JC Master Legal News Issue 890

Key Takeaways for This Issue

Major institutional innovation: “dual-class share structure”

The institutional innovations of the STAR Market continue to unfold in practice. On September 27, the Listing Committee of the Shanghai Stock Exchange’s STAR Market approved the initial public offering applications of three companies: Kingsoft Office, UCloud, and Zhuoyi Information. Notably, UCloud has become the first company with a dual-class share structure to have its application accepted and pass review on the STAR Market; if UCloud successfully completes its IPO, the A-share market will welcome its first “dual-class share” stock.

HeartVascular has become a spun-off subsidiary listed on the Hong Kong stock exchange, marking the first successful listing on the STAR Market.

On July 22 this year, HeartVascular Medical became one of the first companies listed on the STAR Market. According to its prospectus, the company has eight shareholders. Among them, its controlling shareholder, Hong Kong HeartVascular, holds 32.9029 million shares, representing a 60.96% stake, while MicroPort Investment holds a 0.83% equity interest. Both Hong Kong HeartVascular and MicroPort Investment are wholly owned subsidiaries of MicroPort Medical, a Hong Kong‑listed company. This familial “blood relationship” also made HeartVascular Medical the first Hong Kong‑listed subsidiary to successfully gain admission to the STAR Market.

The China Banking and Insurance Regulatory Commission and the People’s Bank of China jointly released the “2019 Report on the Development of Inclusive Finance in China.”

Recently, the China Banking and Insurance Regulatory Commission and the People’s Bank of China released the “2019 Report on the Development of Inclusive Finance in China,” which presents the latest data and achievements in the country’s inclusive finance sector. The report summarizes the measures undertaken by central government departments, local governments, and various market entities to expand service provision in key areas of inclusive finance, deepen institutional and mechanism reforms, innovate technologies and products, leverage the functions of capital markets, strengthen the credit information and guarantee‑enhancement systems, refine differentiated regulatory frameworks, enhance monetary and fiscal policy incentives, address institutional shortcomings, and bolster consumer rights protection.

Outsourcing of audit engagements by accounting offices has given rise to litigation.

Following the execution of the contract at issue, Sui Ruihua Company assigned a project team led by Shen Yuhe to carry out the audit. By the time Sui Ruihua Company formally submitted the final version of the audit report, Sidu Company discovered that the signatures on the document were those of two accountants, Xia Xiulei and Li Shilin. Furthermore, upon receipt of the complaint in this case, it became apparent that Shen Yuhe was not a practicing accountant employed by Sui Ruihua Company, but rather an employee of Jiangsu Sugang Accounting Office. Such conduct violates Article 22 of the Certified Public Accountant Law of the People’s Republic of China (hereinafter referred to as the CPA Law) and Article 61 of the Measures for the Licensing and Supervision of Accounting Offices, which stipulate that a certified public accountant may not permit another person to perform professional services in his or her name, nor may he or she concurrently engage in professional activities at two or more accounting offices. Accordingly, such actions constitute invalid civil acts. Consequently, the audit report submitted by Sui Ruihua Company lacks any legal basis, and from the outset it failed to timely submit an audit report that complies with statutory requirements as agreed upon in the parties’ contract.

Hong Kong has enacted the “Prohibition on Mask-Wearing Regulation,” which takes effect at midnight on the 5th.

On the 4th, Hong Kong Special Administrative Region Chief Executive Carrie Lam convened a special meeting of the Executive Council and, in conjunction with the Council, resolved to invoke the Emergency Regulations Ordinance to enact…

Enact the “Prohibition on Mask-Wearing Regulation” to restore social order as soon as possible and curb violence and chaos.

Table of Contents

Table of Contents

Finance & Capital Markets

Major institutional innovation: “dual-class share structure”

Awaiting the detailed rules for the spin-off and listing on the STAR Market, investment banks are taking the lead in providing advisory services to secure a foothold.

The three major industries have clear advantages in spinning off and listing.

This year, 120 companies have listed on the A-share market, with a high proportion of new listings coming from the high-end manufacturing sector.

The Shanghai Stock Exchange has launched a series of events for “2019 World Investor Week.”

Corporate & Commercial

UCloud Becomes the First “Dual-Class Share” Listing on the STAR Market

HeartVascular has become a spun-off subsidiary listed on the Hong Kong stock exchange, marking the first successful listing on the STAR Market.

Sandar Membrane is rushing to list on the STAR Market, planning to raise RMB 1.41 billion.

Approval Granted for Change in Actual Controller of Hainan Haiyao, Boosting High-Quality Development

Jingfeng Pharmaceutical has obtained the GMP certificate for Ligustrazine Hydrochloride.

Taxation

The China Banking and Insurance Regulatory Commission and the People’s Bank of China jointly released the “2019 Report on the Development of Inclusive Finance in China,” leveraging the service functions of a multi-tiered capital market to broaden financing channels for market entities.

The China Banking and Insurance Regulatory Commission and the National Intellectual Property Administration jointly convened a videoconference on sharing experiences in intellectual property‑pledge financing.

The Financial Stability and Development Committee meeting explicitly called for “deep reforms” of policy-based financial institutions, emphasizing their role in counter-cyclical regulation to support economic transformation, upgrading, and high-quality development.

The Ministry of Finance, the Ministry of Human Resources and Social Security, and the State-owned Assets Supervision and Administration Commission jointly convened a national work deployment meeting on the transfer of a portion of state-owned capital to replenish the social security fund, outlining plans for the full-scale rollout of this initiative.

State Taxation Administration: Starting October 1, urban land use tax and property tax will be filed jointly.

Litigation & Arbitration

Laws and regulations that came into effect in October 2019

Weaving a Robust Web of Liability for Objects Thrown or Falling from Heights: A Review of the 21st “Case Lecture Forum”

Distinction between the Guarantee Period and the Statute of Limitations for the Guarantee Contract

If a party brings a lawsuit on the basis of a private loan relationship, but the people’s court determines that no such relationship exists between the parties, how should the court clarify the situation?

Outsourcing of audit engagements by accounting offices has given rise to litigation.

Other

Hong Kong has enacted the “Prohibition on Mask-Wearing Regulation,” which takes effect at midnight on the 5th.

Finance & Capital Markets

Major Institutional Innovation: “Dual-Class Share Structure”

The institutional innovations of the STAR Market continue to unfold in practice. On September 27, the Listing Committee of the Shanghai Stock Exchange’s STAR Market approved the initial public offering applications of three companies: Kingsoft Office, UCloud, and Zhuoyi Information. Notably, UCloud has become the first company with a dual-class share structure to have its application accepted and pass review on the STAR Market; if UCloud successfully completes its IPO, the A-share market will see its first-ever “dual-class share” stock.

According to available information, UCloud is currently the largest neutral third-party cloud computing service provider in China. Prior to its application to list on the STAR Market, the company established a special voting‑rights structure on March 17 this year: Class A shares held by the joint de facto controllers Ji Xinhua, Mo Xianfeng, and Hua Kun carry five times the voting rights per share compared with Class B shares held by other shareholders, including those subscribing in this public offering.

The “dual-class share” structure has a long history in the U.S. market, and it is widely adopted by high-tech companies listed there. Chinese internet offices such as JD.com, Baidu, and Alibaba, which are listed in the United States, have also implemented this arrangement. This institutional framework is one of the factors that has made the U.S. market attractive to companies from other countries. Previously, the Hong Kong stock market lacked such provisions; in 2013, Alibaba chose New York over Hong Kong as its primary listing venue for this very reason. To address this gap, the Hong Kong Stock Exchange subsequently amended its regulations, enabling several large mainland Chinese internet companies to list in Hong Kong starting in 2017.

The A-share market has long lacked such institutional arrangements, and the STAR Market, entrusted with the mission of institutional innovation, should rightly achieve a breakthrough on this front. On April 17 this year, the China Securities Regulatory Commission amended relevant provisions of the “Guidelines for Articles of Association of Listed Companies,” introducing new clauses specifically for listed companies with special voting rights shares, thereby aligning with the regulatory framework governing the listing of such companies on the STAR Market.

In June of this year, the Supreme People’s Court issued the “Several Opinions on Providing Judicial Safeguards for the Establishment of the STAR Market and the Pilot Reform of the Registration-Based System,” which, from a judicial perspective, recognizes the differentiated voting arrangements adopted by STAR Market‑listed companies through special resolutions passed at shareholders’ meetings prior to their listing. The document also emphasizes respect for the corporate governance structures that STAR Market‑listed companies have designed to align with the distinctive characteristics of science and technology innovation, thereby, for the first time at the judicial level, afofficeing corporate governance arrangements featuring “dual-class share structures.”

Equity structures featuring dual-class share arrangements can, while safeguarding the founding team’s control, maximize the attraction of social capital, thereby fostering the development of technology‑innovation enterprises. The STAR Market’s authorization for companies with dual‑class shares to list represents a major institutional innovation. It is foreseeable that, should “dual‑class share” structures achieve a successful breakthrough in the A‑share market, this will narrow the institutional gap between domestic and overseas stock markets, helping to keep more high‑quality listing opportunities within China. At the same time, such innovations in the equity market will spill over into the venture‑capital and private‑equity sectors, creating favorable conditions for these markets.

It is worth noting that, in response to potential concerns regarding the protection of minority investors’ rights arising from “dual-class share structures,” the aforementioned Supreme People’s Court Opinions have articulated a judicial policy prohibiting shareholders with special voting rights from abusing their powers, thereby ensuring that, while respecting the principle of “different rights for the same share class,” “different responsibilities” are also appropriately assigned.

In terms of institutional design, the STAR Market will also impose ongoing regulatory oversight on companies with weighted voting rights. For example, arrangements for differing voting rights are permitted only prior to listing, and issuers face more stringent listing application requirements. The SSE will require strengthened internal and external supervision and enhanced information disclosure to prevent the abuse of special voting rights.

Awaiting the detailed rules for the spin-off and listing on the STAR Market, investment banks are taking the lead in providing advisory services to secure a foothold.

Several A-share listed companies in China have signaled to the market, through public announcements or investor research, their intention to spin off and list their subsidiaries on the STAR Market.

As the term suggests, a spin-off listing involves two distinct steps: first, the parent company separates a subsidiary with strong growth prospects and aligned with the STAR Market’s strategic focus, establishing it as an independent joint-stock company; second, the newly formed entity issues shares to the public and lists on the stock exchange, thereby creating two separate capital‑raising platforms.

Fu Lichun, Research Director at Northeast Securities, stated that spin-off listings can be categorized into broad and narrow definitions. The broad definition encompasses both listed and unlisted companies, whereby they separate certain business segments from the parent company and list them independently. The narrow definition, by contrast, refers solely to a listed company spinning off a portion of its operations or a specific subsidiary for a separate public offering and listing; this scenario is relatively rare in the A-share market, with such spin-offs typically being listed on other capital markets instead.

“Due to the relatively limited regulations in China governing spin-off listings, detailed rules and interpretations regarding the policy for listing on the STAR Market have yet to be released,” said Fu Lichun. “Encouraging listed companies to spin off and list on the STAR Market can bring more high-quality enterprises to the exchange, while also boosting returns for parent-company shareholders and enhancing corporate financing—both of which reflect a maturing Chinese capital market. However, spin-off listings do carry certain risks, such as the potential for improper related-party transactions between parent and subsidiary companies, or the misuse of parent‑company funds by subsidiaries, thereby harming the interests of minority investors in the parent company—and even giving rise to competitive conflicts between the two entities. Ensuring that listed companies can undertake spin‑off listings in a prudent and well‑managed manner places higher demands on investment banks and sponsoring institutions.”

Fu Lichun noted that if detailed rules governing spin-off listings on the STAR Market are eventually released, they will undoubtedly spur A-share listed companies to pursue such listings, thereby generating greater business volume for sponsoring institutions. However, the STAR Market’s valuation framework differs from that of the broader A-share market, necessitating a careful balancing act between the two markets’ divergent valuation approaches to prevent conflicts of interest. This poses not only a regulatory challenge but also a critical test of the underwriting offices’ professional capabilities.

“This also raises a host of issues, such as whether the subsidiary qualifies as an entity subject to consolidation in the listed company’s financial statements, and how the parent company can maintain controlling interests in its subsidiaries following a spin-off and separate listing. For sponsoring institutions, the workload has increased by far more than double, and the complexity of spin-off listings may even give rise to new business models and service providers,” said Fu Lichun.

An investment banking professional at a brokerage office stated that, with the approval for listed companies to spin off and list on the STAR Market, certain investment banking teams have already begun engaging with spin-off listings and making preliminary preparations. At present, these teams are providing guidance on spin-off listings by, on the one hand, helping listed companies identify subsidiaries that meet the eligibility criteria and navigate the requisite procedures, and, on the other hand, assisting them in clarifying equity and business relationships with the entities slated for separation, while offering recommendations on financial and shareholder‑structure adjustments to facilitate their independent IPOs.

The three major industries have clear advantages in spinning off and listing.

On August 23, the China Securities Regulatory Commission (CSRC) launched a public consultation on the “Several Provisions on the Pilot Program for Listed Companies to Spin Off Their Subsidiaries for Domestic Listing” (hereinafter referred to as the “Provisions”), bringing the long‑dormant practice of spin‑off listings back into the spotlight.

Zhang Xinyuan, head of the Huatai Strategy Team, stated that the breakthrough in domestic spin-off listings on the A-share market represents a crucial step in the deepening reform of the capital market and is expected to facilitate financing for high-quality enterprises while enabling them to focus on their core businesses.

“From the perspective of improving asset liquidity, spin-off listings can encourage leading companies with strong cash flows to increase their external investments; from a corporate governance standpoint, such listings may enable listed offices to focus more on their core businesses, thereby fostering greater dynamism and renewal within the A-share market,” Zhang Xinyuan analyzed.

Meanwhile, regarding the issue of A-share listed companies spinning off subsidiaries to list on the STAR Market, Li Xiang, a fund manager at Beijing Yunfeng Asset Management Co., Ltd., noted that from a corporate perspective, because companies aligned with the STAR Market’s positioning typically feature long capital cycles, high technological intensity, and substantial R&D expenditures, spinning off such businesses into subsidiaries and listing them on the STAR Market not only addresses the funding needs of the subsidiary but also alleviates operational pressures on the parent company and minimizes any adverse impact on its other business lines—making it highly advantageous for the parent. Furthermore, since the STAR Market’s inception, it has consistently faced challenges such as a limited number of listings and difficulties in attracting capital; the renewed emphasis on spin-off listings is expected to directly boost the pool of companies applying to the STAR Market, providing fresh momentum for its expansion.

“The fundamental purpose of the capital market is to address companies’ financing needs. Meanwhile, the establishment of the STAR Market and the pilot registration-based system are designed to help high-tech enterprises that align with the STAR Market’s positioning secure funding, thereby fostering stable corporate growth and accelerating R&D efforts,” Li Xiang further explained. “If the parent company is listed on the A-share market, once a spun-off subsidiary successfully lists on the STAR Market, the original single listed entity will be transformed into two independently valued entities. These two companies can complement each other, making it easier to earn investors’ trust and confidence, which in turn supports an increase in the enterprise’s valuation.”

Compared with the rules on domestic and overseas spin-off listings in 2004 and 2010, the “Several Provisions” introduce three new conditions for spin-off listings, placing particular emphasis on corporate governance and profitability. This requirement also addresses the recent surge in financial fraud among listed companies, reinforcing corporate governance and encouraging high-quality enterprises to leverage the capital markets for financing.

In this regard, Li Xiang believes that, from the regulators’ perspective, it is necessary to strengthen scrutiny and rigorously assess issues such as the compliance of companies filing for registration.

“First, we must examine whether there are any fictitious transactions between the parent company and its subsidiaries—such as overvaluing non‑performing assets while undervaluing high‑quality ones. Second, we need to assess whether there is any hidden transfer of benefits and whether related-party transactions comply with applicable regulations,” Li Xiang added. He further emphasized that regulatory scrutiny should not be confined to the listing stage; instead, both the spun‑off subsidiaries that have successfully listed on the STAR Market and their parent companies should be subject to ongoing oversight. This includes monitoring, over a period of three to five years, metrics such as market‑capitalization fluctuations, profitability, asset performance, and the proportion of R&D expenditures that align with the STAR Market’s characteristics. Only through sustained, rigorous review can we minimize violations between parent and subsidiary entities, safeguard investors, and bolster market confidence.

Meanwhile, Li Xiang stated that, for investors, the spin-off of a subsidiary by a listed company and its listing on the STAR Market requires case-by-case analysis.

“First, investors need to assess the motivations behind a listed company’s spin-off; second, they must evaluate its compliance; and only then should they determine whether it warrants continued investment—this directly informs their subsequent investment decisions,” Li Xiang further explained. He added that investors should also pay close attention to whether, following the spun‑off subsidiary’s listing on the STAR Market, there are any instances of profit transfer or improper related-party transactions between the parent and the subsidiary.

In this regard, Zhang Xinyuan stated that listed companies meeting the relevant requirements for spin-off listings are primarily concentrated in sectors such as real estate, pharmaceuticals, electric power and utilities, electronic components, and transportation, with state-owned enterprises accounting for approximately 43%.

As evidenced by the aforementioned sectors, a relatively large number of listed companies in industries such as pharmaceuticals, electronic components, and transportation meet the criteria for spinning off subsidiaries to list on the STAR Market.

This year, 120 companies have listed on the A-share market, with a high proportion of new listings coming from the high-end manufacturing sector.

Since the beginning of this year, capital markets have stepped up their efforts to support the real economy, with regulators actively encouraging corporate direct financing. According to data from Eastmoney Choice, as of September 29, a total of 120 companies have gone public on the A-share market, based on their IPO listing dates, raising combined proceeds of RMB 131.3 billion.

“Since the beginning of this year, the number of companies that have gone public in their IPOs has already surpassed the total for all of 2018, and the total funds raised are also nearing last year’s full-year level,” said He Nanye, a special researcher at the Suning Institute of Finance.

In addition, data from Eastmoney Choice show that since the third quarter, the pace of new stock listings has accelerated significantly, with 54 companies going public—up 64% quarter-on-quarter compared to 33 listings in the second quarter.

In this regard, Zhao Yayun, a researcher at the CITIC Reform and Development Foundation, stated on September 29 that since the third quarter, the scale of new share listings has expanded for three main reasons: first, the stock market has stabilized in certain segments and posted modest gains, bolstering investor confidence; second, the central bank has begun cutting the reserve requirement ratio and employed market-based measures to guide interest rates lower, thereby ensuring relatively ample liquidity; and third, corporate earnings have shown some improvement.

Notably, according to iFinD data from Tonghuashun, as of now, the CSRC’s Issuance Review Committee has reviewed 96 companies this year, with 80 passing the review, yielding a pass rate of 83.33%. Compared with the same period last year, this year’s IPO approval rate has risen significantly.

Regarding the normalization of IPOs, He NanYe stated that, first, it enhances the predictability of going public, thereby reducing the increased listing costs borne by companies due to uncertainty; second, it enables more IPO‑eligible offices to raise additional capital through access to the capital markets, supporting their growth; and third, when combined with the stringent delisting regime that will be gradually introduced, it will foster a healthier capital market ecosystem characterized by both entry and exit, further enabling the market to fulfill its role in weeding out underperforming entities.

Additionally, data from Eastmoney Choice show that, based on the CSRC industry classification for newly listed stocks in the third quarter, 13 companies belong to the computer, communications, and other electronic equipment manufacturing sector, accounting for 24%; 10 companies are in the specialized equipment manufacturing sector, representing 19%; and 7 offices fall under the software and information technology services sector, making up 13%.

“This clearly demonstrates that the government has introduced policies to encourage import substitution, opening up vast opportunities for these high-end manufacturing sectors. At the same time, it underscores the relative success of China’s economic transformation, with the new economy beginning to accelerate,” said Zhao Yayun.

In He Nany野’s view, after years of economic transformation and upgrading, China has indeed seen a growing share of high‑performing companies—particularly technology offices and those in advanced manufacturing—which are now the mainstay of the IPO market. Notably, policy makers have been vigorously supporting the listing of science‑and‑technology‑driven enterprises and high‑end manufacturers, while regulators have repeatedly stressed the need to facilitate their access to direct financing and streamline the listing process. The increasing number of such companies going public underscores the capital market’s ongoing role in serving and driving economic transformation and upgrading.

The Shanghai Stock Exchange has launched a series of events for “2019 World Investor Week.”

On September 30, 2019, the Shanghai Stock Exchange held the opening ceremony for “World Investor Week 2019.” Jiang Feng, General Manager of the SSE, Qu Bo, Deputy General Manager, along with Huang Yong, Deputy General Manager of the China Securities Regulatory Commission’s Small and Medium‑Sized Investor Service Center, representatives from member institutions, and investor delegates, jointly rang the opening bell to officially launch World Investor Week.

“World Investor Week” is a global initiative launched in 2016 by the International Organization of Securities Commissions (IOSCO), aimed at raising awareness among all market participants about the importance of investor education and protection, and showcasing best practices in investor education and protection adopted by securities regulators worldwide. This year, the third edition of World Investor Week brought together securities regulators and stock exchanges from 87 countries and regions, as well as eight global or regional organizations and investor associations. Notably, for the first time, IOSCO and the World Federation of Exchanges (WFE) invited stock exchanges around the world to jointly ring the opening bell during the event, further promoting financial literacy among investors and enhancing the international visibility of World Investor Week.

Under the unified arrangements of the Investor Protection Bureau of the China Securities Regulatory Commission, the Shanghai Stock Exchange has been participating in “World Investor Week” activities since last year. During the 2018 National Day holiday, it launched a series of audio‑based investor education programs themed “Invest First, Learn First,” which received a positive market response. This year, in conjunction with key initiatives such as the establishment of the STAR Market and the pilot registration system, the Shanghai Stock Exchange will present a special “World Investor Week” program from October 1 to 6, under the theme “Getting Closer to Sci‑Tech Innovation: Together We Go.” Through its official WeChat account, “SSE Investor Education,” and its dedicated investor education website, the Exchange will use engaging formats—including comics, short films, rap music, and audiobooks—to disseminate knowledge about the STAR Market, highlight investment risks, and guide investors in adopting a rational investment mindset while enhancing their self‑protection capabilities.

Launching the “World Investor Week” initiative represents a proactive effort by the Shanghai Stock Exchange to amplify China’s voice and showcase its experience in investor education and protection on the international stage, amid the growing global emphasis on these critical areas. Moving forward, the SSE will continue to earnestly implement the China Securities Regulatory Commission’s directives on investor protection, relentlessly explore new concepts and approaches in investor education and services, and deliver professional, efficient, and intelligent investor‑focused solutions, thereby genuinely enhancing investors’ sense of gain in the capital markets.

Commercial & Corporate

UCloud Becomes the First “Dual-Class Share” Listing on the STAR Market

On the 27th, the Listing Committee of the STAR Market of the Shanghai Stock Exchange held its 27th review meeting, approving the initial public offering applications of three companies: Beijing Kingsoft Office Software Co., Ltd., UCloud Technology Co., Ltd., and Jiangsu Zhuoyi Information Technology Co., Ltd. Notably, UCloud has become the first company on the STAR Market to pass review under the “dual-class share” structure.

At this review meeting, Kingsoft Office and UCloud were both star companies. The actual controller of Kingsoft Office is Lei Jun, the founder of Xiaomi. According to its prospectus, the company reported net profits of RMB 214 million and RMB 311 million in 2017 and 2018, respectively, with its product lineup primarily including WPS Office and Kingsoft PowerWord.

UCloud’s core business is public cloud services. What sets UCloud apart is its “dual-class share structure.” Under the special voting‑rights arrangement, each Class A share held by the company’s joint de facto controllers—Ji Xinhua, Mo Xianfeng, and Hua Kun—carries five times the voting power of each Class B share held by other shareholders, including those subscribing in this public offering. Prior to this offering, Ji Xinhua and his two co‑controllers collectively held 26.8347% of the issuer’s shares directly; pursuant to the company’s then‑in‑effect articles of association, through the special voting‑rights mechanism, they controlled 64.7126% of the issuer’s voting rights.

Zhuoyi Technology possesses proprietary core officeware technologies for cloud computing devices—namely BIOS and BMC—as well as advanced cloud-platform capabilities. On one hand, it offers customized BIOS and BMC officeware development and technical services tailored to the needs of cloud‑computing equipment manufacturers; on the other hand, leveraging its independently developed Zhuoyi Cloud platform, it provides government and enterprise clients with end-to-end, secure, and diversified cloud solutions.

In the Shanghai Stock Exchange’s review comments, the reasonableness of Kingsoft Office’s fundraising was one of the key focuses. The Listing Committee requested that the company provide additional disclosures regarding the scale of the funds to be raised, the alignment between the investment plan and business development, the potential adverse impacts on financial metrics such as gross margin, R&D expenses, and net profit during the period of fund deployment, as well as the principal risk factors and corresponding mitigation measures to be considered in implementation—covering areas such as technology development, product sales, and industry competition.

Yunqi’s growth prospects and other issues have drawn scrutiny. The Listing Committee has requested that the company, together with industry-leading enterprises, fully disclose risks arising from changes in the market environment and their impact on its ability to continue as a going concern. It also requires a detailed analysis of the trends in unit prices of the company’s core products and operating costs over the next three years, along with an assessment of the corresponding net profit performance, and supplementary disclosure of risk factors that warrant investors’ attention. Furthermore, the Committee has asked the company to clarify whether its fundraising‑related investment projects could lead to overcapacity or other related concerns.

The regional concentration and related issues of Zhuoyi Technology’s cloud business have been given particular attention. The Listing Committee has requested the company to provide additional disclosures regarding the potential adverse impacts on its going‑concern status and core competitiveness arising from the concentration of its cloud services in specific regions and among certain customers; the specific progress in replicating and expanding its government‑and‑enterprise cloud business into regions and sectors beyond Yixing; the growth prospects of its cloud services business; as well as the development status and service‑provider landscape of comparable cloud services in similar domestic markets, along with a comparative analysis of its core competitiveness and regional expansion capabilities.

HeartVascular has become a spun-off subsidiary listed on the Hong Kong stock exchange, marking the first successful listing on the STAR Market.

Industry insiders generally believe that the new policy on spin-off listings will help optimize the allocation of resources in the capital market.

In fact, the Hong Kong Stock Exchange has previously established nine requirements to regulate spin-off listings on the Hong Kong market, primarily covering such aspects as the new company’s compliance with listing criteria; the parent company’s ongoing listing tenure and profitability; the independence of key personnel—including directors, supervisors, and senior management—of both the new company and the parent; the separation of the new company’s business and functions from those of the parent; and the protection of the interests of the parent company’s existing shareholders.

Meanwhile, in the A-share market, there is already one STAR Market‑listed company that originated as a spin‑off from a Hong Kong‑listed entity. According to its prospectus, HeartVascular Medical, which debuted on the STAR Market on July 22 this year, has eight shareholders. Among them, its controlling shareholder, Hong Kong HeartVascular, holds 32.9029 million shares, representing a 60.96% stake, and is registered in Hong Kong. MicroPort Investment holds a 0.83% stake; both it and Hong Kong HeartVascular are wholly owned subsidiaries of MicroPort Medical, a Hong Kong‑listed company. This “blood‑relationship” has made HeartVascular Medical the first Hong Kong‑listed subsidiary to successfully gain access to the STAR Market.

In addition to Heartin Medical, which has already been listed on the STAR Market, Weisheng Information, a subsidiary of Hong Kong‑listed Weisheng Holdings, also responded to the second round of inquiries from the STAR Market on September 9. The Shanghai Stock Exchange raised a total of 15 questions, primarily concerning the company’s independence, the integrity of its intellectual property, financial data, and shareholder information.

As Hong Kong‑listed companies shift their focus to the A‑share market, many are opting for a full‑scale listing rather than a spin‑off. Among the companies listed on the STAR Market, China Railway Signal & Communication Co., Ltd. is well known to investors for having chosen the full‑listing approach when applying for its STAR Market debut. Listed on the Hong Kong Stock Exchange in 2015, China Railway Signal & Communication made its first batch of STAR Market listings on July 22 this year.

China Railway Signal & Communication Co., Ltd. stated that it chose to list on the STAR Market as its return to the A-share market because of the STAR Market’s favorable policies. The STAR Market boasts a highly inclusive policy framework that maximizes companies’ innovation drive, while its regulatory standards are modeled after those of the main board, facilitating rigorous corporate governance. Moreover, as early as 2012, China Railway Signal & Communication had set out to build its own brand and lead the development of core high-speed rail technologies—aligning closely with the STAR Market’s strategic positioning.

In addition, Haohai Bioscience, which listed on the Hong Kong Stock Exchange in April 2015, has recently received approval from the China Securities Regulatory Commission for its IPO and is set to be listed on the STAR Market.

Regarding Hong Kong‑listed companies vying to apply for a listing on the STAR Market, industry insiders point out that, compared with the Hong Kong stock market, listing on the STAR Market in mainland China offers several key advantages: higher valuations, larger fundraising amounts, easier access to refinancing, support for expanding into the domestic market, and enhanced opportunities for corporate and brand promotion.

Sandar Membrane is rushing to list on the STAR Market, planning to raise RMB 1.41 billion.

On September 25, after undergoing three rounds of inquiries on the STAR Market, Sanda Membrane Environmental Technology Co., Ltd. (referred to as Sanda Membrane) updated its draft prospectus for review by the listing committee.

On September 29, Lan Weiguang, the actual controller and chairman of Sanda Membrane, was invited by the Chinese government to attend, in his capacity as a foreign expert, the celebration rally and gala marking the 70th anniversary of the founding of the People’s Republic of China, scheduled for October 1 at Tiananmen Square.

Public records show that Lan Weiguang, a Singaporean Chinese national, has served as an associate professor and then a professor at Xiamen University since 1997, and also holds the position of Chief Scientist at the Center for Water Technology and Policy at Xiamen University. Sanda Membrane is a high-tech enterprise specializing in the development and application of membrane technologies, founded by Lan Weiguang.

Lan Weiguang stated that there is no doubt that talent and innovation will be the primary drivers of future development, and that China’s STAR Market will mark a milestone in China’s efforts to lead the way forward. Sanda Membrane aspires to leverage the power of capital to continuously advance technological innovation and become a globally leading enterprise in membrane technology research, development, and application.

SanDa Membrane is rushing to list on the STAR Market.

According to the prospectus (the version submitted for review), Sanda Membrane plans to issue no more than 83.47 million shares, raising RMB 1.41 billion. The proceeds will be allocated to projects including an inorganic ceramic nanofiltration cartridge and water purifier production line, a base for the preparation of nanofiltration membrane materials and the manufacturing of complete membrane equipment, the development and production of specialized separation membranes and associated complete systems, as well as a membrane materials and technology R&D center.

The actual controllers of Sanda Membrane are the couple Lan Weiguang, who, through Singapore‑based Sanda Membrane, hold a 57.81% stake in the company.

Meanwhile, Chairman Lan Weiguang himself is the company’s technical leader. He graduated from the National University of Singapore and earned a Ph.D. in chemistry. From 1997 to the present, he has served successively as an associate professor and then a professor at Xiamen University. In 1996, Lan Weiguang returned to China and founded Sanda Membrane Technology Co., Ltd. in Xiamen.

Furthermore, records show that Lan Weiguang once topped the list of Xiamen’s richest individuals in 2003 and ranked 75th on China’s Forbes Rich List. As early as the late 1990s, Sanda Membrane Technology (Xiamen) Co., Ltd. captured 20% to 25% of China’s industrial separation‑membrane market.

Sandar Membrane is one of the earliest Chinese enterprises to engage in the development of advanced membrane‑based separation technologies for process industries, and also among the first to introduce cutting‑edge foreign membrane technologies into China and deploy them on a large scale. Over more than a decade of growth, the company’s membrane‑technology applications and water‑services investment activities have expanded across most provinces, autonomous regions, and municipalities directly under the central government. Its business has progressively broadened from industrial feed‑liquid separation systems and other membrane‑technology applications to include residential water purification, corporate water‑treatment solutions, and municipal wastewater treatment.

According to the financial disclosures, Sanda Membrane’s operating revenues for the periods from 2016 through the first half of 2019 were RMB 544 million, RMB 586 million, RMB 590 million, and RMB 326 million, respectively; its net profits were RMB 129 million, RMB 185 million, RMB 181 million, and RMB 174 million, respectively.

Among these, the water utilities investment and operations business is a key source of the company’s revenue and profits, accounting for 38.12%, 39.35%, 40.46%, and 41.06% of the company’s main‑business revenue in 2016, 2017, 2018, and the first half of 2019, respectively.

Independently developed core technologies

It is reported that Sanda Membrane’s core technologies are all the result of independent research and development, with numerous patents covering areas such as membrane material development, membrane technology applications, and environmentally friendly water treatment technologies.

Sandar Membrane believes that its nanofiltration cartridge technology, when applied to residential water purifiers, offers distinct advantages over the mainstream reverse osmosis‑based systems currently on the market, both in terms of technical performance and cost-effectiveness. It can effectively remove chemical micro‑contaminants such as pesticides and heavy metals while preserving beneficial minerals naturally present in the water. To date, the project has secured procurement orders; according to disclosures, on August 22, Yan’an Baota District Urban–Rural Construction Investment Co., Ltd. signed a contract with Sandar Membrane for the purchase of nanofiltration water purification equipment, totaling RMB 26.1859 million.

According to Sanda Membrane’s plans, the company will continue to pursue a strategy of technological innovation, establishing three major production bases for inorganic ceramic nanofiltration cartridges and water purifiers, nano‑filtration membrane materials and complete membrane systems, as well as specialty separation membranes and associated equipment, while actively expanding into the residential water‑purification market.

Industry insiders believe that while municipal wastewater projects and other environmental‑water services currently account for the company’s primary revenue, industrial feed‑liquid separation and the residential water‑purification market are clearly set to become the focal points of its future strategic growth.

Approval Granted for Change in Actual Controller of Hainan Haiyao, Boosting High-Quality Development

 On the evening of September 29, Hainan Haiyao Co., Ltd. issued an announcement detailing progress regarding the approval received from the State-owned Assets Supervision and Administration Commission of the State Council and the anticipated change in its controlling shareholder and actual controller. According to the announcement, on September 29, 2019, Xinxing Jihua Group Co., Ltd. (hereinafter referred to as “Xinxing Jihua Group”) received the State-owned Assets Supervision and Administration Commission of the State Council’s “Reply Concerning Issues Related to the Indirect Acquisition of Shares in Hainan Haiyao Co., Ltd. by Xinxing Jihua Pharmaceutical Holdings Co., Ltd.” (Document No. Guozichanquan [2019] No. 573), which in principle approved the overall plan for the pharmaceutical holding company to indirectly acquire shares in Hainan Haiyao. Following this transaction, Xinxing Jihua Group will hold 100% equity in Huatong Industrial through the pharmaceutical holding company, thereby obtaining controlling interest in Hainan Haiyao.

Clearly define objectives and join forces with the pharmaceutical holding company.

It is understood that Hainan Haiyao has taken a series of measures to ensure the smooth implementation of this equity change. On April 30, 2019, Shenzhen Nanfang Tongzheng Investment Co., Ltd. (hereinafter referred to as “Nanfang Tongzheng”), the controlling shareholder of Hainan Haiyao Co., Ltd. (hereinafter referred to as “Hainan Haiyao”), together with Mr. Liu Xicheng, the company’s actual controller, and his spouse, Ms. Qiu Xiaowei, entered into a Control Acquisition Agreement with Xinxing Jihua Pharmaceutical Holdings Co., Ltd. (hereinafter referred to as “Pharmaceutical Holdings”). In addition, Nanfang Tongzheng, its wholly owned subsidiary Hainan Huatong Industrial Co., Ltd. (hereinafter referred to as “Huatong Industrial”), and Mr. Liu Xicheng signed a Voting Rights Transfer Agreement; meanwhile, China Huarong International Trust Co., Ltd. and Pharmaceutical Holdings executed an意向 agreement for the targeted transfer of the “17 Tongzheng EB” bonds.

In June 2019, the pharmaceutical holding company received from the State Administration for Market Regulation the “Decision Not to Conduct Further Review in the Antitrust Review of Concentrations of Undertakings” (Antitrust Review Decision [2019] No. 223).

In August 2019, the company’s controlling shareholder, Nanfang Tongzheng, the company’s actual controller, Mr. Liu Xicheng, and Mr. Liu Xicheng’s spouse, Ms. Qiu Xiaowei, entered into a supplementary agreement to the Control Acquisition Agreement with Pharmaceutical Holdings.

On September 19, 2019, Nanfang Tongzheng and Huatong Industrial signed the “Capital Contribution Agreement of Hainan Huatong Industrial Co., Ltd.”

Following this equity change, Pharmaceutical Holdings will hold 22.23% of Hainan Haiyao’s shares and, in total, control 29.99% of the voting rights, thereby gaining control of Hainan Haiyao. The State-owned Assets Supervision and Administration Commission of the State Council will become the actual controller of Hainan Haiyao.

Market analysts believe that, following the State-owned Assets Supervision and Administration Commission of the State Council’s assumption of de facto control over Hainan Haiyao, the company’s shareholder structure will be optimized, bolstering its risk resilience. Going forward, the pharmaceutical holding company will, in line with the principle of fostering the listed company’s sustainable development, focus on its core business and drive high-quality growth.

High-quality development has entered a new chapter.

Publicly available information indicates that Hainan Haiyao has initially established a business structure encompassing pharmaceutical R&D and manufacturing, biopharmaceuticals, medical devices, internet-based healthcare, and medical services. The company’s core product portfolio comprises six major categories: cephalosporin formulations, gastrointestinal medications, oncology drugs, cochlear implants, active pharmaceutical ingredients, and intermediates. In the medical services segment, its primary offering is comprehensive healthcare provided by E’gang Hospital, a subsidiary controlled by the company. In the first half of this year, Hainan Haiyao reported revenue of RMB 1.408 billion, up 22.12% year over year, with net profit attributable to shareholders of the listed company totaling RMB 81.07 million.

Meanwhile, Pharmaceutical Holdings is a wholly owned subsidiary of Xinxing Jihua Group. Formerly known as Xinxing Cast Pipe Group, the company is now directly supervised by the State-owned Assets Supervision and Administration Commission of the State Council. At present, Xinxing Jihua Group focuses on six major business segments: metallurgy, light industry and textiles, equipment manufacturing, pharmaceuticals, emergency response, and services. Notably, as the group’s pharmaceutical‑focused business platform, Pharmaceutical Holdings has undertaken a strategic initiative to advance into cutting‑edge areas under the “China Pharmaceutical 2025” plan and to build an emerging industry that attracts global talent. To this end, it has acquired listed pharmaceutical companies, leveraging them as platforms for industrial development and capital market operations. According to reports, Pharmaceutical Holdings has acquired controlling interest in Hainan Haiyao, with plans to position Hainan Haiyao as an integrated platform for pharmaceutical sectors, including innovative chemical drugs, biotechnology‑based pharmaceuticals, and high‑end medical devices.

Analysts believe that, driven by sustained economic growth, the gradual improvement of the medical insurance system, an aging population, and rising public awareness of health, China’s pharmaceutical industry will continue to expand, with substantial room for further development. Following the change in the actual controller of Hainan Haiyao, the company will be better positioned to focus on its core business and achieve high-quality growth.

Jingfeng Pharmaceutical has obtained the GMP certificate for Ligustrazine Hydrochloride.

 On the afternoon of September 30, Jingfeng Pharmaceutical announced that its subsidiary, Haimen Huiju, recently received the People’s Republic of China Drug GMP Certificate, approved and issued by the Jiangsu Provincial Drug Administration, marking the successful completion of the acceptance inspection for tetramethylpyrazine hydrochloride, one of the company’s flagship active pharmaceutical ingredients.

Haimen Huiju was founded in 2000 and is a Chinese CDMO company that provides high‑quality services to the global pharmaceutical industry. Leveraging its cGMP‑compliant manufacturing platform, robust analytical capabilities, and dedicated R&D team, the company focuses on process optimization, delivering high‑value APIs and advanced intermediates to help clients reduce costs, shorten drug development timelines, and ultimately benefit patients. Since 2010, Haimen Huiju has been actively exploring the development of APIs whose patents are nearing expiration or challenging original‑patent‑protected compounds. To date, it has successfully developed more than 40 generic APIs, primarily targeting cardiovascular, diabetes, antiviral, and oncology indications. The tetramethylpyrazine hydrochloride recently approved under GMP is clinically indicated for occlusive vascular diseases, cerebral thrombosis, vasculitis, coronary heart disease, angina pectoris, and other conditions. It demonstrates significant therapeutic efficacy in the acute phase, recovery period, and post‑event sequelae of ischemic cerebrovascular disorders, including cerebral hypoperfusion, cerebral thrombosis, cerebral embolism, and cerebral arteriosclerosis.

Jingfeng Pharmaceutical stated that the company will continue to maintain normal production of tetramethylpyrazine hydrochloride API, uphold robust production management and product quality, better meet market demand, and enhance its profitability.

Bi Yuan, Vice President and Secretary of the Board of Jingfeng Pharmaceutical, provided details: “The market price of tetramethylpyrazine hydrochloride API is approximately RMB 2,000 per kilogram. Currently, only a handful of domestic companies, including Xi’an Libang, are capable of producing this drug. We estimate that annual domestic consumption ranges from 60 to 80 tons. Under full‑capacity operation, Haimen Huiju’s production line has an annual capacity of about 25 tons. Starting from the date of receiving the GMP certificate, our production line will be ready to commence manufacturing and bring the product to market.”

Bi Yuan also stated: “This year, our generic and innovative drugs have achieved significant interim milestones. To ensure these achievements are recognized, embraced, and adopted by the market, we have undertaken a major overhaul of our existing marketing system, instilling from top to bottom the guiding principles of delivering value to customers, extending care to patients, and providing exceptional service to healthcare institutions. Since the beginning of this year, we have organized numerous specialized conferences, review meetings, and roundtable discussions on cardiology, neurology, oncology, and postoperative rehabilitation, maintaining close engagement with medical institutions and industry experts. We have promptly shared relevant materials on our internationally aligned generic products, highlighting their clinical characteristics and economic benefits, and actively participated in the deliberation of certain treatment protocols, thereby expanding the range of therapeutic options available to patients. In terms of outcomes, this reform has been met with a positive response from the market, and both internally and externally, there is widespread acceptance of our efforts to advance professionalized marketing centered on internationally competitive generics.”

Taxation TAXATATION

The China Banking and Insurance Regulatory Commission and the People’s Bank of China jointly released the “2019 Report on the Development of Inclusive Finance in China,” leveraging the service functions of a multi-tiered capital market to broaden financing channels for market entities.

2019 was a pivotal year—both a critical phase and a decisive year—for implementing the “Plan for Promoting Inclusive Finance (2016–2020).” Recently, the China Banking and Insurance Regulatory Commission and the People’s Bank of China released the “2019 Report on the Development of Inclusive Finance in China” (hereinafter referred to as the “Report”), which presents the latest data and achievements in China’s inclusive finance. The Report summarizes the measures undertaken by central government departments, local governments, and various market entities to expand service provision in key areas of inclusive finance, deepen institutional and mechanism reforms, innovate technologies and products, leverage the functions of capital markets, strengthen the construction of credit information and guarantee‑enhancement systems, refine differentiated regulatory frameworks, enhance monetary and fiscal policy incentives, address institutional shortcomings, and bolster consumer rights protection.

The Report presents, through data, the achievements made in the development of inclusive finance in China. At present, the public enjoys broader access to financial services; the widespread adoption of bank accounts and payment cards, advances in information technology, and the proliferation of mobile internet have continuously enhanced the convenience of financial services. In rural areas, coverage of basic financial services has continued to expand, with financial institutions innovating delivery models by establishing branch networks, deploying automated devices, setting up community service points, operating mobile service stations, and providing cash‑withdrawal services for farmers, among other measures. Supply in key areas of inclusive finance has steadily increased, with micro‑ and small‑enterprise financial services achieving balanced progress in terms of expanding scale, broadening reach, reducing costs, and managing risks. Meanwhile, financial support for rural revitalization has been strengthened, poverty alleviation efforts have been targeted more effectively, and the accessibility of various financial services has been further improved.

The Report summarizes and organizes initiatives across nine areas: the institutional framework for inclusive finance, financial products and services, capital market financing, the credit information system, the guarantee and credit enhancement mechanism, differentiated regulation, monetary and fiscal policies, laws and regulations, and consumer rights.

Deepen the reform of the inclusive finance system and preliminarily establish mechanisms that encourage financial institutions to both dare to engage in and willingly pursue inclusive finance. Guide financial institutions to further advance institutional reforms in inclusive finance, and ensure that specialized operating models, such as dedicated inclusive finance business units, are more effectively implemented and yield tangible results. Banks should further enforce policies on due diligence exemptions for credit granting and internal performance‑based incentives, while insurance companies should continue to leverage their role in providing risk protection within the inclusive finance framework.

Innovative inclusive finance technologies and products have helped improve the capacity and capability of delivering inclusive financial services. Institutions are being guided to leverage modern information technologies to enhance service quality and efficiency, developing tailored products and services that address the specific characteristics and needs of key target groups in inclusive finance. Insurance companies are encouraged to design highly inclusive insurance products for agricultural enterprises, micro‑ and small businesses, low‑income populations, persons with disabilities, and other vulnerable groups. Meanwhile, localities are actively innovating agricultural insurance delivery models, aligning them with their region’s distinctive industries and comparative advantages.

Leverage the service functions of a multi-tiered capital market to broaden financing channels for market entities. Steadily advance the development of capital market financing instruments, including common and preferred shares on the New Third Board, regional equity markets, bonds issued by innovation‑driven enterprises, and agricultural commodity futures and options, thereby better supporting the development of key areas in inclusive finance.

Strengthen the credit information system and the development of shared platforms to alleviate financing difficulties arising from information gaps. Continue to deepen “bank–taxation collaboration,” steadily advance “bank–business partnerships,” and vigorously implement the “Xinyidai” initiative to support financing for small, medium, and micro enterprises. Continuously promote the building of credit systems for SMEs and rural areas, and further refine the credit reporting framework. In many localities, comprehensive financial service platforms have been established to integrate information resources across various government departments.

Optimize the guarantee and credit-enhancement system and institutional framework, and promote effective risk sharing. Launch pilot programs for unified registration of movable‑property pledges, and establish an accounts‑receivable financing service platform. Set up the National Financing Guarantee Fund and ensure its effective implementation; gradually establish a comprehensive agricultural credit‑guarantee system, and establish special-purpose credit‑guarantee funds and guarantee funds in multiple regions.

Strengthen assessment and evaluation, and refine the differentiated regulatory framework for inclusive finance. Optimize regulatory and performance‑assessment targets for key inclusive‑finance segments, such as small and micro enterprises and rural households, emphasizing a differentiated approach in areas like special financial bonds, risk‑weighted capital requirements, and tolerance levels for non‑performing loans. Launch the “Hundreds of Institutions Engage Ten Thousand Enterprises” financing matchmaking initiative and conduct targeted inspections to ensure the effective implementation of policies supporting private and small‑and‑micro enterprises. Enhance the statistical definition, monitoring, and analytical capabilities for inclusive‑finance activities.

Strengthen policy incentives, and further enhance the synergistic effects of monetary and fiscal policies. Continue to implement and refine the targeted reserve requirement ratio reduction policy for inclusive finance, expanding its coverage. Strengthen the management of re-lending and re-discounting programs supporting agriculture and small businesses, and leverage the guiding role of poverty‑alleviation re‑lending policies. Exempt eligible loans in the inclusive finance sector from value‑added tax and stamp duty, and reduce corporate income tax; at the same time, intensify monitoring of the effectiveness of these policy benefits. Extend the pre‑tax deduction policy for relevant provisions. Optimize the allocation of special funds for inclusive finance development and increase subsidies for agricultural insurance premiums.

Address institutional gaps and strengthen the legal framework for inclusive finance. Enact relevant laws and regulations on collateralization of “two rights,” accelerate efforts to close shortcomings in local financial regulatory systems, and revise the regulatory regime for internet insurance business, thereby providing robust legal safeguards for the implementation of related initiatives.

Strengthen protection of financial consumers’ rights and enhance their financial literacy. Enhance information disclosure and market transparency in the inclusive finance sector, intensify public outreach on financial literacy and consumer education, advance the development of third-party non-litigious dispute resolution mechanisms for financial consumers, and conduct targeted inspections and remedial measures to safeguard financial consumer rights.

The China Banking and Insurance Regulatory Commission and the National Intellectual Property Administration jointly convened a videoconference on sharing experiences in intellectual property‑pledge financing.

To implement the State Council Executive Meeting’s arrangements on expanding intellectual property‑pledge financing, on September 25 the China Banking and Insurance Regulatory Commission (CBIRC) and the National Intellectual Property Administration jointly convened a videoconference on sharing experiences in intellectual property‑pledge financing. CBIRC Vice Chairman Wang Zhaoxing and NIPA Deputy Director He Zhimin attended and addressed the meeting, which was chaired by CBIRC Chief Counsel Liu Fushou.

Wang Zhaoxing has urged banking and insurance institutions, as well as banking and insurance regulatory authorities at all levels, to earnestly implement the CPC Central Committee and the State Council’s work arrangements for accelerating the implementation of the innovation-driven development strategy, and to actively support scientific and technological innovation. They should expand intellectual property‑pledge financing and provide robust support to science‑and‑technology enterprises, private enterprises, and small and micro businesses. First, it is essential to fully recognize the strategic, commercial, and market value of invention patents and other forms of intellectual property, and to appreciate the critical role of intellectual property in advancing the national strategy of building a strong country through innovation. Second, banking and insurance institutions should leverage the current favorable policy and legal environment, continuously explore and innovate in intellectual property‑pledge financing services, and deliver sustained financial support for scientific and technological progress. Third, banking and insurance institutions, together with regulatory authorities at all levels, must remain problem‑oriented, persist in reform, exploration, and innovation, and achieve greater breakthroughs in areas such as intellectual property valuation and the disposal and monetization of pledged assets.

He Zhimin emphasized the importance of fully recognizing the significance of strengthening intellectual property‑related financial services. The national intellectual property system is called upon to collaborate closely with banking and insurance regulatory authorities at all levels to elevate intellectual property‑pledge financing to a new stage. He also urged the enhancement of intellectual property asset valuation management and the expansion of available tools, the refinement of risk‑sharing and compensation mechanisms for IP‑pledge financing, and the streamlining of channels for the disposal and circulation of IP‑secured assets.

The Guangdong Provincial Intellectual Property Bureau, the Zhongguancun Intellectual Property Promotion Bureau, the Preliminary Examination and Process Management Department of the Patent Office of the National Intellectual Property Administration, the Shaanxi Banking and Insurance Regulatory Bureau, the China Construction Bank, the Jiangsu Bank, the Zhejiang Tailong Bank, PICC Property and Casualty Company, and other institutions shared their experiences and practices in conducting intellectual property‑pledge financing.

At its meeting, the Financial Stability and Development Committee specifically called for “deep reforms” of policy-based financial institutions, emphasizing their role in counter-cyclical regulation to support economic transformation, upgrading, and high-quality development.

On the 27th, the Financial Stability and Development Committee of the State Council (hereinafter referred to as the Financial Committee) held its eighth meeting to deliberate on issues such as deepening financial system reform and enhancing the ability of financial services to support the real economy, and to outline priorities for the next phase of work.

It is worth noting that this meeting specifically singled out policy-based financial institutions. Experts believe this may signal that, amid intensified counter-cyclical policy adjustments, these institutions could step in to fill gaps alongside existing fiscal and monetary measures. Together, counter-cyclical regulation, financial reform, and further opening-up will reinforce one another, bolstering the capacity and quality of financial services to support the real economy. In addition, the meeting proposed integrating capital replenishment with improvements in corporate governance and internal management, which is expected to enhance financing accessibility for high-quality small and medium-sized banks.

Deepen the reform of policy-based financial institutions.

The meeting noted that China’s economy is currently operating steadily overall, with growth drivers accelerating their shift and financial risks trending toward convergence. The financial system must implement the decisions and arrangements of the CPC Central Committee and the State Council, adhere to the overarching principle of seeking progress while maintaining stability, earnestly deepen structural reform on the supply side of finance, continue to pursue a prudent monetary policy, strengthen counter-cyclical adjustments, and ensure reasonably ample liquidity and moderate growth in the total amount of social financing.

The meeting emphasized the need to further deepen the reform of policy-based financial institutions, improve their governance systems and incentive mechanisms, adhere to the principles governing financial institution operations, and fully leverage the counter-cyclical regulatory role of these institutions in economic transformation, upgrading, and high-quality development.

Zeng Gang, deputy director of the National Financial and Development Laboratory, believes that policy-based financial institutions can play an even greater role in implementing counter-cyclical regulation. At present, these institutions primarily raise funds by issuing medium- and long-term policy‑oriented financial bonds, enabling them to better align with medium- and long-term investment projects and more effectively support stable growth.

In areas where commercial financial institutions lack sufficient coverage, policy-based financial institutions may play a more significant role. Zeng Gang noted that when the credit‑granting appetite of commercial financial institutions is constrained or impaired, policy‑oriented financial institutions can provide an effective complement, thereby strengthening the entire financial system’s support for the real economy.

Focus on supporting small and medium-sized banks in replenishing their capital.

The meeting noted that it is necessary to accelerate the establishment of a long-term mechanism for replenishing commercial banks’ capital, diversify funding channels for capital supplementation, and further smooth the transmission of financial liquidity to the real economy. Priority should be given to supporting small and medium-sized banks in bolstering their capital base, integrating capital replenishment with improvements in corporate governance and internal management, and effectively guiding these banks to shift their focus downward, serve local communities, and support private enterprises as well as small, micro, and medium-sized businesses.

Regarding supplementary measures and instruments, Ni Jun, Chief Banking Analyst at GF Securities, believes that, internally, banks should refine their corporate governance frameworks and encourage them to enhance their capital structures through retained earnings and capital injections from existing shareholders. Externally, banks can be encouraged to issue new types of capital‑raising instruments, such as preferred shares and perpetual bonds.

Wang Chaonan, Managing Director of the Investment Banking Committee at CITIC Securities, stated that this meeting emphasized integrating capital replenishment with improvements in corporate governance and internal management. On the one hand, this approach incentivizes small and medium-sized banks to strengthen their governance frameworks, enhance internal controls, and refine risk management, thereby reducing systemic risks within the banking system. On the other hand, small and medium-sized banks with more robust governance and stronger credit profiles may gain access to a broader array of capital‑raising tools, further enhancing commercial banks’ ability to allocate resources efficiently. By smoothing the transmission mechanism of monetary policy, these measures will better support the real economy, particularly small, micro, and medium-sized enterprises.

Expand high-standard two-way opening-up in the financial sector.

The meeting noted that it is necessary to further expand high-standard, two-way opening-up in the financial sector, encourage overseas financial institutions and capital to enter the domestic financial market, and enhance the vitality and competitiveness of China’s financial system.

Wang Jingwen, a senior macro analyst at China Minsheng Bank, stated that since the beginning of this year, the financial sector has continued to expand its opening-up. This not only helps attract capital inflows but also strengthens market competition, encouraging domestic financial institutions to improve their efficiency and, in turn, boosting the overall vitality of the financial system.

Previously, Chen Yulu, Vice Governor of the People’s Bank of China, emphasized that the next step will be to align with high‑level opening‑up standards and further advance the financial sector’s opening to the outside world. This involves shifting the underlying philosophy of openness toward a pre‑entry national treatment regime combined with a negative list approach, with the aim of achieving systemic and institutionalized liberalization.

The Ministry of Finance, the Ministry of Human Resources and Social Security, and the State-owned Assets Supervision and Administration Commission jointly convened a national work deployment meeting on the transfer of a portion of state-owned capital to replenish the social security fund, outlining plans for the full-scale rollout of this initiative.

The State Council Executive Meeting decided that, this year, 10% of the state‑owned and state‑controlled shares in large and medium‑sized enterprises and financial institutions—both central and local—will be transferred in their entirety to the National Council for Social Security Fund and relevant local implementing entities, where they will serve as financial investors and, in accordance with applicable regulations, enjoy rights such as dividend entitlements. To implement the spirit of the State Council Executive Meeting, on September 27, the Ministry of Finance, together with the Ministry of Human Resources and Social Security and the State-owned Assets Supervision and Administration Commission, convened a national conference to deploy the task of transferring a portion of state capital to replenish the social security fund. Comrade Liu Kun, Party Secretary and Minister of the Ministry of Finance, conveyed the spirit of the State Council Executive Meeting and outlined the nationwide implementation plan. Deputy Minister You Jun of the Ministry of Human Resources and Social Security and Deputy Secretary‑General Zhao Shitang of the SASAC also addressed the meeting. The meeting was chaired by Comrade Xu Hongcai, Vice Minister of Finance. Officials from the finance, human resources and social security, and state‑asset management departments of all provinces, autonomous regions, and municipalities directly under the central government participated via video link at sub‑venues.

The meeting emphasized that transferring a portion of state-owned capital to replenish the social security fund is an important measure for effectively addressing the shortfall in the basic old-age insurance fund. It reflects the people-centered development philosophy and the objective need to safeguard and improve people’s livelihoods, fully embodying the new-era national strategy of strengthening the social security system. All provinces must resolutely implement the decisions and arrangements of the CPC Central Committee and the State Council, work in concert, and carry out the transfer process in a pragmatic and efficient manner.

The meeting made it clear that the transfer of assets must be substantially completed by the end of 2020, a task that is both time‑critical and demanding. All regions and departments are urged to further elevate their political awareness, align their thinking and actions with the decisions and arrangements of the CPC Central Committee and the State Council, and, with a strong sense of responsibility for people’s livelihoods, meticulously organize and carefully plan the work to ensure its timely and thorough completion as required. The people’s governments of all provinces shall assume overall responsibility for the transfer process, attach great importance to its arduousness and complexity, and, in light of their respective local conditions, promptly formulate implementation plans for carrying out the transfer.

The meeting emphasized that the Ministry of Finance, the Ministry of Human Resources and Social Security, the State-owned Assets Supervision and Administration Commission, and relevant departments at the provincial level should establish a clear‑cut, well‑defined, and tightly coordinated chain of responsibilities, as well as a working framework characterized by vertical linkage and concerted efforts across all levels. At the central level, stronger guidance should be provided to local authorities, with tasks and divisions of labor carefully calibrated; regular oversight and inspections should be conducted to monitor the progress and effectiveness of the transfer process among relevant entities nationwide, and any difficulties encountered in implementation should be promptly addressed through timely research and resolution, ensuring steady and solid progress. Meanwhile, each provincial people’s government should strengthen organizational leadership, enforce departmental accountability, continuously innovate work strategies and approaches, coordinate solutions to major issues, and provide effective supervision and guidance for the transfer process.

State Taxation Administration: Starting October 1, urban land use tax and property tax will be filed jointly.

To reduce the number of tax returns and make tax compliance more convenient for taxpayers, thereby further optimizing the business environment, the State Taxation Administration recently issued the “Announcement on Revising the Declaration Forms for Urban Land Use Tax and Property Tax,” effective October 1, 2019, under which urban land use tax and property tax will be filed jointly.

An official from the State Taxation Administration stated that, in line with the requirements of deepening the “delegation, regulation, and service” reform and optimizing the business environment, the Administration recently issued the “Notice of the State Taxation Administration on Implementing Ten New Measures to Facilitate Tax and Fee Payment,” which explicitly mandates the combined filing of urban land use tax and property tax. This measure aims to further reduce the number of filings required by taxpayers and enhance the convenience of tax administration. To ensure the timely implementation of this taxpayer-friendly initiative, the Administration has revised the relevant declaration forms for urban land use tax and property tax.

The announcement states that certain data items in the declaration forms for urban land use tax and property tax will be adjusted, and the names of some individual data items will be standardized. The separate tax return forms for urban land use tax and property tax, the detailed declaration form for tax reductions and exemptions, and the tax source detail form will each be consolidated into the “Urban Land Use Tax and Property Tax Return Form,” the “Urban Land Use Tax and Property Tax Detailed Declaration Form for Tax Reductions and Exemptions,” and the “Urban Land Use Tax and Property Tax Tax Source Detail Form,” respectively.

Litigation & Arbitration

Laws and regulations that came into effect in October 2019

1. The Judges Law and the Prosecutors Law have come into effect, consolidating the achievements of the judicial accountability reform.

The Standing Committee of the National People’s Congress recently voted to adopt the newly revised Judges Law and Prosecutors Law, which will take effect on October 1. The amended laws reflect the achievements of China’s judicial system reforms in recent years, including the reform of the judicial accountability system and the roster‑based staffing system, and introduce more comprehensive provisions regarding the rights and obligations of judges and prosecutors, as well as their selection, career safeguards, and other aspects. Both laws explicitly stipulate that judges adjudicating cases and prosecutors performing their duties must base their decisions on facts and abide by the law, upholding an objective and impartial stance. The Prosecutors Law further provides that, in handling criminal cases, prosecutors must strictly adhere to the principle of legality, respect and protect human rights, and ensure that while pursuing offenders, they also safeguard those who are innocent from unwarranted criminal prosecution. In addition, the two laws set forth a series of rules governing recusal, disciplinary measures, and concurrent employment for judges and prosecutors, with the aim of ensuring that they exercise their powers within the bounds of the law. By clearly defining management measures for judges and prosecutors through legislation, these laws ensure that power is exercised responsibly, authority is delegated without neglect, and the use of power is subject to oversight.

2. Use of smart parcel lockers shall require the recipient’s consent.

Effective October 1, the Measures for the Administration of Express Delivery Services via Smart Parcel Lockers will come into force. According to these regulations, enterprises operating smart parcel lockers must obtain the recipient’s consent before using such lockers to deliver parcels. If the recipient does not consent, the enterprise shall provide delivery services at the address specified in the express delivery service contract.

3. Insurance advertising shall not use terms such as “deposit.”

The Measures for the Administration of Commercial Banks’ Agency Insurance Business will take effect on October 1. The Measures stipulate that all insurance documents and promotional materials must be clearly distinguishable from bank‑issued documents and promotional materials in terms of color, design, and other aspects, and may not use terms such as “deposit,” “savings,” or “jointly launched with the bank.”

4. Food safety sampling inspections cover unmanned supermarkets.

The State Administration for Market Regulation recently issued the newly revised Measures for the Administration of Food Safety Sampling and Inspection, which will take effect on October 1. The Measures stipulate that market supervision authorities may, by analogy with the provisions of these Measures governing online food safety supervisory sampling, conduct sampling inspections of vending machines, unmanned supermarkets, and similar outlets.

5. New Edition of the Code for Design of Kindergarten Buildings

The Ministry of Housing and Urban–Rural Development recently issued the revised provisions of the industry standard “Code for Design of Nurseries and Kindergartens,” which will take effect on October 1. The new version of the Code specifies the service radius for nurseries and kindergartens, as well as the number of classes and the maximum enrollment per class.

6. Health foods will emphasize both production and regulation.

The Measures for the Administration of the Catalogue of Health Food Raw Materials and the Catalogue of Health Functions, issued by the State Administration for Market Regulation, came into effect on October 1. These measures provide institutional safeguards to ensure that health foods are “well‑regulated, dynamically managed, and of high quality.” They clarify the procedures and pathways for formulating, revising, and publishing both the catalogue of health food raw materials and the catalogue of permitted health functions, shifting away from a previously government‑led approach and placing industry players at the forefront of research on these catalogues and functions. This significantly encourages and promotes R&D and innovation within the sector. Experts note that, in line with scientific advances, dynamically adjusting the list of claimable health functions—eliminating those that no longer meet established standards while allowing new functions to be approved—is an intrinsic requirement for the development of the health food industry and a means of meeting the public’s growing consumer demand.

7. New Management Measures for Farmland Development Projects Are Implemented

The Ministry of Agriculture and Rural Affairs has issued the Measures for the Administration of Farmland Construction Projects, which will take effect on October 1. The Measures stipulate that farmland construction shall be governed by a centralized and unified management system, with unified planning, layout, and construction standards.

8. Abolish the requirement for filing and registration of labels for first-time imports of prepackaged foods.

The General Administration of Customs has issued the “Announcement on Matters Relating to the Inspection and Supervision of Labels for Prepackaged Food in Import and Export,” which, effective October 1, abolishes the requirement for filing label registrations for first-time imports of prepackaged food. Importers shall be responsible for verifying that the Chinese labels of their imported prepackaged foods comply with applicable laws and regulations.

9. No organization or individual may infringe upon children’s personal information.

The Regulations on the Online Protection of Personal Information of Children came into effect on October 1. The regulations explicitly prohibit any organization or individual from creating, publishing, or disseminating information that infringes upon the security of children’s personal information. According to the regulations, children’s guardians shall properly fulfill their guardianship duties, educate and guide children to enhance their awareness and capabilities in protecting personal information, and safeguard the security of children’s personal information. When collecting, using, transferring, or disclosing children’s personal information, network operators must inform the children’s guardians in a prominent and clear manner and obtain their consent. The regulations also stipulate that if a network operator fails to adequately implement its responsibilities for managing the security of children’s personal information, thereby posing significant security risks or resulting in a security incident, the cyberspace administration department shall, in accordance with its duties, conduct a regulatory interview. The network operator shall promptly take corrective measures to eliminate such risks. Any violation of these regulations shall be handled by the cyberspace administration department and other relevant authorities in accordance with their respective duties and in compliance with the Cybersecurity Law and other applicable laws and regulations; where the conduct constitutes a crime, criminal liability shall be pursued in accordance with the law.

Weaving a Tight Web of Liability for Objects Thrown or Falling from Heights — Summary of the 21st “Case Lecture Forum”

In recent years, cases of harm caused by objects thrown or falling from high altitudes have occurred with alarming frequency, seriously infringing upon the people’s rights to life and health as well as their property rights, and have been described by the public as “a pain hanging over our cities.”

In response to widespread public concern and to ensure that cases involving objects thrown or falling from high altitudes are adjudicated lawfully, fairly, and prudently—thereby effectively safeguarding the “safety above our heads”—the Judicial Case Research Institute of the Supreme People’s Court convened the 21st session of its “Case Lecture Series” at the National Judges College on September 26. The session focused on a thematic discussion of recent landmark civil, criminal, and administrative cases involving such incidents, as adjudicated by the people’s courts. The lecture was chaired by Justice Hu Yunteng of the Supreme People’s Court. Scholars and experts from academia, responsible officials from relevant departments of the Supreme People’s Court and the Supreme People’s Procuratorate, judges who presided over the cases under review, participants in the national training program for leading cadres of primary-level people’s courts, and attendees of the National Advanced Training Program on Public Interest Litigation for Judges and Prosecutors all took the floor, offering constructive suggestions on pressing and challenging issues. A vigorous exchange of views ensued, creating a lively and spirited atmosphere, and the lecture concluded in complete success.

Hu Yunteng pointed out that people’s courts should intensify the publicity of typical cases, promote comprehensive governance, and prioritize prevention. They should also urge relevant authorities to promptly collect and securely preserve evidence in related cases; strengthen the development of diversified dispute-resolution mechanisms to pool resources and achieve synergy in resolving disputes, thereby fulfilling the requirements of addressing issues at their source; and coordinate with the procuratorial organs while leveraging the crucial role of administrative adjudication in handling cases involving objects thrown or falling from heights, thus encouraging and supporting property management enterprises to fulfill their duties and play their part.

Further enhance evidence‑gathering capabilities and reduce the burden of proof on rights holders.

Cases involving objects thrown or falling from high altitudes are often described as “unforeseeable, sky‑borne misfortunes,” and they frequently face challenges such as difficulties in investigation and evidence collection, as well as the inability to identify the specific tortfeasor. Cheng Hu, Vice President of the Fourth Intermediate People’s Court of Beijing, believes that further enhancing evidentiary capabilities and promptly collecting and preserving relevant evidence are key to properly adjudicating such cases. “First, it is necessary to expand the scope and increase the number of video surveillance systems, particularly intensifying monitoring at high‑rise buildings to eliminate blind spots; second, a reward system for reporting incidents of objects being thrown or dropped from heights should be established.”

“It is recommended that a dedicated authority, such as the public security organs, be designated to promptly identify the infringer, thereby effectively preventing situations in which judges dismiss plaintiffs’ claims due to an inability to ascertain the perpetrator,” said Zhao Haitao, a judge in the Criminal Division of the People’s Court of Shandan County, Gansu Province. “Otherwise, since the underlying disputes and issues remain unresolved, new litigation is bound to arise.”

The difficulty of providing evidence often deters victims of infringement from filing lawsuits, leaving their legitimate rights and interests unprotected. Professor Yin Tian of Peking University Law School argues that the burden of proof should be shifted away from the victim: “Requiring the victim to bear the burden of proof is, in light of everyday experience, virtually impossible. If the victim clearly knows who the infringer is, then the case no longer falls under the highly controversial category of objects thrown or dropped from high places; rather, it constitutes a straightforward instance of direct tort liability.” He points out that only by reducing the victim’s evidentiary burden can the original intent of the relevant legislation be realized.

Wu Mengshuan, Director of the Civil and Administrative Law Research Division at the Legal Policy Research Office of the Supreme People’s Procuratorate, also pointed out that, under the standard requirements for the burden of proof, it is virtually impossible for the injured party to bear the corresponding evidentiary obligations. He called for officely upholding the banner of rights and doing everything possible to safeguard the legitimate rights and interests of victims, while refining the legal framework—particularly with respect to principles and the allocation of the burden of proof—so that, even when the direct tortfeasor cannot be identified, liable parties can still compensate the injured party.

In this regard, Article 87 of the current Tort Liability Law provides that, in cases involving objects thrown or dropped from high places, the principle of reversed burden of proof applies: the alleged tortfeasor must prove that it was not at fault for the incident; otherwise, it shall bear a certain liability for compensation, thereby maximizing protection of the rights and interests of the injured party.

Yin Tian argues that this reflects a value judgment aimed at safeguarding the rights and interests of the injured party, noting, “It is important to emphasize that this is ‘compensation’—not ‘damages’ or ‘assumption of liability.’” He further points out that, in essence, this constitutes a mechanism for the equitable allocation of social benefits through mutual assistance, which enjoys a certain degree of moral legitimacy.

Strengthen, in accordance with the law, the management responsibilities and liability for compensation of property management companies.

At the symposium, several participants argued that the responsibilities and liability for compensation of property management companies and homeowners should be strengthened in accordance with the law.

“It is essential to strengthen the responsibilities of property management companies and establish a robust safety net to protect the public’s well‑being,” noted Zhang Nengbao, head of the Circuit Supervision Group of the Supreme People’s Court’s Trial Supervision Division. He pointed out that, in cases involving objects thrown or dropped from high altitudes, there is ample legal basis for holding property management companies accountable. For instance, the Regulations on Property Management issued by the State Council explicitly stipulates that property management companies have an obligation to assist in implementing safety measures; moreover, the Supreme People’s Court’s Interpretation on Several Issues Concerning the Specific Application of Law in Adjudicating Disputes over Property Services likewise clarifies that property management companies must bear corresponding liability if they fail to fulfill their relevant management duties.

Zhang Nengbao argues that even when a property management company is implicated in a case but its liability cannot be clearly established, it should not be excluded from the scope of liable parties. “As for the manner in which the property management company bears responsibility, one may apply the principle of equitable liability under Articles 24 and 87 of the Tort Liability Law, or alternatively, creatively invoke the duty of safety protection set forth in Article 37 to require the property management company to assume a certain obligation to provide compensation.”

In his remarks, Wu Mengshuan also underscored the obligations of property management companies in handling such incidents, stating, “To ensure that property management responsibilities are effectively enforced, in addition to legislative efforts, judicial authorities—including the procuratorial organs—can also proactively promote the standardization of property management.” He pointed out that, on the one hand, effective guidance can be provided through specific cases; on the other hand, by submitting judicial and prosecutorial recommendations to the administrative departments overseeing property management companies, or even by filing public-interest lawsuits, it is possible to gradually advance the concretization of property management accountability.

Cheng Hu, for his part, argues that it is necessary to amend the Regulations on Property Management: “The urban construction authorities should assume oversight and regulatory responsibilities over property management companies with respect to the issue of objects being thrown or falling from high altitudes, and these duties and obligations should be incorporated into the regulations.”

The system is mobilizing to achieve source-based governance.

Addressing the issue of objects being thrown or falling from high altitudes is a systemic undertaking. While emphasizing post‑event remedies such as law‑based governance and strengthened accountability, it is equally crucial to bolster preventive measures and tackle the problem at its source in order to fundamentally reduce incidents of such occurrences.

Cheng Hu pointed out that the special role of administrative adjudication in addressing incidents of objects being thrown or falling from high altitudes should be given utmost attention. “When such cases are resolved through civil litigation, the perpetrators face very low costs for their unlawful conduct, while victims bear substantial burdens in seeking redress—particularly when the responsible party remains unidentified. Moreover, imposing ‘collective liability’‑style compensation proves ineffective. These types of judgments tend to have high appeal rates and are extremely difficult to enforce,” he explained. He further noted that using criminal proceedings to tackle these issues is akin to “using a cannon to swat a mosquito,” with limited effectiveness. “We should fully leverage the supervisory function of administrative adjudication over government actions to address disputes over objects thrown or dropped from heights at their source.” To this end, he recommended expanding the scope of administrative litigation to include twelve categories of cases.

“It is essential to fully leverage the role of grassroots people’s mediation organizations,” says Chen Jie, Deputy Chief Judge of the Shuangqiao People’s Tribunal of the Chaoyang District People’s Court in Beijing. She argues that, by establishing a system of advance compensation funded by insurance—operated through property management companies or community-level people’s mediation committees—and subsequently pursuing legal recovery, a significant number of cases involving objects thrown or falling from heights could be effectively resolved at the mediation stage.

Lin Wei, Vice President of the University of the Chinese Academy of Social Sciences, argues that great importance should be attached to the principle of a multi‑pronged, multi‑stakeholder governance approach, making full use of the diverse legal tools available across different branches of law to achieve systematic regulation. In particular, emphasis should be placed on leveraging criminal sanctions to deliver both punitive and educational effects, while strengthening the pursuit of criminal liability. In practice, there are already numerous exemplary cases in which criminal penalties have been imposed for acts of dropping objects from high places. On the basis of clearly identifying the responsible parties, it is essential to distinguish among different circumstances and accurately determine the applicable offense. Common examples include charges such as negligent infliction of serious bodily harm or negligent homicide. Of special note is that, following a substantive assessment of the conduct, if it is found to have created a danger to public safety—even in the absence of severe consequences—the offense of endangering public safety by dangerous methods may still be established; and where serious consequences have already occurred, criminal punishment is all the more warranted. At the same time, it is crucial to examine the specific contexts in which such acts take place and the degree of harm they inflict on various legal interests, paying particular attention to the perpetrator’s subjective state. Accordingly, offenses such as negligent homicide, intentional homicide, endangering public safety by dangerous methods, and crimes involving major accidents due to negligence should be differentiated and appropriately characterized. By fully harnessing the deterrent and preventive functions of criminal sanctions, we can effectively curb the recurrence of such behavior and steadily reduce its frequency.

Jiang Huiling, Vice President of the National Judges College, also emphasized the need to prioritize non-litigious dispute-resolution mechanisms and fully leverage the roles of self-governance organizations and mediation bodies. At the same time, he recommended intensifying legal publicity, strengthening requirements related to social ethics and community self-governance, and raising the public’s legal awareness and moral standards, thereby reducing at the source the incidence of objects being thrown or falling from high altitudes.

In his concluding remarks, Hu Yunteng emphasized that the act of throwing or dropping objects from high places is characterized by complexity and diversity. People’s courts must uphold sound value orientations and draw on practical wisdom, judicial acumen, and political insight to prioritize the protection of victims’ interests and allocate the interests of all parties in a fair and reasonable manner. When pursuing criminal liability, penalties must be proportionate to the offenses, ensuring precision in the administration of justice.

Distinction between the Guarantee Period and the Statute of Limitations for the Guarantee Contract

　[Case Summary]

On November 7, 2014, the plaintiff, a certain bank, entered into a Working Capital Loan Agreement with the defendant, a certain industrial development company, stipulating that the loan amount would be RMB 2.8 million, with a term of one year, from November 7, 2014, to November 6, 2015. The defendants, including Mr. Qin, provided a maximum‑amount joint and several guarantee for the aforementioned debt, with the guarantee period extending for two years from the date on which the obligation under the principal contract became due.

On June 15, 2016, the plaintiff filed a lawsuit for the first time, seeking to hold the borrower and the guarantor liable. Subsequently, due to the guarantor’s suspected involvement in a criminal offense, the court dismissed the plaintiff’s claim and referred the case to the public security authorities for investigation; however, the public security authorities declined to file a case or accept it for investigation. On April 11, 2018, the plaintiff again brought suit, again seeking to hold the borrower and the guarantor liable.

[Investigation and Handling]

The People’s Court of Xihu District, Nanchang City, having ascertained the facts, found that on November 7, 2014, the plaintiff entered into a Credit Agreement with the defendant, a certain Industrial Development Company, which provided for a credit limit of RMB 2.8 million and a credit term of twelve months, from November 7, 2014, to November 6, 2015. On the same day, the plaintiff also executed a Maximum Amount Guarantee Contract with the defendant, Mr. Qin, and others, under which they agreed to provide the plaintiff with a joint and several guarantee liability up to a maximum amount; the scope of the guaranteed claims includes the principal balance not exceeding RMB 2.8 million under the principal contract, interest accrued on such principal balance (including compound interest and default interest), liquidated damages, compensation, other sums payable by the debtor to the plaintiff, and expenses incurred by the plaintiff in enforcing its creditor’s rights and security interests (including, but not limited to, court fees, arbitration fees, property preservation fees, travel expenses, enforcement fees, appraisal fees, auction fees, notarization fees, service‑of‑process fees, public notice fees, attorney’s fees, and the like). The guarantee period shall be two years from the date on which the maturity of the obligations under the principal contract expires.

On the same day, the plaintiff entered into a Working Capital Loan Agreement with the defendant, a certain Industrial Development Company. The agreement stipulated that the loan amount would be RMB 2.8 million, with a term of one year, from November 8, 2014, to November 6, 2015, and that the proceeds were to be used for the purchase of decorative building materials. The loan bore a fixed annual interest rate of 10.26%, which would remain unchanged throughout the contract term. In the event that the borrower failed to repay the principal as agreed, the lender was entitled to impose a penalty interest equal to 50% above the contracted loan rate. Furthermore, if the borrower failed to pay interest (including penalty interest and compound interest) as agreed, the lender could charge compound interest at a rate increased by 50% over the contracted loan rate.

Following the execution of the aforementioned contract, on November 8, 2014, the plaintiff disbursed a loan of RMB 2.8 million to the defendant, a certain Industrial Development Company, as evidenced by the loan agreement. The plaintiff has duly fulfilled its obligation to disburse the loan as stipulated in the contract. However, the defendant, the said Industrial Development Company, has failed to repay the principal and interest as agreed, and the guarantor has likewise failed to assume its guarantee liability. As of October 10, 2018, the defendant still owes the plaintiff a principal amount of RMB 2.8 million, together with interest (including default interest) totaling RMB 2,244,396.60. Accordingly, the plaintiff has brought this action before the People’s Court, setting forth the claims set forth above.

It was further ascertained that, in this case, the plaintiff had filed a lawsuit with the Xihu District People’s Court of Nanchang City on June 15, 2016. However, due to the case being transferred to the public security authorities for investigation, the court ruled to dismiss the plaintiff’s suit. As the public security authorities did not accept the case for filing, it was returned to the court. Consequently, on April 11, 2018, the plaintiff refiled the case.

On October 16, 2018, the People’s Court of Xihu District, Nanchang City, rendered a first-instance judgment, holding that the plaintiff had refiled the lawsuit within the statute of limitations, and that the borrower and the guarantor were respectively liable for repayment and joint and several guarantee liability.

[Legal Analysis]

Article 34 of the Interpretations of the Supreme People’s Court on Several Issues Concerning the Application of the Security Law of the People’s Republic of China provides: “Where, during the guarantee period, a creditor in a general guarantee brings a lawsuit against the debtor or applies for arbitration, the statute of limitations for the guarantee contract shall commence from the date on which the judgment or arbitral award becomes effective. Where, during the guarantee period, a creditor in a joint and several liability guarantee requests the guarantor to assume guarantee liability, the statute of limitations for the guarantee contract shall commence from the date on which the creditor makes such request.” In accordance with the aforementioned provision, if a creditor files a lawsuit within the guarantee period but the suit is dismissed, the date of the first filing shall be deemed the date on which the creditor demanded that the guarantor assume guarantee liability; at that point, the statute of limitations for the guarantee contract begins to run. Should the creditor file another suit, the statute of limitations for the guarantee contract—not the guarantee period—shall then begin to accrue. On June 15, 2016, the plaintiff’s initial filing seeking the guarantor’s liability was made within the guarantee period. Although the plaintiff filed a second suit on April 11, 2018, after the guarantee period had expired, because the plaintiff had already instituted proceedings before the court on June 15, 2016, thereby asserting its rights, the effect of the guarantee period had been exhausted by the time of the first filing. Consequently, the guarantee period no longer runs, and the statute of limitations for the guarantee contract begins to apply. Since the plaintiff’s subsequent filing did not exceed the statute of limitations applicable to either the principal obligation or the guarantee contract, the guarantor is legally obligated to assume guarantee liability.

[Significance and Impact]

The statute of limitations and the guarantee period are two concepts that differ fundamentally in nature.

Under the Guarantee Law, guarantees are categorized into general guarantees and joint and several guarantees, and the guarantee period is the same for both. The guarantee period must be expressly stipulated in the guarantee contract. If no such period is agreed upon, it shall be six months from the date the principal obligation becomes due. Where the guarantee contract provides that the guarantor’s liability shall continue until the principal debt and interest have been fully repaid, or contains similar provisions, such terms shall be deemed ambiguous, and the guarantee period shall be two years from the date the principal obligation becomes due. The statute of limitations for a guarantee contract is two years. The statute of limitations is a variable period, commencing when the creditor knows or ought to know that its rights have been infringed, and is subject to the rules governing suspension, interruption, and extension. Upon expiration of the statute of limitations, the creditor loses the right to bring an action. General guarantees and joint and several guarantees differ with respect to the party against whom the creditor may assert its rights, the manner of such assertion, and the starting point for calculating the statute of limitations; these distinctions are set forth below.

I. General Guarantee. Article 25, Paragraph 2 of the Guarantee Law provides: “If, during the guarantee period agreed upon in the contract or the guarantee period specified in the preceding paragraph, the creditor has instituted litigation or arbitration, the provisions on interruption of the statute of limitations shall apply to the guarantee period.” In conjunction with Article 34, Paragraph 1 of the Interpretations of the Guarantee Law, which stipulates: “Where a creditor under a general guarantee brings suit or initiates arbitration against the debtor before the expiration of the guarantee period, the statute of limitations for the guarantee contract shall commence from the date on which the judgment or arbitral award becomes effective,” it follows that the characteristics of the statute of limitations for a general guarantee are as follows: 1) For a general guarantor to be held liable, the creditor must assert its rights within the guarantee period; 2) The only permissible means of asserting such rights is through litigation or arbitration—no other methods are allowed; 3) The subject of the lawsuit or arbitration may be only the debtor, not the guarantor, because a general guarantor enjoys the right of prior defense, which means that, until the principal contract dispute has been resolved by judgment or arbitration and the debtor’s assets have been lawfully enforced to satisfy the debt, the general guarantor may refuse to assume liability; 4) Upon the entry into force of the judgment on the principal contract, the guarantee period terminates, and the statute of limitations for the guarantee contract begins to run, thereby effecting a transition from the guarantee period to the statute of limitations.

II. Joint and Several Guarantee. Article 34, Paragraph 2 of the Interpretation of the Security Law provides: “If a creditor under a joint and several liability guarantee requests the guarantor to assume guarantee liability before the expiration of the guarantee period, the statute of limitations for the guarantee contract shall commence from the date on which the creditor makes such request.” Accordingly, the characteristics of the statute of limitations for a joint and several liability guarantee contract are as follows: 1) The manner in which the creditor asserts its rights may be through litigation or arbitration, or by other means; 2) The creditor must include the guarantor among the parties against whom it asserts its rights; it may simultaneously assert its rights against both the debtor and the guarantor, or it may assert its rights solely against the guarantor; 3) If the creditor asserts its rights against the guarantor within the guarantee period, the guarantee period terminates on the date of such assertion, and the statute of limitations begins to run from that date.

In summary, failure by the creditor to exercise its rights within either the guarantee period or the statute of limitations may result in the guarantor no longer being liable under the guarantee. However, the two periods differ fundamentally: during the guarantee period, the creditor’s exercise of its rights alters the original legal relationship, thereby extinguishing the effect of the guarantee period; whereas, during the statute of limitations, the creditor’s assertion of its rights serves to preserve the existing legal relationship, allowing it to remain in force.

If a party brings a lawsuit on the basis of a private loan relationship, but the people’s court determines that no such relationship exists between the parties, how should the court clarify the situation?

In accordance with the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases, clarification shall be provided from the following aspects:

First, the duty to clarify must adhere to the principle of judicial transparency. As the exercise of the duty to clarify is an integral part of judicial proceedings, it must naturally comply with the requirements of judicial openness. Such clarification should be conducted in a manner that is subject to oversight; most importantly, it should take place in the presence of both parties, or the content of the clarification addressed to one party should be communicated to the other. Clarification may not be carried out in a back-to-back format.

Second, it is generally held that clarification should be applied throughout the entire civil litigation process; however, since legal clarification entails an assessment of legal relationships, it must be grounded in sufficient evidentiary materials and clear factual findings. To ensure due caution, the court should, after the conclusion of the fact‑finding phase and before the commencement of oral argument, comprehensively ascertain the established facts and, based on its evaluation of the case, promptly provide appropriate clarification to the parties.

Third, when clarifying the legal relationship, the court should clearly inform the parties of the nature of the legal relationship as determined on the basis of the evidence they have submitted, and should refrain from using ambiguous language that might impair the parties’ ability to make an informed judgment, thereby undermining the very purpose of such clarification.

Fourth, the exercise of the court’s power to clarify must adhere to the principle of limitation: the court’s clarification of the claims must be grounded in the factual relationships alleged by the parties. In other words, such clarification is constrained by the parties’ factual assertions; the court may not, beyond those assertions, suggest amendments, corrections, or supplements to the claims. If, upon informing the parties of a proposed amendment to the claims, the court does not alter the factual relationships as pleaded by the parties, then the court’s clarification constitutes a duty. By contrast, if, in urging the parties to amend their claims, the court prompts them to advance new grounds for factual relationships that differ from those they have already advanced, such conduct should be deemed a violation of the adversarial principle.

Fifth, when providing clarification on the claims at issue, the court should afford the parties corresponding procedural safeguards, ensuring they have the opportunity to express their views on the court’s clarifications. First, the parties’ right of free disposition constitutes the boundary that the court must respect in exercising its power of clarification. In civil proceedings, “the judge should assist the parties in reaching a sound decision, but must not substitute for them; the judge’s rationality may not be allowed to override the parties’ will.” Following such clarification, whether the parties choose to amend their claims is left to their own discretion. As a general rule, after the court has clarified, any claims, facts, or evidence that the parties failed to raise at that stage may no longer be adduced. Second, the opposing party’s right to present arguments must also be respected. Clarification regarding the amendment of claims can substantially alter the outcome that might have been achieved under the original claims; therefore, the opposing party must be afforded an opportunity to comment on such changes, lest this effectively deprive them of their right to argue and constitute a serious defect in the procedural process.

Outsourcing of audit engagements by accounting offices has given rise to litigation.

Intermediate People’s Court of Nanjing, Jiangsu Province Civil Judgment Case No. (2019) Su 01 Min Zhong 5918

Appellant (Defendant in the original trial, Plaintiff in the counterclaim): Sido New Energy Vehicle Co., Ltd.

Legal Representative: Li Sirui, General Manager of the company.

Authorized litigation agent: Du Yi, male, an employee of the company.

Appellee (Plaintiff in the original trial, Defendant in the counterclaim): Jiangsu Suruihua Accounting Office Co., Ltd.

Legal Representative: Yan Dongsheng, General Manager of the company.

Authorized litigation agent: Qian Yafei, attorney at Jiangsu Zhongshun Law Office.

Authorized litigation agent: Wang Shu, intern lawyer at Jiangsu Zhongshun Law Office.

The appellant, Sidu New Energy Vehicle Co., Ltd. (hereinafter referred to as Sidu Company), dissatisfied with the civil judgment No. (2018) Su 0113 Min Chu 5471 rendered by the Qixia District People’s Court of Nanjing Municipality in a dispute over a service contract with the appellee, Jiangsu Suruihua Accounting Office Co., Ltd. (hereinafter referred to as Suruihua Company), has filed an appeal with this court. After accepting the case on July 3, 2019, this court duly constituted a collegiate panel and held a public hearing on August 5 of the same year. Du Yi, the authorized litigation agent of the appellant Sidu Company, and Qian Yafei and Wang Shu, the authorized litigation agents of the appellee Suruihua Company, appeared in court to participate in the proceedings. The trial of this case has now concluded.

Sidi Company’s appeal request: Revoke the first-instance judgment, render a new judgment dismissing Su Ruihua Company’s claims, and order Su Ruihua Company to bear the litigation costs of both the first and second instances. Facts and grounds:

1. Su Ruihua Company violated both statutory prohibitions and the contractual provisions agreed upon by the parties by entrusting a third party to perform this contract. Following the execution of the contract at issue, Su Ruihua Company assigned a project team led by Shen Yuhe to carry out the audit. However, when Su Ruihua Company formally submitted the final version of the audit report, Sidu Company discovered that the signatures were affixed by two accountants—Xia Xiulei and Li Shilin. Furthermore, upon receipt of the complaint in this case, Sidu Company learned that Shen Yuhe was not a practicing accountant employed by Su Ruihua Company, but rather a staff member of Jiangsu Sugang Accounting Office. Such conduct contravenes Article 22 of the Certified Public Accountant Law of the People’s Republic of China (hereinafter referred to as the CPA Law) and Article 61 of the Measures for the Licensing and Supervision of Accounting Offices, which stipulate that certified public accountants may not permit others to practice under their own name, nor may they concurrently engage in professional activities at two or more accounting offices. Accordingly, such actions constitute invalid civil acts. Consequently, the audit report submitted by Su Ruihua Company lacks any legal basis, and from the outset to the present, it has failed to timely submit an audit report that complies with applicable legal requirements as prescribed in the parties’ contract.

2. During the audit, personnel designated by Suruihua Company seriously violated auditing procedures. Article 21 of the Certified Public Accountants Law stipulates that certified public accountants must issue reports in accordance with the work procedures prescribed by professional standards and rules when performing audit engagements. Clause 3 of Article 3 of the contract at issue provides that, within ten days after the completion of the audit, the auditor shall submit to Party A the audit report, the report on the determination of liability, and the relevant audit working papers. However, even at the time of the first-instance trial in this case, Suruihua Company was unable to produce the audit working papers and had not carried out such procedural steps as observation, inquiry, or conofficeation. Consequently, the audit report it issued was based entirely on data provided by Situdu Group Co., Ltd. (hereinafter referred to as Situdu Holding), the controlling shareholder of Situdu Company, and thus constitutes a false audit report lacking both factual and legal basis.

3. The audit report provided by Sui Ruihua Company contains serious errors. On page 5, line 6 from the bottom of the report, it states: “Accounts payable to Guoying Investment Fund: RMB 351.85 million; accounts receivable from Sidu Holdings: RMB 281.13 million; after offsetting, a net difference of RMB 70.72 million is deemed to represent funds injected by Sidu Holdings.” However, Sidu Holdings and Guoying Investment Fund Management (Beijing) Co., Ltd. (hereinafter referred to as Guoying Investment Fund) are two separate shareholders of Sidu Company, each possessing independent legal person status. During the first-instance proceedings, Sidu Company submitted an audit report prepared by a third-party office, Unite (Tianjin) Tax Consulting Co., Ltd. (hereinafter referred to as Unite), which explicitly characterized and stated that the acts of Guoying Investment Fund and Sidu Holdings in siphoning off company funds constitute suspected criminal conduct and must be immediately rectified. In August 2018, Zhang Yeqiang, the actual controller of Guoying Investment Fund, along with others, orchestrated the withdrawal of substantial funds from Sidu Company by Sidu Holdings; this conduct has been formally investigated by the Economic Investigation Division of Xuanwu District, Nanjing, on suspicion of criminal activity. Article 21 of the Certified Public Accountant Law stipulates that when issuing an audit report, a certified public accountant shall not: (1) knowingly fail to point out that the client’s financial accounting treatment of material matters conflicts with relevant state regulations; or (2) knowingly conceal such treatment or issue a false report when aware that it will directly harm the interests of the report’s users or other stakeholders. Pursuant to Articles 5 and 6 of the Supreme People’s Court’s Provisions on Several Issues Concerning the Adjudication of Civil Tort Compensation Cases Involving Accounting Offices in Audit Activities, if an accounting office, through negligence, issues a materially inaccurate report in the course of its audit work and thereby causes losses to stakeholders, the people’s court shall determine the office’s liability for compensation based on the degree of its negligence. With respect to Sidu Holdings’ misappropriation of RMB 287 million from Sidu Company and the resulting impact on the company’s financial condition, Sui Ruihua Company made no mention whatsoever in its audit report; accordingly, it should bear responsibility for issuing an inaccurate audit report. Therefore, the claims it advances in this case lack legal basis. Furthermore, because Sui Ruihua Company failed to conduct the audit within the scope agreed upon in the contract, Sidu Company was compelled to engage Unite to audit the omitted matters.

4. The first-instance judgment also erroneously found that “Sido Company did not raise any objections to the audit report” and that “Sido Company requested a delay.” Under the contract at issue, Suruihua Company was required to submit the audit report by April 30, 2018; however, it did not do so until June 4, 2018. Upon receiving the audit report, Sido Company repeatedly pointed out that it contained serious errors and that many of its conclusions lacked factual basis. After unsuccessful negotiations, Sido Company engaged a third-party office, Unite Co., to conduct an independent audit and, relying on Unite Co.’s audit report, rejected Suruihua Company’s unreasonable demands. The first-instance court, without any factual support, concluded that Sido Company had sought to delay the audit—this finding is inconsistent with the facts.

Suiruihua Company argues that the first-instance judgment clearly establishes the facts and correctly applies the law, and that Sidu Company’s appeal lacks both factual basis and legal grounds. It requests the second-instance court to dismiss the appeal and uphold the original ruling. Facts and Reasons: 1. Suiruihua Company has completed all audit services in accordance with the Audit Services Agreement entered into by both parties. The professional standards governing the conduct of audit engagements require a three-tier review process and an expert finalization system, with the participation of engagement personnel, reviewers, assistants, and other relevant staff. Ultimately, the registered accountants who sign and certify the audit report, together with the accounting office, bear responsibility to third parties. The audit report at issue issued by Suiruihua Company complies with applicable auditing standards, both procedurally and substantively. Even if Shen Yuhe and others participated in this audit project, their involvement does not constitute the invalid acts alleged by Sidu Company. 2. The audit report prepared by Suiruihua Company in accordance with accounting standards includes a determination of liability; therefore, there is no need to issue a separate liability‑determination report. 3. Pursuant to Clause 1.1 of the Audit Services Agreement, Suiruihua Company undertook a special audit solely of the relevant circumstances of Sidu Company and its subsidiaries, and did not include an audit of the operations of Sidu Company’s parent company or other investors. The audit report explicitly sets forth Sidu Company’s financial statements and clarifies that the offsetting effects of Guoying Investment Company and Sidu Holdings—both outside the scope of this audit—have been excluded.

Suiruihua Company filed a lawsuit with the court of first instance, requesting that Sidu Company be ordered to pay the outstanding audit fee of RMB 126,000, together with interest (calculated from May 26, 2018, until the date of actual payment, at the prevailing rate for similar loans set by the People’s Bank of China), and to bear the litigation costs.

Sido Company filed a counterclaim with the court of first instance, requesting that Suruihua Company be ordered to pay Sido Company RMB 120,000 in audit fees incurred for engaging an independent third-party auditor, together with interest (calculated from July 19, 2018, until the date of actual payment, at the prevailing benchmark lending rate for similar loans set by the People’s Bank of China), and to bear the litigation costs.

Findings of Fact by the Court of First Instance: In early 2018, Sidu Company (the Client, Party A) and Suruihua Company (the Auditor, Party B) entered into an Audit Engagement Agreement, under which Party B was engaged to conduct a special audit of Party A and its subsidiaries—particularly those located in Beijing, Tianjin, Hebei, Shandong, and Nanjing. The agreement stipulated the following: I. Scope, Purpose, and Duration of the Special Audit 1. Party B, upon acceptance of Party A’s mandate, shall perform a special audit of Party A and its subsidiaries—focusing on Beijing, Tianjin, Hebei, Shandong, and Nanjing—covering their 2017 revenues, costs, asset positions, as well as cash inflows, outflows, and utilization. 2. Party B’s special audit shall be conducted in accordance with the Chinese Certified Public Accountant Auditing Standards, including an evaluation of Party A’s internal control system and compliance therewith, selective testing of accounting records, determination of responsibilities and issuance of recommendations, and such other audit procedures as Party B deems necessary under the circumstances, culminating in the issuance of a special audit opinion on the matters entrusted. 3. The audit period shall commence upon the effective date of this contract and conclude on April 30, 2018; the audit report and the responsibility‑determination report are to be issued by that date. Should more complex circumstances arise requiring an extension of the audit period, the parties shall negotiate and agree separately. II. Responsibilities of Party A 3. To promptly provide Party B with all accounting records and other relevant materials required for the audit, together with written explanations regarding specific accounting matters. 5. To furnish the personnel assigned by Party B with the necessary working conditions and assistance; detailed requirements will be set forth by Party B’s audit team in a checklist prior to the commencement of work. 6. To pay the audit fees in full and on time as stipulated in this agreement. 7. Party A shall have the right to supervise the quality of the audit reports and related deliverables issued by Party B. If it is found that any audit report or other deliverable violates applicable laws, regulations, rules, or professional standards, or fails to meet Party A’s requirements, Party A may, in accordance with relevant industry provisions, hold Party B liable. III. Responsibilities of Party B 1. Party B’s responsibility is to issue an audit opinion, based on the audit work performed, concerning Party A and its subsidiaries—particularly those in Beijing, Tianjin, Hebei, Shandong, and Nanjing—regarding their 2017 revenues, costs, asset positions, and cash flows. Party B shall carry out the audit in compliance with the Chinese Certified Public Accountant Auditing Standards (hereinafter referred to as the “Auditing Standards”). 3. To complete the special audit within the agreed timeframe, prepare the special audit report, and submit to Party A, within ten days after the conclusion of the audit, the audit report, the responsibility‑determination report, and the relevant audit working papers. 4. Party B shall designate a certified public accountant as the project leader. 8. Upon discovering any indications of legal or regulatory violations, to promptly report such findings to Party A. 9. When issuing the audit report, Party B shall refrain from the following practices: knowingly failing to disclose that Party A’s financial accounting treatment of material matters conflicts with applicable national regulations; knowingly concealing or submitting false information when such treatment would directly harm the interests of report users or other stakeholders; or knowingly failing to alert users or stakeholders to significant misunderstandings that may result from Party A’s financial accounting treatment. IV. Audit Fees and Payment 1. Audit Fees: Following mutual consultation, the total fee for this audit engagement is RMB 180,000. 2. Payment Method: Within three business days of signing this Audit Engagement Agreement, Party A shall make an advance payment of RMB 54,000. Upon delivery of the draft audit report and the responsibility‑determination report, Party A shall remit RMB 72,000 within three business days. The remaining balance shall be paid in full within ten days after Party B completes the audit and submits both the audit report and the responsibility‑determination report. All payments shall be conditioned upon receipt of Party B’s official invoice. V. Intended Use, Distribution, and Restrictions on Utilization of Reports Party B shall issue five copies of the special audit report and the responsibility‑determination report to Party A, for use solely in connection with the aforementioned commissioned project; such reports shall not be used for any other purpose. IX. Liability for Breach of Contract 1. If either party breaches any of the foregoing provisions, it shall be liable for compensating the other party for reasonable losses incurred as a result. 2. Except where the breach is attributable to the Client, if Party B fails to submit the audit report within the contractual deadline, the Client may refuse to pay the service fees. 4. If Party B’s breach necessitates that Party A engage a third‑party auditor, Party A may require Party B to bear all costs associated with such third‑party audit.

After Sui Ruihua Company and Sidu Company entered into an engagement letter for audit services, Sidu Company provided Sui Ruihua Company with the materials required for the audit, and Sui Ruihua Company commenced its work. Subsequently, at Sidu Company’s request to extend the audit through the end of April 2018, the audit report could not be issued by that date, prompting Sui Ruihua Company to continue its audit efforts. On May 26, 2018, Sui Ruihua Company issued Audit Report No. Sui Ruihua Hui Zhuan [2018] 2‑598, titled “Internal Audit Report on Sidu New Energy Vehicle Co., Ltd.” In this report, Sui Ruihua Company stated that the originally agreed‑upon audit period had been extended from December 31, 2017, to April 30, 2018. The report covered eight key areas: the company’s general profile; its financial position as of April 30, 2018, including details on funds held by various entities and the distribution of those funds; operating results; significant factors affecting operating performance; identified issues; matters requiring special attention; audit recommendations; and the intended scope of use of the report. The report was signed by certified public accountants Xia Xiulei and Li Shilin and bore the official seal of Sui Ruihua Company. Later, after unsuccessfully seeking payment of the audit fees, Sui Ruihua Company filed a lawsuit with the court of first instance on September 6, 2018, requesting resolution of the matter. The court of first instance attempted to serve the litigation documents at Sidu Company’s registered address; however, since Sidu Company was no longer conducting business at that location, direct service proved impossible, and the court accordingly resorted to public notice for service.

The court of first instance further found that Sidu Company’s subsidiary, Sidu (Tianjin) Automobile Sales Co., Ltd. (the entrusting party, hereinafter referred to as Sidu Tianjin), entered into a “Tax‑Related Services Agreement” with Yunitai Company (the entrusted party). Under the agreement, the entrusting party commissioned the entrusted party to conduct a special audit of both the entrusting party and Sidu Company, with the following specific scope: 1) conducting a special audit of the financial records related to applications for government subsidies by Sidu Company and the entrusting party; 2) reconciling the financial transactions between Sidu Company and Sidu Holding Company, as well as intercompany fund transfers; and 3) excluding Sidu Company’s subsidiaries and affiliated entities from the scope of the audit. The audit was required to be completed by July 29, 2018, at a service fee of RMB 120,000. On July 26, 2018, Yunitai Company issued a report to Sidu Tianjin. On July 25, 2018, Sidu Company paid RMB 120,000 to Sidu Tianjin as audit fees, and Sidu Tianjin subsequently remitted RMB 120,000 to Yunitai Company as its service fee. Based on this, Sidu Company contends that, after Surihua Company failed to fulfill its contractual obligations, it engaged its subsidiary, Sidu Tianjin, to carry out the special audit and incurred audit fees totaling RMB 120,000, which it seeks to recover from Surihua Company. In contrast, Surihua Company argues that the commissioning party for the audit was Sidu Tianjin, and that the audit matters are unrelated to it.

Furthermore, according to information obtained from the enterprise credit website, Sido Company’s shareholders are Sido Holding Co., Ltd. (holding 48%), Guoying Investment Fund (holding 40%), and Cui Qun (holding 12%). The company’s key personnel include Supervisor Lu Mei, Chairman Shen Tong, Directors Ning Guobao and Zhou Dayu, General Manager Li Sirui, Director Nie Haipeng, and Vice Chairman Cui Qun. On June 15, 2018, the legal representative was changed from Cui Qun to Li Sirui. Currently, Sido Holding Co., Ltd.’s shareholders are Li Sirui and Li Hongying, and its senior management comprises Directors Yang Jie and Nie Haipeng, Director Qu Jiang, Supervisors Lina and Yang Guo, and Chairman Li Sirui, among others.

During the course of its audit, personnel representing Sidu Holding Co., Ltd., a shareholder of Sidu Co., Ltd., engaged in discussions with Su Ruihua Co., Ltd. regarding the audit report. On June 4, 2018, Su Ruihua Co., Ltd. delivered the audit report to Sidu Co., Ltd., which did not raise any objections. However, the parties were unable to resolve the issue of audit fees. On August 27, 2018, Su Ruihua Co., Ltd. issued an invoice for audit fees in the amount of RMB 180,000; due to the unknown whereabouts of Sidu Co., Ltd., the invoice could not be delivered to that company.

The court of first instance held that the audit engagement agreement entered into between Sui Ruihua Company and Sidu Company does not violate any statutory provisions, is lawful and valid, and that the parties are obligated to perform their respective duties as agreed. Following Sui Ruihua Company’s completion of the audit, Sidu Company requested an extension of the audit to cover up to the end of April 2018; accordingly, Sui Ruihua Company issued an electronic version of the audit report on May 26, 2018, and delivered a hard copy on June 4, in compliance with the contractual terms. Thus, Sui Ruihua Company did not breach the contract regarding the timing of issuing the audit report. Moreover, Sui Ruihua Company prepared the audit report in accordance with auditing standards and included a statement of responsibility therein; therefore, it was not required to issue a separate report on liability. Accordingly, Sidu Company was obligated to pay the audit fees as stipulated in the contract. At present, Sidu Company owes Sui Ruihua Company RMB 126,000 in audit fees. Sui Ruihua Company’s claim for payment of this amount is supported by both factual and legal grounds, and the court of first instance upheld such claim. Sui Ruihua Company further sought interest on the overdue payment from May 26, 2018. However, since the contract provides that payment of fees is conditional upon receipt of an invoice, and Sui Ruihua Company did not issue the invoice until August 27, 2018—by which time Sidu Company’s whereabouts were unknown, preventing delivery—the condition for delivery was deemed fulfilled. Consequently, Sidu Company must pay interest on the overdue amount commencing from that date. Sidu Company argued that it should withhold the remaining RMB 126,000 because Sui Ruihua Company had failed to complete the audit; however, this contention lacks factual basis and was rejected by the court of first instance. Furthermore, Sidu Company commissioned a third party to conduct an audit, but the scope of work under the “Tax-Related Services Agreement” concluded between Sidu Company’s subsidiary and the third party differs substantially from the audit performed by Sui Ruihua Company, and the two audits are unrelated. Therefore, Sidu Company’s assertion that Sui Ruihua Company failed to complete the audit is unfounded. Finally, Sidu Company contended that, pursuant to the parties’ agreement, Sui Ruihua Company should bear the cost of the audit, amounting to RMB 120,000, together with interest; however, this position finds no legal support, and the court of first instance dismissed this claim. In sum, in accordance with Article 45, Paragraph 2, Articles 60, 107, and 109 of the Contract Law of the People’s Republic of China, and Articles 39, 64, and 142 of the Civil Procedure Law of the People’s Republic of China, the court rules as follows: 1. Within five days from the date this judgment becomes legally effective, Sidu Company shall pay Sui Ruihua Company RMB 126,000 in audit fees, together with interest calculated at the prevailing benchmark lending rate of the People’s Bank of China, accruing from August 27, 2018, until the full amount is paid. 2. The remaining claims of Sui Ruihua Company are dismissed. 3. The counterclaims of Sidu Company are dismissed. The court fees for the original action, totaling RMB 3,080 (RMB 2,820 for case filing and RMB 260 for public notice), shall be borne by Sidu Company. The court fee for the counterclaim, amounting to RMB 1,350, shall also be borne by Sidu Company.

During the second-instance proceedings, the parties submitted evidence in accordance with the law in support of their respective appeals. The court organized an exchange of evidence and conducted cross-examination. The evidence submitted by Sidu Company includes: 1. Two sets of financial transaction details and accompanying vouchers, demonstrating financial transactions between Sidu Company and its two corporate shareholders in 2017, intended to show that Surihua Company failed to conduct such an audit in compliance with standard procedures, rendering it impossible to reflect these matters in the audit report; 2. One board resolution of Sidu Company, setting forth the purpose for engaging the audit, intended to prove that Surihua Company did not fulfill its contractual audit obligations. Following cross-examination, Surihua Company disputed the authenticity of Evidence 1; it acknowledged the authenticity of Evidence 2, noting that this document demonstrates that Yu Ting, Qu Jiang, Ning Guobao, Nie Haipeng, and others effectively controlled Sidu Company. The court’s findings are as follows: With respect to Evidence 1, the financial transaction details constitute a table unilaterally prepared by Sidu Company, and no original supporting documents are available for verification; since Surihua Company does not recognize its authenticity, the court likewise declines to conoffice it. As for Evidence 2, Surihua Company has acknowledged its authenticity, and the court accordingly accepts it.

With respect to the facts found by the first-instance court, Sido Company’s objections are set forth in its appeal brief, and it contends that Sido Holdings, as a shareholder of Sido Company, lacks the authority to negotiate with Suruihua Company on behalf of Sido Company; Suruihua Company, for its part, raises no objection. As to the factual findings of the first-instance judgment upon which both parties are in agreement, this Court hereby conoffices them in accordance with the law.

During the second-instance proceedings, Sidu Company stated that it did not contend that Suruihua Company’s delayed submission of the audit report constituted a breach of contract, and further indicated that, upon receiving the audit report issued by Suruihua Company, it had raised objections with its controlling shareholder, Sidu Holdings. In turn, Suruihua Company asserted that the working papers could be submitted only after it had prepared the audit report and Sidu Company had made the corresponding payment.

As conofficeed by both parties, the second-instance court has identified the central issue in this case as follows: whether Sido Company’s appeal—that Suruihua Company failed to perform its entrusted audit obligations in accordance with the law and the contract—is well-founded.

This Court holds that the audit engagement agreement represents the true intentions of both parties, does not contravene any mandatory provisions of laws or administrative regulations, and is therefore lawful and valid. Both parties are obligated to perform their respective obligations under the agreement, and Shen Yuhe’s participation in the audit project, as well as his status therein, does not affect the validity of the civil legal acts at issue between the parties. Article 90 of the Interpretations of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China provides that a party shall furnish evidence to substantiate the facts upon which its claims are based or to rebut the facts relied upon by the opposing party, unless otherwise provided by law. If, prior to rendering a judgment, a party fails to produce evidence or the evidence is insufficient to prove its factual assertions, the party bearing the burden of proof shall bear the adverse consequences. In the present case, Sidu Company contends that during the audit conducted by Suruihua Company, serious violations of auditing procedures occurred, resulting in grave errors and significant omissions in the audit report; however, the evidence it has adduced is inadequate to support these allegations, and it must therefore bear the consequences of failing to establish its case. Suruihua Company duly issued the audit report in accordance with the contract, and Sidu Company was obliged to pay the audit fees as agreed. In practice, after Suruihua Company delivered the draft audit report, Sidu Company accepted it without raising any objections, and subsequently paid RMB 72,000 within three working days of receipt of the draft and RMB 54,000 within ten days of submission of the final audit report, for a total of RMB 126,000—both sums having been paid by Sidu Company as stipulated in the contract. Under these circumstances, Suruihua Company’s failure to yet submit the working papers to Sidu Company does not constitute a breach of contract. Accordingly, the first-instance court’s determination that Sidu Company shall pay Suruihua Company the remaining audit fee of RMB 126,000 together with the corresponding interest for late payment is supported by both factual and legal grounds. Sidu Company’s appeal is unfounded and is hereby dismissed. In accordance with Article 170, Paragraph 1, Item 1 of the Civil Procedure Law of the People’s Republic of China, the Court rules as follows:

The appeal is dismissed, and the original judgment is afofficeed.

The second-instance case filing fee of RMB 2,820 shall be borne by the appellant, Sidu Company.

This judgment is final.

Other

Hong Kong has enacted the “Prohibition on Mask-Wearing Regulation,” which takes effect at midnight on the 5th.

On the 4th, Hong Kong Special Administrative Region Chief Executive Carrie Lam convened a special meeting of the Executive Council and, in conjunction with the Council, decided to invoke the Emergency Regulations Ordinance to enact the “Mask Ban Regulation,” with the aim of swiftly restoring social order and bringing an end to violence and chaos.

Carrie Lam emphasized that invoking the Emergency Regulations Ordinance does not amount to declaring a state of emergency in Hong Kong. Under this ordinance, when the Chief Executive, acting with the Executive Council, deems that an emergency situation or a threat to public safety has arisen, the Chief Executive and the Executive Council may promulgate any regulations they consider to be in the public interest. The recent situation in Hong Kong clearly constitutes a threat to public safety.

Carrie Lam stated that the “anti‑masking law” was enacted because, over the past four months, nearly all protesters engaging in violent acts have been wearing masks to conceal their identities and evade criminal liability, thereby becoming increasingly reckless. The legislation will help the police enforce the law. The “Prohibition on Mask-Wearing Regulation” will come into effect at midnight on October 5, with violators facing a maximum penalty of a HK$25,000 fine and one year’s imprisonment.

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