of Corp Law 284 at 284-8; Also see, R Nottle, "The Development of Securities Markets in China in the 1990s" (1993) 11 Company & Securities Law Journal 503-19; and Gao,
Shangquan and Chi Fulin (eds), The Chinese Securities Market, Beijing, Foreign Language Press,
1996.
9

Quoted by Seidlitz and Murphy, above n 7.

10
See further, R Tomasic, "Asian Economic Law and Legal Institutions in the Wake of the
World Financial Crisis", unpublished paper presented to 4th Conference of the Asia Pacific Economic
Law Forum, City University of Hong Kong, December 1998. See also Lee, Kuan Yew, The Singapore

Page 18

Story, Singapore, Prentice Hall, 1998; and A Josey, Lee Kun Yew: The Crucial Year, Singapore,
Times Books International, 1968.
11
R Evans, Deng Xiaoping and the making of Modern China, London, Penguin Books, 1995, p
253. More recently, Li Peng has observed that: "An overview of the international situation and
modern history reveals that to adopt the Western system indiscriminately and completely in developing countries will not work and imposing it in developing countries has never produced good results", quoted by Seidlitz and Murphy, above n 7, p 17.
12
For a discussion of this theme see further: A Woodiwiss, Globalisation, Human Rights and
Labour Law in Pacific Asia, Cambridge, Cambridge University Press, 1998.
13

Quoted by Sun Shangwu, above n 3.

14

Reported in China Daily, 20 November 1998, http://www.chinadaily.net/cndy/history.

15
Zhou, Daojiong, "Promote the Standardization and Development of China's Securities Market by Attaining Perfection of Securities Legislation", (pp 7-15) in Collection of Essays and Articles
from the International Symposium on Securities Law, compiled by the China Securities Regulatory
Commission, Beijing, Publishing House of Law, 1997 pp 9-14.
16
See for example, Gao, Xi-Qing, "Developments in Securities and Investment Law in China"
(1996) 6 Aust Jnl of Corp Law 228-47; also see Fang, Liufang, "China's Corporatisation Experiment"
(1995) 5 Duke Journal of Comparative and International Law 149-269.
17
R Tomasic, "An Overview and Assessment of the Draft Securities Law of the People's Republic of China" (1998) 9 Aust Jnl of Corp Law 284.
18
Such as the Eggleston Principles which are found in the Australian Corporations Law and
those set out in s 1(2) of the Australian Securities and Investment Commission Act.
19
See further the case of insider trading against Guan Weiguo, a securities regulator in the
northeastern industrial city of Shenyang in 1994: see Associated Press report, "Mainland securities official charged", South China Morning Post, 7 January 1994. More recently, a senior official at the
Shenyin and Wanguo Securities Co was investigated for submitting false information to regulators in
relation to a 1996 share sale, with the intent of inflating the number of shares being sold to workers.
A number of other share brokerage houses in China are also currently being investigated by regulators for illicit activity: see further the story reported at http://lateline.muzi.net (27 December 1998).
20
An example of this occurred recently in Beijing when disgruntled investors marched on the
offices of the Xinhua News office because of the nature of various reports by that office concerning a
securities fraud. See further Reuters, "Chinese investors stage rare protest on futures scam", Australian Financial Review, 12 November 1998, p 13.
21

See further Art 7 of the law.

22
Lateline News, "China's A share market shut to foreigners for now", http://lateline.muzi.net
(30 October 1998).
23
The NPC Chairman, Li Peng has taken the view that China's securities market is still too
weak for the A shares market to be opened to foreigners: Shu Shangwu, "A-shares stay bared to foreigners", China Daily, 30 October 1998. Also see Sun Shangwu, "Securities Law given overwhelming approval", China Daily, http://www.chinadaily.net/cndy/history (30 December 1998).

Page 19

24
See generally, G Soros, The Crisis of Global Capitalism: Open Society Endangered, London, Little Brown & Co, 1998.
25
Sun Shangwu, "Legislators debate securities, budget subcommittee", China Daily,
http://www.chinadaily.net/cndy/history (24 December 1998).
26
Lateline News, "China's A share market shut to foreigners for now", http://lateline.muzi.net
(30 October 1998).
27
Editorial, "No devaluation in China", Financial Times, 28 January 1999, p 13; and J Kynge,
"China softens its resolve not to devalue currency", 28 January 1999, Financial Times, p 14; J
Harding, "China throws a lifeline", 28 January 1999, Financial Times, p 13.
28

Reported in China Daily, 15 September 1998, http://www.chinadaily.net/cndy/history.

29
Lateline News, "China B shares
http://lateline.muzi.net), 20 January 1999.
30
1999).

end

at

record

lows

on

profit

woes",

(at

Lateline News, "China Stock Markets said Expanding", http://lateline.muzi.net (21 January

31
Lateline News, "China slows pace of stock listings in weak market", http://lateline.muzi.net
(16 January 1999).
32
Chapter IV of the Company law deals with the issue and transfer of shares, while Ch V deals
with company bonds.
33
N S Poser, International Securities Regulation: London's "Big Bang" and the European Securities Markets, Boston, Little Brown & Co, 1991, p 185.
34

Ibid, p 244.

35
Lateline News, "China securities law to ban banks trading stocks", http://lateline.muzi.net (2
December 1998).
36
Lateline News, "China Clears Merger of Securities Firms Owned by Banks, Insurer.",
http://lateline.muzi.net, (16 January 1999).
37
The CIRC issued its first decree in December 1998; this concerned the matter of air passenger insurance: see further Lateline News, at http://lateline.muzi.net (18 December 1998).
38 Duke Journal of Comparative and International Law , Vol 5(2), 1995.
39
For example, the power to issue a business licence to securities firms was previously a
power of the People's Bank of China but is now vested in the CSRC by Arts 117 and 119.
40
Art 8 states that:
"On condition that the State regulates the issuing and trading of securities on a centralized and unified basis, a Securities Industry Association shall, in accordance with
law, be established for self-regulation."
41
Art 9 states that:
"The State audit authority shall, in accordance with law and through
auditing, supervise stock exchanges, securities companies, securities registration and clearing institutions and the securities regulatory authority."

Page 20

42
Arts 14 and 15, for example, create what might be called a pre-vetting regime for the issue of
securities. Thus Art 15 provides (in part) that: "The securities regulatory authority under the State
Council shall, in accordance with the statutory conditions, be responsible for verification of applications for issuance of shares. The verification procedures shall be made public and shall be subject to
supervision according to law ...." Decisions by the commission upon applications for the issue of
shares must be made within three months of the application being accepted by the commission: Art
16. Where shares are to be issued at a premium, the commission must also provide approval for
such action: Art 28. The form in which securities are traded, where they are not traded in paper format, must also be approved by the commission: Art 34. Companies seeking to list their securities
outside China must also obtain the approval of the commission: Art 29.
43
These are dealt with in Arts 58 to 66 of the law as well as in various previously issued regulations issued by the commission. For a discussion of these information disclosure rules, see further: J
Fu, "Information Disclosure and Investor Protection in China's Securities Markets" (1998) 9 Aust Jnl of
Corp Law
194-209.
44
The commission's investigatory powers are set out in Art 168, which is as follows:
"
When performing its functions according to law, the securities regulatory authority under the State
Council shall have the power to adopt the following measures:

(1)
(2)
(3)

(4)

to enter the site where an illegal act is committed to investigate and collect evidence;
to question the party concerned and any unit or individual connected with the event
under investigation, and to require them to give explanations concerning matters
connected with the event under investigation;
to inspect and make copies of the securities trading records, records of registration of
change in ownership, financial and accounting information and other relevant documents
and materials of the party concerned and any unit or individual connected with the event
under investigation, and to seal up documents or materials likely to be removed or concealed; and
to examine the fund accounts and securities accounts of the party concerned and any
unit or individual connected with the event under investigation, and if there is evidence to
substantiate signs that illegally obtained funds or securities have been removed or concealed, to apply to a judicial organ to freeze the same."

Those being investigated by the commission are required by Art 171 to assist the commission " ...
cooperate and provide truthful relevant documents and materials. ...".
45
These constraints upon the abuse of power are provided for in Arts 169 and 170, which are
as follows:
Art 169: When members of the securities regulatory authority under the State Council conduct supervision, inspection or investigation during the lawful performance of their duties, they shall produce the
relevant papers and be obligated to maintain the confidentiality of the commercial secrets of units or
individuals which they become aware of.

Art 170:The staff of the securities supervisory and regulatory department shall be loyal to their duties,
"will" act in accordance with laws, "will" be honest and shall not make unlawful profits by their positions.
46
Art 174 provides that: "No members of the securities regulatory authority under the State
Council may concurrently hold a position in an organization that is under the regulation of the authority."

Page 21

47
See generally the Organic Law of the People's Procuratorates of the People's Republic of
China (1979). This law was amended by the 1983 Decision of the Standing Committee of the National People's Congress on the Revision of the Organic Law of the People's Procuratorates of the
People's Republic of China, in Vol 6 of The Laws of the People's Republic of China (1983-1986),
Beijing, Foreign Language Press, 1987.
48
Art 119 provides as follows: "The State administers securities companies by dividing them
into categories--comprehensive securities companies and brokerage securities companies. The securities regulatory authority under the State Council shall, on the basis of the these categories, issue
business permits to them."
49
Art 123 therefore provides that: "The establishment or closure of branches of a securities
company, change in its scope of business, registered capital or articles of association, and merger, division, change in its corporate form, and its dissolution shall be subject to approval by the securities
regulatory authority under the State Council."
50

Arts 129 to 131 are as follows:

Art 129:
ness:

(1)
(2)
(3)
(4)

Comprehensive securities companies may engage in the following securities busi-

brokerage business;
securities business on its own account;
securities underwriting business; and
other business verified by the securities regulatory authority under the State Council.

Art 130: Brokerage securities companies are permitted only to engage in securities brokerage business.

Art 131: A securities company shall, on the basis of the lines of business specified in the preceding
two Articles, submit an application for its scope of business to the securities regulatory authority under
the State Council for verification.

No securities company may engage in securities business or other business beyond the scope of
business verified.
51

Art 110.

52

Art 111. This fund is to be held in a special banking account.

53

Art 113.

54
Art 46 of the law in part provides that: " [a]fter an application for share listing is verified by
the securities regulatory authority under the State Council, the issuer shall submit to the stock exchange the verification document and the relevant documents specified in the preceding Article.
The stock exchange shall make arrangements for the listing and trading of the said shares within six
months from the date of receiving the documents specified in the preceding paragraph and submitted
by the issuer of the shares."
55

Art 50.

Page 22

56
Art 146 is as follows:
"A securities registration and clearing institution is a non-profit legal
person that provides centralized registration, custody and clearing services for securities trading."
57

Art 156.

58

Art 149.

59

See Ch VIII. Arts 157 and 158 of this chapter are as follows:

Art 157: Professional securities investment consulting organizations and credit-rating institutions may
be established, where they are needed for securities investment and trading business. The conditions
for establishment of securities investment consulting organizations and credit-rating institutions, the
examination and approval procedures and the business rules of such organizations and institutions
shall be prescribed by the securities regulatory authority under the State Council.

Art 158: The business persons of professional securities investment consulting organizations and
credit-rating institutions shall be persons who are armed with professional knowledge of securities and
have engaged in the securities business for not less than two years. The criteria and administrative
measures for determining the qualifications of such persons to engage in securities business shall be
formulated by the securities regulatory authority under the State Council.
60

See Arts 78 to 94.

61
See generally, Fang Liufang, "The Governmental Role in M & As in China: The Kodak Case"
(1999) 10 Aust Jnl of Corp Law 81-8.
62
See Arts 182-188 of the 1993 PRC Company Law. For example, Art 87 of the Securities
Law provides that a company may need to change its structure if it fails to meet the requirements of
a company under the Company Law after the takeover has been completed.
63

Art 78.

64
Where a takeover occurs pursuant to Art 81, a prescribed takeover report must be supplied
by the offeror to both the commission and the stock exchange: Art 82. The period of the takeover offer must not be less than 30 days or more than 60 days: Art 83. Where a person obtains 90% or
more of the shares in a company, the remaining shareholders are entitled to require the majority
shareholder to acquire their shares on the same conditions as those contained in the takeover offer:
Art 87.
65

Art 89.

66

Art 86.

67

Art 14.

68

Art 17.

69

Art 13.

70

Art 24.

71

Art 20.

72

Art 20.

Page 23

73
Art 21. The securities company must enter into an underwriting agreement with the issuing company which contains various prescribed items, such as the names of the parties, the classes
of shares, the issue price, the period of the underwriting agreement, etc: see Art 23.
74

Art 25.

75

Art 30.

76

Art 34.

77
Art 35. Penalties for short selling are to be found in Art 186 (namely, a fine of between
RMB30,000 and RMB300,000).
78

Art 40.

79

Art 39.

80

Art 41.

81

Art 42.

82
See generally, F Donnan, "Self-regulation and the Demutualisation of the Australian Stock
Exchange", (1999) 10 Aust Jnl of Corp Law 1-33.
83

Art 95.

84

Art 98.

85

Art 96.

86

Art 99.

87

Art 103.

88

Art 113.

89

Art 108.

90

Art 110.

91

Art 111.

92

Arts 117 and 123.

93
Foo Choy Peng, "Securities Law 'grey areas' may unwittingly strangle the market", South
China Morning Post, 1 January 1999, Business Post, p 3.
94
Art 136 provides that where the capital is lower than the requirements for its business the
securities supervisory and regulatory department under the State Council shall revoke the verification
of the company's business scope.
95 This is provided for in Arts 121 and 122 which are as follows:
Art 121: The following conditions shall be satisfied for the establishment of a comprehensive securities
company:

Page 24

(1)
(2)
(3)
(4)

to have a minimum registered capital of 500 million yuan;

to have chief administrators and business persons who are qualified to engage in
securities business;
to have a fixed place of business and up-to-standard trading facilities; and
to have a sound management system and a standardized system for the separate administration of business on its own account and brokerage business.

Art 122: The minimum registered capital of a brokerage securities company is 50 million yuan, the
chief administrators and business persons of such a company shall be qualified to engage in securities business, and it shall have a fixed place of business, up-to-standard trading facilities and a sound
management system.
96
Foo Choy Peng, "Securities Law 'grey areas' may unwittingly strangle the market", South
China Morning Post, 1 January 1999, Business Post.
97

Ibid.

98
Art 76 is as follows: "State-owned enterprises and enterprises where State-owned assets
constitute a controlling interest may not speculate in listed shares."
99

Art 35 states that: "Securities trading shall take the form of spot transaction."

100

Art 145.

101

Art 76.

102

Art 77.

103
Art 183 is as follows: "If, before information that may affect the issuance or trading of securities or other information that may have a major effect on the price of securities is made public, a person who has knowledge of inside information on securities trading or a person who illegally obtains
such information purchases or sells such securities, divulges such information or counsels another to
purchase or sell such securities, he shall be ordered to dispose of the illegally obtained securities according to law, his illegal gains shall be confiscated and, in addition, he shall be imposed a fine of not
less than the amount of but not more than five times the illegal gains, or a fine of not more than the
value of the securities illegally purchased or sold. If the offence constitutes a crime, criminal liability
shall be pursued according to law.
If a staff member of the securities regulatory authority engages in insider trading, he shall be given a
heavier punishment."