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The impact of China's regulatory investigations following the recent stock market crash 1
The impact of China's regulatory
investigations following the recent stock
market crash
What's the background?
China's stock market crashed at the end of June 2015. By early July, around a thousand of
the shares listed on PRC stock exchanges were suspended for trading and the A share index
fell by a third in a few weeks, losing over RMB20 trillion (roughly USD3.5 trillion).
Fearful of the potential impact on the Chinese economy, PRC regulators have adopted a
series of bail-out measures in a bid to stop the stock market from falling further. Some of
these measures are unusual, such as asking PRC securities companies to purchase A
shares with their proprietary funds and banning major shareholders and all shareholders with
over 5% shareholding of a listed company from selling the company's shares on the
secondary market within a period of 6 months from 8 July 2015. In addition, the Chinese
Securities Regulatory Commission (CSRC), has initiated an investigation into illegal trading
activities including "malicious shorting" and market manipulation which are regarded as
among the main causes of the stock market turmoil. Subsequently other PRC regulators and
relevant exchanges including the PRC Ministry of Public Security (MPS), the China Financial
Futures Exchange (CFFEX), the Shanghai Stock Exchange (SSE) and the Shenzhen Stock
Exchange (SZSE) are also carrying out investigations.
Foreign investors have expressed concern about the intervention of PRC regulators which
appears inconsistent with the government's stated aim to "let the market play a decisive role."
What are the regulators doing?
On 26 June 2015, after the stock market decreased 1,000 points over ten trading days, the
CSRC announced at its weekly press conference that it was cracking down on insider trading
and market manipulation.
On 2 July 2015, the CSRC said that it would carry out a special examination of market
manipulation and in particular, cross-market manipulation. It added that it was going to take
serious measures against market manipulation and if criminal activities were discovered, it
would transfer the cases to the public security department. The CSRC also asked the CFFEX
to cooperate in the special examination. In response to abnormal trading of stock option
futures, the CFFEX has taken several regulatory measures including restricting the opening
August 2015 Briefing note
2 The impact of China's regulatory investigations following the recent stock market crash
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of positions by some futures accounts.
On 9 July, the MPS announced that it would work with the CSRC to deal with criminal
activities in securities and futures trading such as the "malicious shorting of stocks," market
manipulation and the dissemination of false information on securities and futures trading.
Investigations against foreign investors
Since the beginning of the stock market crash, some in the Chinese market have blamed the
situation on hostile foreign investors seeking to make profits from a falling A share market.
According to press reports, some foreign investors, including foreign-invested onshore
companies trading in PRC securities or futures, have become targets of the regulatory
investigations.
Stock index futures trading by QFIIs and RQFIIs were among the first in the spotlight. On 1
July 2015, in response to accusations in the market that QFIIs and RQFIIs were shorting
stock index futures, the CFFEX announced that all the stock index futures trades conducted
by QFIIs and RQFIIs on the CFEEX were for hedging purposes only.
Reportedly, the CSRC is also paying attention to foreign investors' trading under the
Shanghai – Hong Kong Stock Connect program and the shorting of A shares or the A share
index (such as the SGX FTSE China A50 Index Futures) via offshore transactions.
Since 31 July 2014, the SSE and the SZSE have suspended trading (for three months) on 34
securities accounts which have been involved in frequent order routing and cancelling.
According to news reports, one of the suspended securities accounts belongs to a trading
subsidiary of an international hedge fund.
Key regulatory issues
As yet, there has been no official result of the investigations, so it remains unclear how the
CSRC or the MPS will identify and determine illegal trading activities related to the stock
market crash. One of the key issues is what activities will be viewed as "malicious shorting" –
this seems to be the focus of the investigations. It is worth noting that "malicious shorting" is
not a defined term under any PRC securities or futures regulation.
In addition, the SSE and the SZSE suspended trading of the 34 securities accounts mainly
on the grounds of "abnormal trading." Unlike market manipulation or insider trading, for
which the relevant PRC regulations have provided relatively specific fact patterns, "abnormal
trading" operates under the trading rules of relevant exchanges as a catch-all provision to
address trading which may have an unusual impact on market prices or trading volumes of A
shares. In practice, the abnormal trading rules give the exchanges a high degree of
discretion to determine what constitutes abnormal trading and to take action accordingly.
The impact of China's regulatory investigations following the recent stock market crash 3
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Outlook
Since the A-share market is yet to be "stabilised" and the investigations are still on-going, it
remains to be seen whether and how the regulators will take further action. The final results
of the investigations may provide some guidance on understanding what may constitute
malicious shorting and other market manipulative activities under PRC laws. In the
meantime, foreign investors should be aware of the unusual action taken by PRC regulators
and expect more scrutiny from PRC regulators on their trading related to China A shares.
Clifford Chance is keeping a close eye on the market and policy developments in China and
is helping to guide clients through this new regulatory environment. We will provide further
updates as the situation develops.
4 The impact of China's regulatory investigations following the recent stock market crash
517571-4-6262-v0.5
This publication does not necessarily deal with every important topic or cover every aspect of the topics with which it deals.designed to provide legal or other advice.
As is the case for all international law firms licensed in China, we are authorized to provide information concerning the effect of the Chinese legal environment, however we are not permitted to engage in Chinese legal affairs in the capacity of a domestic law firm. Should the services of such a firm be required, we would be glad to recommend one.
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Authors and China Contacts
Yang Tiecheng
Partner
T:86 10 65352265
Email: [email protected]
Hong Kong Contacts
Francis Edwards
Partner
T: 852 2826 3453
Email: [email protected]
The impact of China's regulatory investigations following the recent stock market crash
necessarily deal with every important topic or cover every aspect of the topics with which it deals. It is not
As is the case for all international law firms licensed in China, we are ation concerning the effect of the
Chinese legal environment, however we are not permitted to engage in Chinese legal affairs in the capacity of a domestic law
Should the services of such a firm be required, we would be
Clifford Chance, 40th Floor, Bund Centre, 222 Yan An East Road, Shanghai 200002, People's Republic of China
© Clifford Chance 2015
Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC323571
Registered office: 10 Upper Bank Street, London, E14 5JJ
We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications
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*Linda Widyati & Partners in association with Clifford Chance.
Authors and China Contacts
Ge Yin
Counsel
T: 86 21 23207202
Email: [email protected]
Mark Shipman
Partner
T: 852 2825 8992
Email: [email protected]
The impact of China's regulatory investigations following the recent stock market crash
CN-8000-COMM-15
fford Chance, 40th Floor, Bund Centre, 222 Yan An East Road, Shanghai 200002, People's Republic of China
Clifford Chance LLP is a limited liability partnership registered in England and Wales under number OC323571
10 Upper Bank Street, London, E14 5JJ
We use the word 'partner' to refer to a member of Clifford Chance LLP, or an employee or consultant with equivalent standing and
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