A milestone in capital market transformation
On Dec 28, the revised Securities Law of the People's Republic of China was approved and adopted by the Standing Committee of the National People's Congress, the country's top legislature, and it will come into effect on March 1.
Compared with the original law, the revised law substantially raises the bar in the punishment of illegal activities and rule violations, strengthens the requirement of information disclosure and improves the system to protect investors' rights and interests, which is of far-reaching significance for China to build a rules-based and transparent capital market.
The adoption of the law is a milestone event in the process of transforming China's securities market into a market-oriented, rules-based and international one.
In recent years, the number of rule violation cases in China's securities market has remained high. According to Wind Info, there were 1,917 cases of rule violation by A-share listed companies last year.
The number was much higher than the 1,203 cases in 2017, although it was a slight decrease from the level of 1,968 in 2018. There were a total of 685 listed companies that engaged in rule-violation activities last year, accounting for 18.22 percent of all A-share listed companies. Most violations were related to information disclosure.
The revised Securities Law substantially raises the maximum punishment in this area to 10 million yuan ($1.44 million) from only 600,000 yuan in the original law. The previously low penalty for committing a crime has undoubtedly encouraged the occurrence of illegal activities and resulted in some serious law violations with bad social impact.
For example, Chinese pharmaceutical firm Kangmei Pharmaceutical engaged in one of the country's largest financial frauds totaling $12.7 billion last year. The company's stock price plunged by more than 75 percent in less than two months, causing huge losses for investors.
The emphasis on information disclosure and investor protection is crucial to improving the efficiency of the financial market. Information is the basis of investors' decision-making process. Timely and complete information disclosure will help improve the efficiency and liquidity of the financial market and a sound mechanism for the protection of investors' rights and interests can ensure investors' legitimate profits and help promote the healthy development of the financial market.
An efficient and rules-based secondary market is also important for the function of the primary market. The improvement of the efficiency and liquidity in the secondary market is beneficial for the corporate financing and valuations in the primary market, thus promoting the development of the real economy.
The development of an efficient financial market also relies on a stable and orderly market environment, which requires a sound information communication channel to ensure market forces play a major role. This has become the consensus of scholars and industry experts. The illegal activities in the securities market have jeopardized fair market competition, harmed the normal and stable operation of the market, and undermined investors' interests and confidence.
Building a rules-based and transparent capital market requires market players to obey rules and regulations and disclose information in a timely manner. It also requires the regulators to act swiftly to crack down on illegal activities.
Therefore, the adoption of the revised Securities Law will further energize the market, help boost investors' confidence and allow the financial market to play a more effective role. A healthy and orderly financial market will better support economic development, better meet the financing demand of companies and promote sustainable economic growth.
The introduction of the revised Securities Law holds far-reaching significance as it will help draw more investors from home and abroad into the Chinese capital market. Global economic growth has been sluggish amid growing challenges and uncertainties. Investors' sentiment has been depressed.
Against such a backdrop, China has been firmly pushing capital market reforms, aiming to build a standardized, transparent, open, and dynamic capital market. As Chinese A shares and sovereign bonds are increasingly being included in major global indexes such as the MSCI and FTSE, the Chinese market has drawn growing attention from international investors.
The adoption of the revised Securities Law is a major step in China's capital market reform and it will help boost the market's attractiveness to foreign investors, improve their confidence and maintain a stable and orderly market environment.
On the other hand, the introduction of the new Securities Law also helps to better regulate the behavior of institutional investors. As an important part of the securities market, institutional investors can help stabilize the market and put checks on listed companies.
The provisions of the new Securities Law, such as strengthened regulation on information disclosure and higher penalty for fraudulent securities issuance, will expand the positive influence of institutional investors in both the primary and secondary markets.
The revised law will enable them to better screen and verify the quality of the unlisted companies in the primary market and the behavior of the listed companies in the secondary market, therefore forming an effective linkage between the two markets and eventually helping improve the quality of the Chinese listed companies.
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