Stock markets in China grow governance teeth

Kingold Jewelry

05/08/2020 04:33

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Pete Sweeney
    HONG KONG, Aug 5 (Reuters Breakingviews) - 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  SBUX.O , 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  KGJI.O  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
 002450.SZ . 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.
    On Twitter https://twitter.com/petesweeneypro 
    
    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.
    -  For previous columns by the author, Reuters customers can
click on  SWEENEY/ 
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Supreme court announcement (Chinese)     http://www.court.gov.cn/zixun-xiangqing-245501.html?mc_cid=79c1ca0b4b&mc_eid=8fc4964376
 
Caixin article     https://www.caixinglobal.com/2020-06-11/scandal-hit-kangde-xin-faces-new-probe-over-bonds-101566134.html
 
BREAKINGVIEWS-China’s tough Luckin line faces deaf U.S. ears   
 urn:newsml:reuters.com:*:nL3N2CH0E6
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 (Editing by Una Galani and Sharon Lam)
 ((pete.sweeney@thomsonreuters.com; Reuters Messaging:
pete.sweeney.thomsonreuters.com@reuters.net))