


































Economics, Law and Policy 
ISSN 2576-2060 (Print) ISSN 2576-2052 (Online) 

Vol. 7, No. 1, 2024 

www.scholink.org/ojs/index.php/elp 

 
 

166 

Original Paper 

The Construction of Chinese Securities Fraud Rules 

Zhu Pei
1 

1
 BOCOM, Zhejiang Province, Hangzhou, China 

 

Received: April 20, 2024        Accepted: June 10, 2024         Online Published: June 13, 2024 

doi:10.22158/elp.v7n1p166         URL: http://dx.doi.org/10.22158/elp.v7n1p166 

 

Abstract 

Building an effective and fair legal system is one of the ultimate goals of China’s capital market 

construction. To protect minority investors, changes has been made in recent years, especially rules 

about securities fraud. Though China constantly reform its securities regulation system, whether is it a 

perfect solution to transplant the regulation in US securities market remains unknown. This article is to 

critically examine China’s securities fraud regulation, both from the perspective of practice and theory. 

It is argued that the impact of these changes has the common goal and that they will make profound 

basis on capital market. 

Keywords 

Securities Regulation, The Reform of Chinese Securities Law, Legal Transplantation 

 

1. Introduction 

In recent years, the regulation of China’s securities market has been constantly explored. The whole 

fundamental structure was established by 1988 PRC Securities Law. The revised rules in 

misrepresentation in the 2019 revision of the PRC Securities Law and the following rules in 2022 made 

significant progress in dealing with the false statement on the securities market.  

False statements in the securities market refer to significant false, misleading, omitted, or inappropriate 

disclosure of information related to securities issuance, trading, and related activities disclosed by 

relevant entities or actors in the securities market. Such deceptive information results to investors 

participating in securities or trading activities without understanding the true situation. Due to the basis 

of the modern securities market is a such common sense, that the market can function well under the 

circumstance that the company provide all subjective information, including financial and operating 

status, while the investors are able to make rational judgement on investment. The main responsibility 

of government or other regulative department is to maintain information disclosed by listing and listed 

company is fully, reliable and timely.  

 



www.scholink.org/ojs/index.php/elp              Economics, Law and Policy                  Vol. 7, No. 1, 2024 

 
Published by SCHOLINK INC. 

167 

It is no doubt that the fairness and the effectiveness of the whole securities market would be drastically 

weakened if the false statements can not be restrained properly. Thus, restraining false statement 

through legal enforcement is an essential way to maintain the order of the securities market and 

leverage the market’s self-regulation function. After the disclosing of misrepresentation, the further 

punishment will not only focus on the liability of involved company, such as penalty and dismissing 

qualifications of public co-operates, but also aiming at compensation for loss of concerned investors. 

Above all, observing the securities regulation from a broad perspective of institutional evolution can 

provide a background framework for understanding China’s corporate capital system reform and its 

potential impact on the capital market. 

 

2. The History of PRC Securities Law 

The Securities Law of the People’s Republic of China, which was implemented in 1999, has formed the 

initial framework of China’s securities legal system (Fang, Tian & Yanfei, 2022). The whole legal 

system of capital market has been in progress in past 30 years. The Securities Law had been revised for 

twice at 2005 and 2019. The whole securities regulation system has been enriched by judicial 

interpretation from the Supreme Court of PRC and administrative rules from the State Council, beside 

that judicial cases plays a role in legal practice related to capital market.  

With the unprecedented thriving of capital market, the fraud and deceit became a serious problem, as 

the companies engage in financial fraud during the issuance stage or make false statements during the 

operation period. Thus, the relative lack of civil liability and investor protection has become an 

unneglectable shortcoming of this law (Hu, 2016). It was not until 2002 that the Supreme People’s 

Court enacted Certain Provisions of the Supreme People’s Court on the Trial of Civil Compensation 

Cases arising from Misrepresentation in the Securities Market (Judicial interpretation 2002), which 

marked the beginning of the introduction of a new tort law regime in China-the tort of 

misrepresentation (Fang, Tian & Yanfei, 2022). The tort of misrepresentation is a product of the 

historical development of Anglo-American tort law (Ban, 2017), and the creation and application of its 

system are closely related to the institutional environment in which Anglo-American tort law arose and 

exists (Jeong, 2015).
 

 

3. Restrain Securities Fraud: From the Perspective of Comparative Law 

3.1 Dealing with Securities Misrepresentation 

From the perspective of comparative studies, the concept of misrepresentation was first used in 

England (Purshouse, 2018). Subsequently, the term misrepresentation was gradually used in securities 

law and became an important concept in the early regulation in the UK (Ernst, 1943, pp. 549-550). In 

the case of the United States, although there is no uniform statutory provision for misrepresentation in 

transactions, state courts generally recognize tort law remedies for types of misrepresentation 

(Affiliated UTE Citizens of Utah et al. v. United States et al. 406 U.S., 1972, p. 128; Blackie v. Barack, 



www.scholink.org/ojs/index.php/elp              Economics, Law and Policy                  Vol. 7, No. 1, 2024 

 
Published by SCHOLINK INC. 

168 

524F.2d891, 1975; Shi & Zhou, 2015, p. 217), and the United States has also enriched the tort of 

misrepresentation by providing tort law remedies for misrepresentation in special areas through the 

provisions of special laws such as the Advertising Act and the Securities Exchange Act (Karpoff, Lee 

& Martin, 2007).  

3.2 Stones from Other Mountains: Legal Transplantation in Securities Law (Traditional Chinese 

proverb, n.d.) 

Legal transplantation is a difficult and continuous process, and it is important to deeply understand and 

grasp the historical motives and realistic appearance of the creation and development of the 

misrepresentation tort system, which is an essential foundation for the successful completion of the 

transplantation of law; and a prerequisite for the establishment of a comprehensive misrepresentation 

tort system in China (Gao & Wang, 2016). The initial legal transplantation was a special type-Chinese 

securities regulation learned from the United States, coupled with the residual influence of traditional 

systems, manifested as a mixed system of securities regulation.  

The content of the Securities Law 2019 has made great effort on regulating fraud, including 

strengthening information disclosure regulations, increasing the protection system for investors, 

increasing the punishment for illegal and irregular activities, and clarifying market manipulation and 

insider trading behavior.The content of the Securities Law (2019) includes provisions similar to those 

of the US Securities Law of 1933 and the Securities Exchange Law of 1934, most of the revise can 

been seen as prototype from securities regulation from US. The judicial interpretation of 2002 has 

made a more comprehensive regulation of the tort of misrepresentation in securities issuance and 

securities trading in the form of the special law. 

 

4. The Imperfect Securities Fraud Rules 

The Chinese mode of regulation is certainly conducive to specific problem-solving and enhancing the 

relevance of institutional regulation, but the special law provisions lacking general law support are 

inherently inadequate (Guo, 2003, pp. 95-99). Although the current establishment of China’s 

misrepresentation tort system has drawn on the theories of the common law system, there are still 

dilemmas in judicial practice that cannot be perfectly integrated with China’s domestic securities 

market, including the problems of expanding the application of the permitted evidence, unclear 

determination of the substantial standard, insufficient improvement of the causation rules, and the weak 

function of the class action mechanism (Tang & Li, 2022, pp. 61-72). 

First, the Chinese Supreme Court stated that the new judicial interpretation can also be applied to 

misrepresentations occurring in equity markets other than national securities trading venues (Lin, Fu & 

Zhou, 2022, pp. 43-50). The core of the securities misrepresentation tort system lies in the presumption 

of causation, and the “reference” application means that this presumption needs to be extended beyond 

its original scope of application, the such phenomenon needs to be alerted and the limits of its 

application need to be analyzed. When discussing the application or “reference” application of the tort 



www.scholink.org/ojs/index.php/elp              Economics, Law and Policy                  Vol. 7, No. 1, 2024 

 
Published by SCHOLINK INC. 

169 

system of securities misrepresentation, we should not focus entirely on whether the object of the 

transaction in question constitutes a nominal “security” but should pay attention to the rule of 

presumption of causation as its essence and be alert to the great power of the presumption of causation 

(Fan, 2016, pp. 1495-1511). The Court should be alert to the great power of the presumption of 

causation and evaluate the liability for securities fraud in an appropriate and fair manner. 

Second, there is a theoretical deficiency in China’s judicial practice regarding the determination of  

the materiality of securities misrepresentations. Whether a misrepresentation is a material is only one of 

the factors to be considered when administrative penalties are imposed by administrative authorities 

such as the Securities Regulatory Commission. Even if a misrepresentation is not material, it may be 

subject to administrative penalties. At the same time, it is inconsistent with the current legal provisions 

and judicial interpretations as the defendant are not allowed to prove the basic facts found in the 

administrative penalty decision in a civil action for misrepresentation. And a phenomenon has also 

been noted that limiting the defendant’s opportunity to raise the defense that false statements are not 

material does not necessarily benefit small and medium-sized investors (Cox, 1997, p. 497). For 

example, attorneys’ fees and expert witness fees are unavoidable expenses, so small and medium-sized 

investors as a whole are at a disadvantage in a civil action for misrepresentation (Fox, 2009). 

Moreover, the core of the fraud on the market theory is that the stock price accurately and time reflects 

the public information disclosed by the perpetrator of the misrepresentation, so that an investor’s 

investment transaction based on stock price fluctuations may be presumed to have relied on the 

information disclosed by the perpetrator, but such reliance cannot be presumed when the information 

has no effect on the stock price (Langevoort, 2007). In the United States, the Supreme Court held that a 

defendant could rebut the presumption of a causal link in a transaction since the misrepresentation had 

no effect on the price of the stock (Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398, 2014). 

In this regard, China’s courts should also allow defendants to rebut the presumption of causation on 

this ground, preventing civil litigation from becoming “insurance” for investors’ investments. 

 

5. The Judicial Progress of Securities Fraud Case 

In the absence of general legislative regulation of misrepresentation infringement, only the special type 

of misrepresentation infringement is provided for, which will inevitably lack generalization and 

abstraction of the general elements of misrepresentation infringement and easily bring legal loopholes 

in the special law regulation (Li, 2015, p. 250). These challenges in the misrepresentation tort regime 

were further addressed by the promulgation of the 2022 Supreme People’s Court Regulations on the 

Trial of Civil Compensation Cases for Misrepresentation Infringement in the Securities Market (Fang, 

Tian & Yanfei, 2022). The newly revised judicial interpretation has the important significance of 

improving the liability system for misrepresentation and promoting the progress of civil liability 

adjudication rules (Tang & Li, 2022, pp. 61-72). The new judicial interpretation introduces the 

fraudulent market theory and scientifically designs the logical system of civil compensation for 



www.scholink.org/ojs/index.php/elp              Economics, Law and Policy                  Vol. 7, No. 1, 2024 

 
Published by SCHOLINK INC. 

170 

misrepresentation tort.  

Nevertheless, the litigation system of securities investors still need to be activated further. It is to be 

noted that existing empirical studies show that one of the main problems reflected in the low filing rate 

of misrepresentation cases in China is the lack of investor confidence in the civil compensation 

mechanism and the fact that the existing litigation mechanism does not yet provide a strong litigation 

tool for injured investors (Tang, 2019, pp. 58-59). In addition to the “implied entry and express exit” 

litigation mechanism in the United States, there still a large space to explore when it comes to the 

subject of building a class action system that is consistent with the Chinese securities market (Xu, 2020, 

pp. 61-73). Such issues should be considered, for example, the proper and reasonable identification of 

the scope of rights holders, the clarification of the scope of authorization of insurance institutions, and 

the expansive effect of class action results. 

 

6. Case Shock the Market: Kangmei Case 

Kangmei Pharmaceutical Co., Ltd. (hereinafter referred to as Kangmei Pharmaceutical) was established 

in 1997 and listed on the Shanghai Stock Exchange in 2001. It is a listed company that focuses on the 

production and sales of traditional Chinese medicine decoction pieces. During the period from 2015 to 

2018, Kangmei Pharmaceutical Company’s operations expanded in disorderly manner, and engaged in 

financial fraud. The controlling shareholder and related-parties occupied funds for private purposes, 

leading to insolvency and delisting. The controller of the company was held criminally responsible for 

manipulating the securities market and engaging in illegal disclosure or non disclosure of important 

information. In November 2021, Kangmei Pharmaceutical was fined 5 million yuan on charges of 

cooperative bribery. Soon after, the local Court in Guangzhou has made a judgment, which is also the 

first securities false statement liability dispute in China, that Kangmei Pharmaceutical has compensated 

52037 investors with a loss of 2.459 billion yuan. 

6.1 Determination of False Statements in the Case 

In the “2016 Annual Report”, “2017 Annual Report”, and “2018 Half Year Report” disclosed by 

Kangmei Pharmaceutical, there is a false increase in operating income, interest income, and operating 

profit, a false increase in monetary funds, and a failure to disclose the non-operational occupation of 

funds by controlling shareholders and their related parties. This constitutes the act of making false 

records of major events that inconsistent with facts, causing significant omissions in disclosure. There 

are false records in the audit reports of Kangmei Pharmaceutical’s financial statements in 2016 and 

2017 issued by accounting firm. Thus, the court confirmed the fact that Kangmei Pharmaceutical had 

false records and major omissions, and found that the case had false statements. 

6.2 Factual Causation between the Plaintiff’s Investment Losses and the False Statements 

Article 18 of the “Several Provisions of the Supreme People’s Court on the Trial of Civil 

Compensation Cases Caused by False Statements in the Securities Market” stipulates: “If an investor 

has the following circumstances, the people’s court shall determine that there is a causal relationship 



www.scholink.org/ojs/index.php/elp              Economics, Law and Policy                  Vol. 7, No. 1, 2024 

 
Published by SCHOLINK INC. 

171 

between the false statement and the damage result: (1) the investor invests in securities directly related 

to the false statement; (2) the investor buys the securities before the disclosure date or correction date 

on or after the implementation date of the false statement; (3) the investor incurs losses due to selling 

the securities or continuing to hold the securities on or after the disclosure date or correction date of the 

false statement”. According to the provisions of this judicial interpretation, it shall be presumed that 

there is a causation between the loss of investors and the defendant’s false statement behavior. 

6.3 Compensation Liability  

Article 69 of the Securities Law of PRC (2014 Amendment) set the rule that the issuer or listed 

company hold the compensation liability in false misrepresentation. The directors, supervisors, senior 

management personnel, other directly responsible personnel, the controlling shareholder or actual 

controller of the issuer or listed company shall bear joint and several compensation liability with the 

issuer or listed company, except for those that can prove that they are not at fault. Thus, the Kangmei 

Pharmaceutical is liable for compensation for the losses suffered by the investors involved in the case. 

 

7. Conclusion 

This article briefly reviews the history of China’s securities law legislation and revision, and analyzes 

the reference of China’s capital market regulation to foreign securities markets, especially the United 

States. In response to fraudulent behavior in the securities market, China’s securities regulatory 

mechanism is rapidly improving, but there are still some problems in this mixed regulative system. 

Strengthening ex ante regulation and establishing a connected litigation system are possible directions 

for future. This article attempts to illustrate the legislative and judicial changes in recent years through 

a framework review of China’s securities regulation, and indicates that these changes will have a 

profound impact on the Chinese capital market. 

 

References 

Affiliated UTE Citizens of Utah et al. v. United States et al. 406 U.S. (p. 128). (1972).  

Ban, A. (2017). Misrepresentation in Applications for Insurance and the pro rata Clause in German 

Insurance Contract Law. Journal of Insurance Science. https://doi.org/10.5609/jsis.2017.637_53 

Blackie v. Barack, 524F.2d891. (1975).  

Cox, J. D. (1997). Making Securities Fraud Class Actions Virtuous. The Arizona Law Review, 39, 497. 

Ernst, E. G. (1943). Misrepresentation. British Medical Journal, 2, 549-550. 

https://doi.org/10.1136/bmj.2.4321.549 

Fan, J. (2016). New issues of causality on misrepresentation transactions in China’s securities market. 

Peking University Law Journal, 06, 1495-1511. 

Fang, F., Tian, W., & Yanfei, Z. (2022). Test on the law protection of minority investors in China: 

Perspective of misrepresentation in securities market. Managerial and Decision Economics. 

https://doi.org/10.1002/mde.3772 

https://doi.org/10.5609/jsis.2017.637_53
https://doi.org/10.1136/bmj.2.4321.549
https://doi.org/10.1002/mde.3772


www.scholink.org/ojs/index.php/elp              Economics, Law and Policy                  Vol. 7, No. 1, 2024 

 
Published by SCHOLINK INC. 

172 

Fox, M. B. (2009). Why Civil Liability for Disclosure Violations when issuers do not trade. Wisconsin 

Law Review. 

Gao, S., & Wang, Q. (2016). The U.S. Reorganization Regime in the Chinese Mirror: Legal 

Transplantation and Obstructed Efficiency. 

Guo, F. (2003). The recognition and compensation of misrepresentation tort. China Legal Science, 02, 

95-99. 

Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398. (2014). 

Hu, H. (2016). Misrepresentation, Involuntary Delisting and Investor Protection—The Dilemma of 

Dislocated Regulation on Chinese Securities Market. Chinese Law Journal. 

https://doi.org/10.2139/ssrn.3007037 

Jeong, S. (2015). A Study on Misrepresentation in the Anglo-American Contract Law: Comparison 

with our legal system and Implications for US. 

Karpoff, J. M., Lee, D. S., & Martin, G. S. (2007). The Legal Penalties for Financial Misrepresentation. 

Torts & Products Liability Law eJournal. https://doi.org/10.2139/ssrn.933333 

Langevoort, D. C. (2007). Basic at Twenty: Rethinking Fraud-on-the-Market. Corporate Law: 

Securities Law. https://doi.org/10.2139/ssrn.1026316 

Li, G. G. (2015). Understanding and Application of the Judicial Interpretation of the Supreme People’s 

Court on the Trial of Cases of Misrepresentation in the Securities Market (p. 250). The People’s 

Court Press. 

Lin, W. W., Fu, J. L., & Zhou, L. J. (2022). The Understanding and Application of Several Provisions 

on the Trial of Civil Compensation Cases for Misrepresentation in the Securities Market. People’s 

Judicature, 07, 43-50. 

Purshouse, C. (2018). Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465. Essential Cases: 

Tort Law. One of the major outcomes of this case was the enactment of The Misrepresentation Act 

1967 in the UK. https://doi.org/10.1093/he/9780191866128.003.0016 

Shi, T. T., & Zhou, L. J. (2015). Classic Cases of U.S. Securities Fraud: Insider Trading and 

Misrepresentation (p. 217). Law Press China. 

Tang, X. (2019). Establishing a Chinese style securities class action system. China Finance, 23, 58-59. 

Tang, X., & Li, Z. Z. (2022). Review of the newly revised judicial interpretation of civil compensation 

for misrepresentation. Journal of Law Application, 03, 61-72. 

Traditional Chinese proverb. (n.d.). Use stones from another mountain to polish one’s jade. 

Xu, Y. W. (2020). On the improvement of bond class action system in the new Securities Law. Review 

on Law and Finance, 61-73. 

 

 

https://doi.org/10.2139/ssrn.3007037
https://doi.org/10.2139/ssrn.933333
https://doi.org/10.2139/ssrn.1026316
https://doi.org/10.1093/he/9780191866128.003.0016

