Stock markets in China grow governance teeth

Now Chinese investors, previously prevented from suing as classes, can jointly seek recompense through the courts

  
People wear protective masks as they walk past a panel displaying the Hang Seng Index during morning trading following the outbreak of the new coronavirus in Hong Kong, China March 2, 2020.

People wear protective masks as they walk past a panel displaying the Hang Seng Index during morning trading following the outbreak of the new coronavirus in Hong Kong, China March 2, 2020.

REUTERS/Tyrone Siu

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

HONG KONG - Chinese equity market regulators are growing a set of governance teeth. The Supreme Court has finally permitted shareholder lawsuits similar to the class-action litigation deployed against corporate malfeasance in the West, mostly famously in the cases of Enron and WorldCom. As other liberalisations unleash massive rallies on domestic bourses, it’s past time to deter executive abuses.

Recent headlines have been dominated by fraud at New York-listed Chinese firms. Luckin Coffee, a Chinese rival to Starbucks, admitted to fabricating sales earlier in the year; the company, once valued at $12 billion, was then forced to delist. In June local magazine Caixin reported Nasdaq-listed Kingold Jewelry had used gold adulterated with copper alloy as collateral for $2.8 billion in loans. It might get the boot too.

Beijing regulators have publicly lambasted Luckin; the case donated ammunition to U.S. politicians seeking to eject mainland companies from American exchanges. But Nasdaq is not within the China Securities Regulatory Commission’s jurisdiction, so angry gestures are scant consolation. Yet Chinese investors get plenty of abuse from companies listed at home, and here Beijing has scope to turn talk into action.

Take Shenzhen-listed Kangde Xin Composite Material. In 2019 the company defaulted on a bond, which prompted an investigation that discovered some 15 billion yuan, roughly $2 billion, of cash and deposits had vanished from the company’s bank accounts. Trading was halted almost a year ago, but shareholders are still unable to exit their positions. The regulator has threatened punishments, but nothing has been meted out yet. Nor does jailing people provide financial compensation.

Now Chinese investors, previously prevented from suing as classes, can jointly seek recompense through the courts. It won’t be a free-for-all, however; plaintiffs must go through a representative government agency charged with investor protection. This caveat could allow officials to effectively block embarrassing suits against state-owned companies. It might also prevent the mobs of irate elderly day traders who routinely protest outside wealth management sales offices from swamping the dockets. Even so, it’s a step forward, and China Inc had better lawyer up.

CONTEXT NEWS

- China’s Supreme Court on July 31 published new regulations allowing “collective proceedings” in securities disputes, through which representative agencies can exercise litigation on behalf of a class of shareholders.

- Investors themselves cannot initiative legal action, but must rely on government institutions to represent them to the courts.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

(Editing by Una Galani and Sharon Lam) ((pete.sweeney@thomsonreuters.com; Reuters Messaging: pete.sweeney.thomsonreuters.com@reuters.net))

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