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Chinese securities regulations have rather strict provisions for company disclosure. Generally speaking, the information disclosure regime in China’s securities market was set up to satisfy the needs of the market. But the simple truth that the Australian Law noticed and that would come soon to attention of the Chinese Law is that it is impossible to formulate a list that includes all of the information that may be important for investors.
In China the most serious problem is the dominant role of the State in the stock markets. While China has reformed itself into a quasi-market economy, the State has attempted to direct that economy through economic law and policies. [xv] In a time when the protection of the investors is the main concern of Australia, China has attempted to protect itself rather than the investors. In fact, information disclosure in China is inconsistent with a general condition of less transparency because the State allowed the shareholding experiment to go forward as a means of raising capital for state-owned companies that were on the verge of bankruptcy[xvi]. Unlike Australia, the Chinese securities regulation is dominated by the tension between the State’s economic policy and the State’s regulation of market activity. Therefore, requirements for corporate transparency might not be effective in light of a lack of lawmaking transparency. This reality is easily felt when we look at the one of the biggest scandals in China concerning disclosure. We are also going to show how Australian Law would have reacted if put in a similar position.
Hainan Minyuan Modern Agricultural Company
Hainan Minyuan Modern Agricultural Company made its public offering on April 30, 1993.[xvii] In 1996 and 1997, a series of public disclosures pushed the price of Minyuan’s stock to new heights. On January 22, 1997, the company announced a profit in 1996 of 0.867 yuan per share, an improvement of 1290.68 times over profits in 1995.
While Minyuan’s stock rose, the company could not escape doubts about the annual report. The company was suspected of trading its own shares. The company released a mysterious “supplemental report” on February 1, 1997 which changed some of the company’s financial indicators. In March, five directors who approved the false reports resigned and disappeared.
Responding to requests from investors, an investigation into Minyuan’s financial reports was launched on March 5, 1997. The investigation went on for more than a year. According to the investigation, the CSRC found that the company had fraudulently inflated accounts by 1.2 billion yuan from illegal real estate transactions in Beijing. Criminal charges were filed against the chairman and five directors, marking the first time criminal charges were filed against senior officials of a listed company.[xviii] A commentary in China Securities Newspaper labeled this scandal as the most serious case of securities fraud on China’s securities markets.[xix]
However, Minyuan refused to help the CSRC find the five directors, and the CSRC later released a notice that there is “no obligation” for Minyuan to help. The reason weakness of the CSRC is suspected for political reasons. Two of the largest shareholders of Minyuan had ties to China’s late paramount leader, Deng Xiaoping, one is Deng’s son, Deng Pufang, the other is Deng’s son-in-law, Wu Jianchang.
As we can see, this case definitely undermines the CSRC powers. It shows the limits of this regulator. This will definitely permit other companies to breach their duties of disclosure. In Australia, the situation would have been probably different. The Australian regulators are an independent government body that main duty is to protect investors and consumers in the Australian financial system[xx]. But the simple reality is that in Australia there is a lack of case law in that field. Very few cases deal directly with the issue of prospectuses.[xxi] As a result, guidance on these provisions will probably be derived from case law on s 51A and 52 of the Trade Practices Act 1974. But after the Financial Reform Act, the liability rules for securities dealings are now contained in the Corporations Law. Section 52 and the associated consumer protection provisions of the Trade Practices Act (and the Fair Trading legislation of the States and Territories) do no longer apply to dealings in securities. What is the liability regime in China and Australia?
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