China: Regulators Building Investor Confidence—Chinese Style

Last Updated: 22 December 2005
Article by Joseph R. Tiano, Jr.

Recent events foreshadow the opportunities and challenges that Chinese companies and their investors will face in both the U.S. and People’s Republic of China as they seek to access the public capital markets. A speech by the head of the U.S. Securities and Exchange Commission (SEC) and a collaborative effort by three major PRC governmental and financial institutions to establish a 10 billion (RMB) investor protection fund send a strong and very positive message to the global investment community. The message is that securities regulatory agencies recognize that many Chinese companies are currently ill-prepared for the regulatory demands of the public capital markets and stand ready to rectify this situation. As securities regulators continue to shape the landscape of the capital markets, one message is clear—the critical element to an efficient marketplace for Chinese companies is the establishment and enhancement of investor confidence.

Directors and executive officers of Chinese companies should anticipate and prepare now for the demands of a new regulatory regime. Effective preparation will allow companies to advantageously position themselves for a long and successful foray into the public capital markets as well as ensure market stability for years to come.

Guidance Given by SEC Chairman Christopher Cox

During his October 18, 2005 speech to the Securities Industry Association at Tsinghua University, SEC Chairman Christopher Cox, announced that he and his counterpart at the Chinese Securities Regulatory Commission (CSRC), Chairman Shang Fulin, reached an accord on the parameters of their upcoming discussions to formalize an agreement on the regulatory schema that will apply to publicly-traded Chinese companies. Telegraphing what promise to be the SEC’s "hot button" issues in the upcoming discussions, Chairman Cox’s speech has presented Chinese companies with a real opportunity to prepare for the changing regulatory environment.

Chairman Cox indicated that the mutual goal of the U.S. and Chinese securities regulatory bodies should be to educate Chinese companies about operating in an evolved capital markets environment. With this mutual goal in mind, Chairman Cox shared his vision for achieving the goal and encouraged Chinese companies to embrace critical components of an evolved public traded securities market—high quality disclosure, fair operation of the capital markets and efficient capital formation. In the Chairman's estimation, all of these components present significant, but surmountable, challenges to Chinese companies in light of how their businesses currently are conducted. A general shift in the current Chinese business paradigm also is a critical element to the participation of Chinese companies in an evolved capital marketplace.

On a more concrete level, Chairman Cox outlined his view on the steps required for Chinese companies to become viable capital markets candidates and competitors. The first step requires Chinese companies to enhance their efforts toward increasing shareholder democracy. Drawing on lessons learned from the recent U.S. corporate scandals and the relatively negligible evaporation of investor confidence, Chairman Cox explained that Chinese companies that wish to list on U.S. exchanges must embrace shareholder driven accountability in order to foster investor confidence. Citing the inevitable tension between market-driven, economic decisions and geopolitically driven decisions, Chairman Cox emphasized that the privatization of Chinese state owned enterprises is a necessary predicate to ensuring that decisions by companies are motivated by economic objectives of the shareholders, not political objectives of the sovereign.

Highlighting another likely SEC pressure point, Chairman Cox expressed concerns with the limitations on access to information in the media. He noted that all market participants and constituencies in our capital market expect and will demand greater access to corporate information. According to Chairman Cox, a concerted, PRC-driven focus must be placed on removing obstructions to free information flow and financial transparency. Viewing the PRC’s restrictions on news and information as a serious impediment to the free exchange of accurate and complete information, Cox called for a significant abatement of such restrictions prior to the entry of Chinese companies to the U.S. exchanges.

Finally, Chairman Cox emphasized the need for tough and independent regulation, presumably of a caliber no less stringent than that imposed and enforced by the SEC. Chairman Cox encouraged directors of Chinese companies to recognize that strong regulation fosters investor confidence and assured Chinese companies that going through the rigorous listing process in the U.S. would help these companies improve their disclosure practices. Noting that the Chinese government controls the vast majority of over 1400 companies and the inherent conflict of interest when the regulated is also the regulator, Cox advocated of a regulatory schema which is arms-length and independent and predicated on privatization.

We can fairly assume that Chairman Cox will advocate the same positions and embrace the same regulatory construct in his upcoming discussions with the CSRC Chairman Fulin.

Organization of the Fund to Protect Securities Investors

In another important development, the CSRC, the China Ministry of Finance and the People’s Bank of China have established a 10 billion (RMB) investor protection fund designed to compensate clients of troubled brokerage firms. The fund, which is called the "Fund to Protect Securities Investors," is analogous to, and should offer a comparable level of, protection as that offered by the Securities Investor Protection Corporation (SIPC). Brokerages and other securities houses in China are required to finance the investor protection fund in varying amounts, depending on the level of risk that they present to the fund.

The fund will not be used to protect investors against normal market risks and fluctuations. Instead, when a brokerage house has been shut down by Chinese regulators due to financial difficulties and customer assets have been lost, the assets of the fund will be used to return customers’ cash, stock and other securities. We again can reasonably conclude that the establishment of this fund is a predicate to the agreement to be negotiated between Chairman Cox and Chairman Fulin.

Lessons for Deal Makers

The entry of Chinese companies into the U.S. capital markets has created an extraordinary economic opportunity for Chinese companies and investors alike. Such opportunities are counter-balanced by comparably large challenges. Chinese companies and their investors must heed the signals emanating from Chairman Cox’s speech and prepare for an evolved capital market with restored investor confidence as the paramount goal.

Given this environment, Chinese companies that intend to access U.S. capital markets should consider taking preparatory action now so that they are poised to move quickly when the opportunity to access the public capital markets presents itself. These recent developments demonstrate that both U.S. and Chinese regulators will take significant measures to improve investor confidence and we can reasonably anticipate that they will continue to do so in the future. While it is impossible to predict all of the measures that will result from the discussions between Chairman Cox and Chairman Fulin, several lessons from these recent events should be learned.

Movement Towards Privatization. One can fairly conclude from Chairman Cox’s remarks that he believes that PRC state ownership and control of Chinese companies is antithetical to an evolved capital marketplace. The PRC may hope to alleviate Chairman Cox’s concerns by adopting a more muffled voice over the business affairs of Chinese companies. This, however, may not adequately address Chairman Cox’s concerns. It is likely that Chinese companies will have to address the issue of privatization and the buy-out of the PRC’s state owned equity (i.e., SOE Privatizations). This process is complicated and time consuming. Any Chinese company expecting access to U.S. capital markets should commence the SOE privatization process well in advance of its anticipated entry into the market. After the buyout of the government’s ownership interest, Chairman Cox’s hope that the PRC will play a less influential role in determining the business direction of these companies is more likely to be realized as economics should replace politics as the driving force behind business decisions.

No Relief From Sarbanes-Oxley. Despite the market potential and magnitude of the business opportunity presented by the opening of the Chinese consumer market and capital market, there is little chance that the regulatory environment will be relaxed simply to capitalize on the opportunity. To the contrary, regulation of the public capital markets is likely to maintain its stringent nature, especially with respect to Chinese listed companies. Chairman Cox made clear that Chinese companies should expect to be Sarbanes-Oxley compliant and directors of those companies should prepare themselves for liability for failing to do so. As publicly-reporting U.S. companies have already learned, Sarbanes-Oxley imposes a high standard of financial reporting and disclosure of information about listed businesses. To the unfamiliar and unsuspecting Chinese company, the SEC’s disclosure and reporting requirements promise to be a rigorous, eye-opening experience. Chinese companies should consult with their advisors about these requirements ahead of time to gain a fuller understanding of the Sarbanes-Oxley regulatory demands.

Enhanced Information Flow. When alluding to the fact that the U.S. capital markets benefit from the free flow of information, Chairman Cox’s comments suggested that the flow of business and economic information, through both the traditional media and Internet resources, significantly enhances the annual and periodic reporting requirements under the Securities and Exchange Act of 1934 and promotes an efficient and evolved capital market. Chairman Cox also intimated that Chinese companies and their investor base would benefit from the abatement of restrictions on the free flow of information. While Chinese companies will certainly be expected to comply with the typical securities disclosure requirements, one can only wonder if Chairman Cox will advocate the loosening of restrictions on the free flow of information in mainstream media for purposes of the SEC/CSRC agreement.

Joint U.S./Chinese Regulation. In his speech, Chairman Cox did not extensively address the issue of joint regulation, although that topic should be thoroughly discussed and addressed in the agreement to be reached by Chairman Cox and Chairman Fulin. Joint regulation and the respective regulatory reach of the SEC and the CSRC will largely depend on progress made by China in readying itself and its companies for participation in a sophisticated capital market environment. With respect to significant Chinese investment in U.S. companies and other cross-boarder listings by Chinese companies where investor protection presents a significant concern, one should not expect the SEC to relinquish any of its regulatory oversight and control as investor protection will remain paramount to the SEC. To the extent that PRC companies make significant progress towards the goals outlined by Chairman Cox, we may see a willingness of the SEC to relax duplicative rules and eliminate contradictory regulations, but only if investor protection is not compromised and a significant burden is placed on a regulated company.

Implication for Chinese Investment in U.S. Listed Companies. Given China’s enormous trade surplus of more than $100 billion a year with the United States and its already significant investment in U.S. debt securities and bonds, it is fair to assume that the natural tendency of the PRC and its companies will be to diversify their investments by acquiring U.S. companies with global brand-name recognition. Any U.S. public company that is considering taking on a significant investment from the PRC or a Chinese investor should take a strong cue from Chairman Cox’s speech. In an era where information on a company’s largest investor is often as important as information on the company itself, U.S. companies cannot be careful enough to know their investors and to take steps that facilitate compliance with regulations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions