Three decades ago, China’s decision to develop a “socialist market economy” helped bolster foreign investors’ confidence, resulting in the country’s rise to become the second largest economy in the world.  Today, if China shows similar determination to bring about positive changes in crucial areas, foreign investors will have strong reasons for continuing to feel optimistic about the Chinese market.  One crucial area is the regulation of China’s stock market.  China does have regulatory tools to combat irregularities in the stock market.  Have these tools been used well? 

Insider Trading & Divulging Inside Information

Two key irregularities in China’s stock market are insider trading and divulging inside information.  Article 180 Paragraph 1 of the Criminal Law of the People’s Republic of China sets forth the elements of these crimes as follows:

[…] before the information involving the issuance of securities or the trading of securities or futures, or other information that has major effects on the trading prices of securities or futures, is made public, a person who has inside information regarding the trading of the securities or futures or a person who illegally obtains inside information regarding the trading of the securities or futures buys or sells the securities, engages in futures trading related to the inside information, divulges the information, or explicitly or implicitly suggests that others engage in the above-mentioned trading activities […]. (emphasis added)

The paragraph continues to provide two sentencing levels covering “serious” circumstances and “particularly serious” circumstances, respectively:

[If]the circumstances are serious, [the person] shall be sentenced to a limited-term imprisonment or detention of no more than five years and in addition or as sole [punishment] shall be fined one to five times [the person’s] unlawful gains.  If[, however,] the circumstances are particularly serious, [the person] shall be sentenced to a limited-term imprisonment of five to ten years and in addition or as sole [punishment] shall be fined one to five times [the person’s] unlawful gains. (emphasis added)

To help judges determine what “serious” and “particularly serious” circumstances are, the Supreme People’s Court of China has issued a judicial interpretation to provide specific thresholds for making such determination.  For example, if “the amount of benefits derived” is at least RMB 150,000, the circumstances are considered to be “serious”, whereas if such amount is at least RMB 750,000, the circumstances are considered to be “particularly serious”.

Using Nonpublic Information for Trading & Ambiguous Legislation

The significance of Article 180 Paragraph 1 of the Criminal Law goes beyond insider trading and divulging inside information.  In fact, it also affects another irregularity, i.e., using nonpublic information for trading.  This is because while Article 180 Paragraph 4, which is quoted below, sets forth the elements of the crime of using nonpublic information for trading, it covers sentencing by referring to Article 180 Paragraph 1: 

Where an employee of a financial institution, such as a stock exchange, futures exchange, securities company, futures brokerage company, fund management company, commercial bank, or insurance company, or a staff member of a related regulatory department or industry association, uses nonpublic information which is not inside information but to which [the employee or the staff member] has easy access because of his duties to engage, in violation of provisions, in securities or futures trading activities related to the information, or to explicitly or implicitly suggest that others engage in related trading activities, and the circumstances are serious, [the employee or the staff member] shall be punished in accordance with [Article 180] Paragraph 1. (emphasis added)

Based on Article 180 Paragraph 4, it is clear that the sentencing level for a crime of insider trading or divulging inside information committed under “serious” circumstances, as provided for in Article 180 Paragraph 1, are also applicable to a crime of using nonpublic information for trading committed under “serious” circumstances. 

But what if the circumstances under which a crime of using nonpublic information for trading is committed are “particularly serious”?  Does the sentencing level for a crime of insider trading or divulging inside information committed under “particularly serious” circumstances, as provided for in Article 180 Paragraph 1, still apply, given that Article 180 Paragraph 4 has no explicit reference to “particularly serious” circumstances?

The answer to the above question is a clear “yes”, after a long legal proceeding concluded with a retrial judgment rendered by the Supreme People’s Court.  This case was finally selected as Guiding Case No. 61, to which I now turn.

Guiding Case No. 61

Guiding Case No. 61 concerns the crime of using nonpublic information for trading committed by MA Le, who, through the commission of this crime, illegally derived benefits of more than RMB 19 million (note: were this amount derived from a crime of insider trading or divulging inside information, the circumstances would be considered to be “particularly serious” because RMB 19 million far exceeds the threshold (i.e., at least RMB 750,000) set by the Supreme People’s Court (see above)).

Lower-level courts handling the Ma Le case, i.e., the Intermediate People’s Court of Shenzhen Municipality and the High People’s Court of Guangdong Province, felt bound by the lack of explicit reference to “particularly serious” circumstances in Article 180 Paragraph 4 of the Criminal Law and, therefore, sentenced MA Le in accordance with the sentencing level for a crime of insider trading or divulging inside information committed under “serious” circumstances, as provided for in Article 180 Paragraph 1. 

Finally, the Ma Le case was retried by the Supreme People’s Court, which adopted a broader interpretation of Article 180 Paragraph 4 of the Criminal Law to allow the sentencing level for “particularly serious” circumstances, as stated in Article 180 Paragraph 1, to be applicable to the “crime of using nonpublic information for trading”.  In June 2016, this case was released as Guiding Case No. 61, in which the following guiding principle was provided to guide courts handling subsequent similar cases:

The citation of statutory sentences for the crime of using nonpublic information for trading provided for in Article 180 Paragraph 4 of the Criminal Law should be [interpreted as] the citation of all statutory sentences for the crime of insider trading or divulging inside information [provided for] in Paragraph 1.  This means that the crime of using nonpublic information for trading should have two types of situations—where “circumstances are serious” and where “circumstances are particularly serious”—and two [corresponding] sentencing levels.

Impact on Judicial Practice

Guiding Case No. 61 has given courts in China a valuable tool to handle cases involving the crime of using nonpublic information for trading.  Yet, a quick search conducted in commonly used databases of cases in China shows that only a handful of cases (the most recent one was decided in 2017) have explicitly applied the principle stated in Guiding Case No. 61. 

Is it because there have not been many irregularities in the stock market that amount to the crime of using nonpublic information for trading committed under “particularly serious” circumstances?  Unlikely.  Or is it because, in many cases, judges simply applied the principle stated in Guiding Case No. 61 without mentioning it and, therefore, these cases did not show up in the results of a search for cases with explicit reference to Guiding Case No. 61?  Perhaps.  Or is it because, for reasons such as privacy or national security, these judgments have been withheld from publication?  Hard to say. 

Regardless of the reason(s), it will be beneficial to China if it can demonstrate that the tool created by the Supreme People’s Court in Guiding Case No. 61 has been used effectively and if all interested parties, including foreign investors, can gain greater awareness of this fact.

P.S. I want to thank David Wei Zhao, Co-Managing Editor of SINOTALKS.COM, for providing research support during the preparation of this article.

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^† The citation of this article is: Dr. Mei Gechlik, Irregularities in China’s Stock Market and Sentencing, SINOTALKS.COM, In Brief No. 13, June 1, 2022, https://sinotalks.com/inbrief/insider-trading.

The original, English version of this article was edited by Nathan Harpainter.  The information and views set out in this article are the responsibility of the author and do not necessarily reflect the work or views of SINOTALKS.COM.