China Securities Regulatory Commission (CSRC) in Beijing Photo:VCG

China is tightening up efforts to comprehensively prevent and stem financial fraud in the capital market to ensure its high-quality development, according to a government circular on Friday. 

The State Council, China's cabinet, on Friday published a circular on further toughening crackdown measures to prevent and punish financial fraud in the capital market. The circular was drafted by six government agencies including the China Securities Regulatory Commission (CSRC), Ministry of Public Security and the People's Bank of China.
 
The government guideline, which has 17 concrete measures, called for a strict crackdown on financial fraud in accordance with the law, strengthening penetrating-style supervision, and improving the quality and efficiency of law enforcement and judicial work.

At a press conference on Friday, a spokesperson with the CSRC, China's securities watchdog, further elaborated on the new measures as the country tightens up management for illegal behaviors in the capital market in a comprehensive manner.

For instance, the CSRC is pushing legal work to drastically raise the punishment cap for violations in information disclosure from 600,000 yuan ($82,565) to 10 million yuan for companies, and from 300,000 yuan to 5 million yuan for individuals, the CSRC spokesperson said on Friday.

The upper limit of punishment for IPO frauds is to be raised from 5 percent of the raised funds to 100 percent.

Observers said the release of the circular on Friday is a "turning point" in the capital market signaling supervision taking a turn toward all-round, intensified oversight, as it conspicuously introduced punishment measures that are far tougher than current ones.

"Although there had been various safeguards and regulations in place before, the severity of punishment lacks enough deterrence, leading to the emergence of illegal behaviors," Xi Junyang, a professor at the Shanghai University of Finance and Economics, told the Global Times on Friday. "The new regulation significantly increased the costs of crimes."

This is extremely positive news for the capital market as it reiterated the principle of a capital market governed by rules, Xi said, 

Xi noted that the move will lead to better investor protection and the forging of a fair, just and open capital market. "Without these traits, the capital market cannot retain its attractiveness to investors, especially individual and small investors who are often at the disadvantageous end of the market." 
A comprehensive scheme for cracking down on and suppressing financial fraud in key areas will be set up, with severe punishment doled out for IPO fraud, false information disclosure, embezzlement of raised capital and evasion of financial obligations, according to the circular.

Both "culprits" and "accomplices" will be held accountable, and those responsible for counterfeiting and cooperating with counterfeiting, including third-party organizations such as intermediaries and financial institutions, will be prosecuted by law enforcement, according to the circular. The ecosystem of fabricating false financial statements by professional criminal gangs should be resolutely smashed, the circular said.

To ensure a comprehensive crackdown method, the mechanism of incentivizing whistleblowers and coordination with criminal prosecution agencies, as well as coordination between the central and local government will be improved, according to the circular.

In carrying out regulation using both "teeth and thorns" to maintain pressure on illegal behaviors, the CSRC recently handed out a combined penalty of 68.3 million yuan to three listed firms over financial misstatement and embezzlement by major shareholders. Another two listed firms will be fined a combined 52.7 million yuan, according to CSRC.

In May, the CSRC fined Evergrande Group 4.175 billion yuan for fraudulent bond issuance and information disclosure violations, while imposing a lifetime ban on Hui Ka Yan, also known as Xu Jiayin, the founder of the real estate developer, from the securities market together with a fine of 47 million yuan.