Investor protection in China's securities markets: marginalization of the judiciary and utilization of political resources

• Author: HUANG Tao, HE Weiping
• Pages: 473-495

FRONTIERS OF LAW IN CHINA

VOL. 12 SEPTEMBER 2017 NO. 3

DOI 10.3868/s050-006-017-0025-4

ARTICLE

INVESTOR PROTECTION IN CHINA’S SECURITIES MARKETS: MARGINALIZATION

OF THE JUDICIARY AND UTILIZATION OF POLITICAL RESOURCES

HUANG Tao*, HE Weiping**

Abstract China’s securities markets have been experiencing high growth this year.

The Shanghai Stock Exchange is now ranked as the fourth largest stock exchange of the

world. So, who is protecting the Chinese investors in this fast growing and potentially

volatile market? The Incomplete Law Theory of Pistor and XU contends that regulators,

as they are more efficient, play a more dominate role than the judiciary in protecting

investors in the securities markets. This theory to some extent explains why the China’s

judiciary has been inactive in protecting investors in China, the host of the third largest

securities market in the world. However, this article finds that the theory is not able to

adequately explain the investor protection mechanism in China. We find that by

deploying various political resources, the Chinese state plays a direct role in protecting

the interest of investors that is often more significant than that played by judicial or

regulatory authority action.

Keywords securities market regulation, court, Incomplete Law Theory, investor protection,

political resource

INTRODUCTION .................................................................................................................... 473

I. CHINA’S REGULATIONS OF SECURITIES MARKETS — THE JUDICIARY AND THE

REGULATORY AUTHORITY...................................................................................... 477

II. MOBILIZING THE POLITICAL RESOURCES OF THE STATE TO PROTECT INVESTORS —

AN ALTERNATIVE MECHANISM TO THE JUDICIARY AND THE REGULATORY

AUTHORITY ............................................................................................................ 484

III. CAUSES AND EFFECTS........................................................................................... 491

CONCLUSION........................................................................................................................ 494

INTRODUCTION

The rapid development of China’s securities markets over the past two decades is

* (黄韬) Ph.D. in Law, Law School, Peking University, Beijing, China; Associate Professor, KoGuan Law

School, Shanghai Jiao Tong University, Shanghai 200030, China. Contact: huangtaokgls@sjtu.edu.cn

** (贺唯萍) Ph.D. in Law, School of Law, University of South Australia, Adelaide, Australia; Lecturer,

Law Faculty, Monash University, Victoria 3800, Australia. Contact: weiping.he@monash.edu

474 FRONTIERS OF LAW IN CHINA [Vol. 12: 473

undeniable. As of the end of December 2015, after the turmoil in June and July 2015,

Shanghai Stock Exchange (SSE) had a total market capitalization of around $ 4.55 trillion,

and is a bourse with over 136 million shareholders and 2,558 listed companies.1 At the

same time, China’s securities markets are renowned for their speculative nature,2 and had

also been likened to a casino.3 But China’s status as the host of the third largest securities

market of the world cannot simply be explained as the result of tens of millions of

investors being given the opportunity to speculate in unregulated markets.

This article examines the applicability of Pistor & XU’s Incomplete Law Theory to

China’s regulation of its securities markets. The Incomplete Law Theory contends that

because of their greater power and efficiency, regulators play a more dominant role as

opposed to the judiciary in protecting investors in the financial markets. This article finds

that, on the contrary to the theory emphasizing on the role of the regulator, the Chinese

government (both central and local), by exercising their political resources, largely

displaces the judiciary and regulatory authorities from the roles they would play in a

Western economy as the protectors of investors’ interests.

Djankov argues that there are four strategies for social control of business: private

orderings, private litigation, regulation and state ownership.4 When it is applied to the

social control of secondary market trading of securities, private ordering impels listed

companies to disclose information. State ownership refers to a situation where the state is

the single player in the market. Litigation is where the possibility of judicial

intervention-through private legal action plays a deterrent role in investors’ protection.

Regulation is where the state actively exercises its power in eliminating unlawful conduct.

These four strategies are not mutually exclusive. Under the socialism, with state

ownership, the government takes complete control over an activity (see Fig. 1).5 The

question is to which extent a strategy plays a role in given economic, social, and cultural

circumstances. Incomplete Law Theory attempts to answer the question of the extent to

which judicial and the state regulation play a role in regulation of securities markets.

1 Securities and Futures Commission, HK, Table A: Market Capitalisation of the World’s Top Stock

Exchanges (as at End Mar. 2015), available at http://www.sfc.hk/web/EN/files/SOM/MarketStatistics/a01.pdf

(last visited Mar. 22, 2016).

2 MEI Jianping, Jose A. Scheinkman & WEI Xiong, Speculative Trading and Stock Prices: Evidence from

Chinese A-B Share Premia, 10 Annals of Economics and Finance, 225–255 (2009); Sheldon Gao, China Stock

Market in a Global Perspective, Dow Jones Indexes, Sep. 2002.

3 WU Jinglian interviewed by the correspondent of Half-Hour Economy from CCTV, on Jan. 12, 2001.

Also see HONG Jing, China’s Securities Markets Are Still a Gaming House, available at

http://www.forbeschina.com/review/201304/0025298.shtml (last visited Nov. 21, 2014).

4 Simeon Djankov, Edward Glaeser & Rafael La Porta et al., The New Comparative Economics, 31

Journal of Comparative Economics, 595–619 (2003).

5 Id.