Financial Commission: another pillar in China’s new government structure – Victor Shih

 

Victor Shih

Xi Jinping has been building up a new government structure and the just-installed Central Financial Commission will be key in making financial decisions for the central government, says political analyst Victor Shih in the Financial Times. The “de facto watchdog, planner, and decision maker for China’s US$61tn financial sector, weakening the power of state institutions such as the People’s Bank of China and China Securities Regulatory Commission.”

The Financial Times:

Wang Jiang, a veteran state banker, has been appointed executive deputy director of the office of the commission, reporting to He Lifeng, a vice-premier and Xi’s new economic tsar, the people familiar with the new body said.

Victor Shih, professor of Chinese political economy at the University of California, San Diego, said businesses should expect to be affected by the commission, which will have the final say on important deals including major mergers and joint ventures.

Shih said the commission would also control mid-level state financial sector personnel appointments and the regulations applied by government agencies. State institutions such as the central bank have already suffered a decline.

Since August, the chairs of some state banks have in effect outranked the PBoC governor in the Communist party hierarchy.

More in the Financial Times.

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New rules for overseas IPO’s need more clarifications – Winston Wenyan Ma

 

Winston Wenyan Ma

The China Securities Regulatory Commission (CSRC) has proposed over Christmas rules for Chinese firms who want to apply for an IPO at overseas stock markets. But those new rules lack much-needed clarity, says financial expert Winston Wenyan Ma at CNBC. “Domestic companies need to comply with relevant provisions in the areas of foreign investment, cybersecurity and data security, a draft said, without much elaboration,” writes CNBC.

CNBC:

The CSRC’s proposed rules said an overseas listing could be stopped if authorities deemed it a threat to national security. Domestic companies need to comply with relevant provisions in the areas of foreign investment, cybersecurity and data security, a draft said, without much elaboration.

“The details of rule enforcement still need further observation, especially the supervisory scope of other related ministry regulators, in addition to the CSRC,” said Winston Ma, adjunct professor of law at New York University and co-author of the book “The Hunt for Unicorns: How Sovereign Funds Are Reshaping Investment in the Digital Economy.”

Companies in China are subject to the oversight of several ministries, ranging from industry-specific ones to ones focused on particular aspects of operations such as foreign exchange.

More at CNBC.

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China blinks at the PCAOB - Paul Gillis

China has been banning US regulators at the PCAOB from getting access to information of Chinese companies at US stock markets, as they should do according to US regulations to protect its state secrets. But things are changing, notes auditing expert Paul Gilles at his weblog Chinaaccountingblog. "I suspect that Yi’s comments are a signal that China will back down on this issue, allowing joint inspections with adequate controls to protect state secrets," writes Gillis.

Paul Gillis:

Paul Gillis

Caixin has reported($$) some amazing comments from CSRC chairman Yi Huiman. Yi reportedly said that: “As long as the U.S. side is truly willing to solve the problem, we can definitely find a way for China and the U.S to cooperate on audit regulation”  HT to Donald Clarke for tipping me off on this. 

Yi further added: Chinese law stipulates that exchanging information, such as providing audit working papers for overseas regulators, should be conducted through regulatory cooperation and comply with security and confidentiality regulations. Carrying out joint inspections is a common practice of international cooperation on this issue. 

I doubt Yi is unaware of the fact that China has blocked inspections since the passage of Sarbanes Oxley in the early 2000s. The U.S. has certainly shown its willingness to solve the problem, even agreeing to a joint trial inspection that was called off when Chinese regulators would not allow the PCAOB to see documents or ask questions. 

Yi is correct that joint inspections are the common practice of international cooperation. I believe this is the first time Chinese authorities have sanctioned that approach. Formerly they argued for regulator equivalency, where US regulators would rely on Chinese regulators to examine auditors.  The PCAOB has long rejected that approach, although it was adopted by the EU. 

I suspect that Yi’s comments are a signal that China will back down on this issue, allowing joint inspections with adequate controls to protect state secrets.

More at the Chinaaccountingblog.

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At last: opening the China markets for IPO's - Shaun Rein

Shaun Rein

Many successful Chinese companies listed in the US, rather than in China, because of the stringent regulations in their own country. Now going IPO in China is at least becoming easier, says business analyst Shaun Rein, author of The War for China's Wallet: Profiting from the New World Order to Harbour Times. And some Chinese companies might come back from the US.

Harbour Times:

Xiaomi filed documents in early May to list in Hong Kong. The company is expected to raise $10 billion from the offering and aimed for a valuation of about $100 billion, despite the head of the company’s top lawyer Zhang Liang said in March 2015 that the company had no plans to list within the next 5 years. 

The application came after the China Securities Regulatory Commission reportedly issued new listing rules in April in hopes of retaining potential technological giants in the home market, by promising fast-tracked approvals and easing regulations, on top of additional incentives. 

The new rules allow non-listed local companies to conduct initial public offerings without meeting the traditional financial requirements, according to reports. 

“Changing the requirements will unlock opportunities for both start-ups and investors and is something that should have been done years ago,” said Shaun Rein, managing director of the China Market Research Group in Shanghai. 

“Many Chinese firms that would prefer to go public in China ended up listed in the US instead because of onerous profit requirements. In fact, many great companies like Amazon never would have been allowed to go public in China if they had been Chinese start-ups.” 

Meanwhile, the pain of losing out on a listing by Chinese e-commerce juggernaut Alibaba in 2014 has also prompted the Hong Kong Exchanges and Clearing (HKEX) to examine new measures.

More at the Harbour Times.

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Time to take insider trading serious - Sara Hsu

Sara Hsu

The China Security Regulatory Commission (CSRC) has, again, announced it will act harshly in the case of insider trading. Rightfully so, writes financial analyst Sara Hsu in the Diplomat. But it is not enough.

Sara Hsu:

Still, insider trading remains a problem. While shareholder trading is banned one month before the announcement of a financial report, those who trade before the announcement may make a profit of 2.83 times that of uninformed trades, according to Zhu and Wang (2015). Insider trading is more of a problem among large shareholders in private as opposed to state-owned firms, as the former have higher levels of involvement in business operations and a stronger profit motive. 

One major reason why insider trading continues to pose such a problem is that penalties are relatively light and the crime is difficult to prove. According to the law, those found guilty of engaging in insider trading can be fined up to five times the illegal gains and be imprisoned for up to ten years. The courts have generally baulked at handing down the maximum penalties, although it has been argued that simply publishing the names of insider traders has done greater damage by way of blemishing reputations. Regulators lack the resources to properly investigate the crimes, which are difficult to detect. 

Moreover, legal language surrounding insider trading, written in the Securities Law of 2005 and the Regulation on the Administration of Futures Trading, is unclear, and the judicial interpretation written in the Insider Trading Interpretation is insufficient to clarify the language. For example, it is unclear who exactly is considered an insider and which bodies are to regulate insider trading, which undermines the basic understanding of the crime. 

If China is to effectively combat insider trading, then, not only is it important to devote more resources to investigating and prosecuting insider trading cases, it is also essential to ensure that the legal language is clarified going forward. The CSRC’s renewed campaign against insider trading may help to attract fresh attention to this issue.

More in the Diplomat.

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