Reputational Sanctions as A Self-regulatory Tool of China’s Stock Exchanges: Recent Developments of the Law and Practice

Abstract

China has recently carried out significant reforms on its securities market and law, strengthening the self-regulatory role of its two stock exchanges in Shanghai and Shenzhen. As a reputational sanction, public criticism by the stock exchange is considered one of the most severe self-regulatory measures, and yet remains an understudied topic, particularly in a transitional economy like China. This paper aims to fill this gap by examining the implementation of public criticisms by the two Chinese stock exchanges over a recent six-year period of 2013-2018. Based on such examination, this paper will further explore its implications for the enforcement strategies of securities law and the development of the capital markets in China. Although public criticisms provide a useful self-regulatory tool for the stock exchanges, its effectiveness can be affected by many factors, including the relevant features of the criticized companies and the context in which they are used. Little overlap is found between the regulatory penalties by the stock exchanges and the state regulator, presumably because they coordinate their regulatory activities to target various types of misconduct under a co-regulatory regime. The state regulator may need to reinforce the self-regulatory deterrence of the stock exchanges, particularly when public criticisms are imposed on companies such as large SOEs which are less sensitive to reputational sanctions. Although there has been little direct competition between the two exchanges in the past, regulatory competition is likely to arise due to recent market developments and legal reforms, which would provide a better environment for the functioning of reputational sanctions.

Keywords: Reputational sanctions; public criticisms; stock exchange; self-regulation; law enforcement; China

JEL Classification: K22; K42; G14