JC Master Legal News Issue 797

Key Takeaways for This Issue

Internet Finance Rectification Office: Immediately suspend the approval of new online microloan institutions.
On November 21, 2017, the Office of the Leading Group for the Special Rectification of Internet Finance Risks issued the “Notice on Immediately Suspending the Approval of New Online Small-Loan Companies.” Effective from the date of issuance, regulatory authorities at all levels are prohibited from approving the establishment of new online (internet) small‑loan companies, and are also forbidden from granting approval for existing small‑loan companies to expand their small‑loan operations across provinces, autonomous regions, or municipalities.
The State-owned Assets Supervision and Administration Commission of the State Council has officially issued the “Notice on Strengthening Risk Management and Control of PPP Projects in Central Enterprises.”
The State-owned Assets Supervision and Administration Commission of the State Council (SASAC) has officially issued the “Notice on Strengthening Risk Management and Control of PPP Projects in Central Enterprises.” The notice outlines related measures across six key areas: guiding strategic divestitures, reinforcing group-level oversight, imposing stringent entry criteria to enhance project quality, strictly controlling project scale to prevent an escalation of debt risks, optimizing partnership arrangements to ensure shared risk‑taking, standardizing accounting practices to accurately reflect the status of PPP operations, and rigorously pursuing accountability to deter non‑compliant business and investment activities.
The Ministry of Finance and the State Taxation Administration have issued the “Resource Tax Law of the People’s Republic of China (Draft for Public Comment).”
On November 20, 2017, the Ministry of Finance and the State Taxation Administration issued the “Resource Tax Law of the People’s Republic of China (Draft for Public Comment)” and solicited public input. With respect to tax items and rates, the draft, apart from making appropriate adjustments to the rate ranges for certain items, largely maintains the existing methods for determining tax rates and the current rate levels. The draft also specifies four circumstances under which tax reductions or exemptions may be granted.
The State Taxation Administration has announced seven typical cases of tax fraud and illegal invoice issuance.
On November 21, 2017, in the context of a special campaign to combat tax fraud and the fraudulent issuance of invoices, the local tax authorities, together with public security and other relevant departments, announced seven typical cases involving tax fraud and fraudulent invoicing, with total amounts involved approaching RMB 5 billion. All seven cases have now been referred to the judicial process.
The capital markets continue to closely monitor the escalating fallout from the Red Yellow Blue “child abuse” incident.
Following the child-abuse scandal, Red Yellow & Blue (NYSE: RYB) closed down 38.41% at $16.45, falling below its IPO price of $18.50. The company’s market capitalization shrank by roughly $290 million, equivalent to nearly RMB 1.94 billion. Meanwhile, at least two New York–based law offices have formally launched class-action investigations into alleged violations of securities laws by the company.

Table of Contents
Table of Contents

Finance & Capital Markets

Internet Finance Rectification Office: Immediately suspend the approval of new online microloan institutions.
The China Banking Regulatory Commission has issued the “Guidelines on Interest Rate Risk Management for Commercial Banks’ Banking Book (Revised Draft for Comments).”
Hunan Province will issue 73.8 billion yuan of local government bonds on the Shanghai Stock Exchange.
This year, the China Securities Regulatory Commission has imposed fines and confiscated proceeds totaling over RMB 9 billion. The cases investigated, enforced, and publicly disclosed exhibit five key characteristics.
The China Securities Regulatory Commission will establish a Commission for the Supervision of Issuance and Mergers & Acquisitions.
    
Corporate & Commercial

The State-owned Assets Supervision and Administration Commission of the State Council has officially issued the “Notice on Strengthening Risk Management and Control of PPP Projects in Central Enterprises.”
The State Council has issued the “13th Five-Year Plan for Railway Development.”
The consolidation of state-owned enterprises in the telecommunications sector is accelerating; the Wuhan Institute of Post and Telecommunications Technology and the China Electronics Technology Group Corporation are planning a restructuring.
Alibaba acquires a controlling stake in Sun Art Retail for HK$22.4 billion.
China’s annual box office has surpassed 50 billion yuan.

Taxation

The Ministry of Finance and the State Taxation Administration have issued the “Resource Tax Law of the People’s Republic of China (Draft for Public Comment).”
The State Taxation Administration has issued an announcement regarding issues related to the scope of aggregation for the pre-tax additional deduction of R&D expenses.

Litigation & Arbitration

The State Taxation Administration has announced seven typical cases of tax fraud and illegal invoice issuance.
*St. Kunji’s financial fraud scheme exposed: the company may face massive compensation claims

Other

The capital markets continue to closely monitor the escalating fallout from the Red Yellow Blue “child abuse” incident.
In the A-share market, 70% of listed companies have shareholders involved in share pledge arrangements, with 816 such pledges already reaching the warning or liquidation thresholds.

Finance & Capital Markets

Internet Finance Rectification Office: Immediately suspend the approval of new online microloan institutions.
On November 21, 2017, the Office of the Leading Group for the Special Rectification of Internet Finance Risks issued the “Notice on Immediately Suspending the Approval of New Online Micro‑Loan Companies” (hereinafter referred to as the “Notice”). The Notice stated that some localities had successively approved the establishment of online micro‑loan companies or permitted existing micro‑loan companies to engage in online micro‑loan business, and that certain institutions’ “cash loan” operations posed significant risks. To implement the spirit of the instructions issued by leading officials of the State Council, effective immediately, regulatory authorities at all levels are prohibited from approving the establishment of new online (internet) micro‑loan companies, and are also forbidden from authorizing any newly established micro‑loan company to conduct micro‑loan business across provinces (autonomous regions or municipalities directly under the central government).

The China Banking Regulatory Commission has issued the “Guidelines on Interest Rate Risk Management for Commercial Banks’ Banking Book (Revised Draft for Comments).”
On November 24, the China Banking Regulatory Commission issued the “Guidelines on Interest Rate Risk Management for Commercial Banks’ Banking Book (Revised Draft for Public Comment)” (hereinafter referred to as the “Guidelines”) and opened it to public consultation.
The key revisions to the Guidelines are as follows: First, they refine risk management requirements by standardizing the risk governance framework and management policies and processes, strengthening system‑building, modeling, and data‑management standards, and detailing internal application and reporting obligations for measurement results. Second, they standardize risk measurement by clearly defining the criteria and components for selecting interest‑rate shock and stress scenarios, and by designing differentiated regulatory reporting frameworks based on banks’ systemic importance and the complexity of their operations. Third, they enhance oversight and inspection by specifying regulators’ requirements for periodic assessments of commercial banks’ risk profiles and the corresponding supervisory measures, while increasing the frequency of off‑site reporting submissions.

Hunan Province will issue 73.8 billion yuan of local government bonds on the Shanghai Stock Exchange.
On November 29, the Hunan Provincial Department of Finance will conduct a public tender through the Ministry of Finance’s SSE Government Bond Issuance System to issue RMB 73.8 billion in local government bonds. This marks the second time this year that Hunan Province has issued local government bonds on the Shanghai Stock Exchange. Earlier, on September 8, Hunan successfully placed RMB 33 billion in special-purpose government bonds on the exchange. According to reports, once this issuance is completed, with a total issuance volume of RMB 106.8 billion, Hunan will become the region with the largest local government bond issuance on the Shanghai Stock Exchange this year.
This bond issuance comprises book-entry, fixed-rate, interest-bearing bonds with a total size of RMB 73.8 billion, including RMB 30.5 billion in general bonds and RMB 43.3 billion in special-purpose bonds. The general bonds are offered in three tenors—3-year, 5-year, and 7-year—with planned issuance sizes of RMB 15.5 billion, RMB 10.0 billion, and RMB 5.0 billion, respectively. The special-purpose bonds are available in three tenors—1-year, 3-year, and 5-year—with planned issuance sizes of RMB 10.0 billion, RMB 20.0 billion, and RMB 13.3 billion, respectively.

This year, the China Securities Regulatory Commission has imposed fines and confiscated proceeds totaling over RMB 9 billion. The cases investigated, enforced, and publicly disclosed exhibit five key characteristics.
As of November 22, the China Securities Regulatory Commission has announced more than 130 administrative penalty cases so far this year, averaging over 10 cases per month. The total fines and confiscations imposed by the CSRC on various violators and parties involved have exceeded RMB 9 billion, representing a 114% increase compared with last year’s full-year total of RMB 4.2 billion. According to an analysis, the CSRC’s inspection and enforcement activities, as well as the cases it has disclosed, exhibit five key characteristics: first, substantial penalties and frequent application of maximum‑level sanctions; second, a high incidence of insider trading and violations of information disclosure regulations; third, a significant number of major, high‑profile, and emblematic cases; fourth, routine investigations conducted in parallel with special enforcement campaigns and targeted inspections, creating a robust regulatory and enforcement environment; and fifth, many cases referred to public security authorities, with several resulting in judicial rulings, thereby integrating self‑regulatory measures, administrative oversight, and civil and criminal accountability. In addition, the practice of holding weekly press briefings to announce administrative penalty cases has been maintained this year.

The China Securities Regulatory Commission will establish a Commission for the Supervision of Issuance and Mergers & Acquisitions.
On November 20, the 63 members of the China Securities Regulatory Commission’s 17th Issuance Review Committee held a collective oath‑taking ceremony at the CSRC. At the event, CSRC Chairman Liu Shiyu stated that the oversight mechanisms for the Issuance Review Committee and its members would be strengthened. The CSRC Party Committee has decided to establish an Issuance Supervision Commission, which will operate in parallel with the Issuance Review Committee, to conduct comprehensive oversight of the CSRC’s IPO, refinancing, and M&A‑restructuring activities.
This marks the entry of the Issuance Review Committee into the 2.0 era. While it may appear to add an additional layer of oversight, it actually represents a decentralization of review authority. The key highlight of this new policy is the checks-and-balances mechanism that ensures each committee member has both the incentive and the capacity to resist corruption.

Commercial & Corporate

The State-owned Assets Supervision and Administration Commission of the State Council has officially issued the “Notice on Strengthening Risk Management and Control of PPP Projects in Central Enterprises.”
Recently, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) officially issued the “Notice on Strengthening Risk Management and Control of PPP Projects in Central Enterprises” (hereinafter referred to as the “Notice”). The Notice outlines relevant measures across six key areas: guiding strategic reductions in holdings and reinforcing group-level oversight; tightening entry criteria and enhancing project quality; strictly controlling project scale to prevent an increase in debt risks; optimizing cooperation arrangements to ensure shared risk allocation; standardizing accounting practices to accurately reflect the status of PPP projects; and rigorously enforcing accountability to deter non-compliant business and investment activities.
The key points are as follows: 1. Enterprises with a high concentration of PPP projects should develop dedicated PPP‑specific plans to optimize the layout and structure of their PPP operations; 2. The group headquarters shall assume responsibility for unified approval of PPP projects and strictly control investment in PPP initiatives outside the core business areas; 3. It is strictly prohibited to undertake projects that lack sound economic rationale, to make decisions based on blind judgment, and to engage in short‑term, opportunistic practices; participation in projects whose payment sources are not adequately secured is also forbidden; 4. For enterprise groups subject to central‑government oversight of debt‑risk management, the cumulative net investment in PPP projects shall, in principle, not exceed 50% of the group’s consolidated net assets from the previous year, and the undertaking of PPP activities must not lead to a significant increase in the asset‑liability ratio; 5. Clear caps shall be set on the scale of PPP activities for relevant subsidiaries: subsidiaries with an asset‑liability ratio exceeding 85% or those that have incurred losses for two consecutive years may neither independently invest in PPP projects nor participate in projects that merely provide financing without involvement in construction or operation; 6. It is prohibited to assume risks that should properly be borne by other parties through mechanisms such as introducing equity‑based funding disguised as debt or purchasing subordinated tranches; 7. Where project‑level debt financing requires credit enhancement, such enhancement should, in principle, be provided by the project’s own equity, assets, or equity‑based guarantees; 8. Accountability will be rigorously enforced, with a lifetime‑accountability system applied to major decision‑making related to PPP activities.

The State Council has issued the “13th Five-Year Plan for Railway Development.”
On November 24, 2017, the National Development and Reform Commission, in collaboration with China Railway Corporation, the Ministry of Transport, and the National Railway Administration, released the “13th Five-Year Plan for Railway Development” (hereinafter referred to as the “Plan”). The Plan sets forth that by 2020, the railway network will be optimized and improved; equipment will be advanced and appropriately matched to operational needs; transport safety will remain consistently stable; operations management will be modern and scientifically sound; innovation capacity will continue to strengthen; transport capacity and service quality will be comprehensively enhanced; and market competitiveness and international influence will be significantly bolstered—thus meeting the requirements for building a moderately prosperous society in all respects.
The key tasks of this plan primarily include improving the railway infrastructure network, upgrading technical and equipment standards, enhancing railway transport services, strengthening safety production management, advancing intelligent and modernized operations, promoting green railway development, and bolstering international cooperation and exchanges.

The consolidation of state-owned enterprises in the telecommunications sector is accelerating; the Wuhan Institute of Post and Telecommunications Technology and the China Electronics Technology Group Corporation are planning a restructuring.
On November 23, 2017, the three listed subsidiaries of the Wuhan Institute of Post and Telecommunications—FiberHome Technologies, Changjiang Communications, and Opticore Technology—announced that the Wuhan Institute of Post and Telecommunications, which is the controlling shareholder of FiberHome Technologies Group Co., Ltd., is currently in discussions with the China Academy of Telecommunications Technology regarding a restructuring. The restructuring plan remains subject to approval by the relevant authorities. All three listed companies stated that this restructuring pertains solely to the Wuhan Institute of Post and Telecommunications and is unrelated to the companies themselves; it does not involve any major asset reorganization and will not affect the companies’ normal production or business operations. Furthermore, there will be no change in the companies’ actual controllers.
Meanwhile, on November 22, 2017, Datang Telecom and GaoHong Shares—both A‑share listed companies under the China Academy of Telecommunications Technology—announced that their controlling shareholder, the China Academy of Telecommunications Technology, is currently planning a restructuring. The specific terms of the restructuring have not yet been finalized, and once determined, they will still require approval from the relevant regulatory authorities. According to the announcement, the number of shares held by the China Academy of Telecommunications Technology and its equity stake in the companies remain unchanged, and the company’s actual controller will also remain unchanged. The aforementioned restructuring is an internal matter at the level of the China Academy of Telecommunications Technology and is not directly related to the companies themselves.
Based on the announcements issued by the aforementioned listed companies, the planned restructuring currently involves only the Wuhan Institute of Post and Telecommunications Sciences and the China Academy of Telecommunications Technology, and does not extend to the listed companies’ respective business operations.

Alibaba acquires a controlling stake in Sun Art Retail for HK$22.4 billion.
On November 20, 2017, Alibaba officially announced that it would invest approximately HK$22.4 billion (about US$2.88 billion) to acquire a direct and indirect stake of 36.16% in Sun Art Retail. Sun Art Retail is currently the largest retail company in China; its two flagship brands, Auchan and RT‑Mart, operate a vast network of large supermarkets and hypermarkets across 29 provinces, municipalities, and autonomous regions nationwide. With annual revenues exceeding RMB 100 billion, the company has maintained the top position in China’s retail sector for many consecutive years.

China’s annual box office has surpassed 50 billion yuan.
According to data from the Film Bureau of the State Administration of Press, Publication, Radio, Film and Television, at 6:57 p.m. on November 20, 2017, China’s annual box office reached RMB 50 billion, surpassing the RMB 50 billion mark for the first time in just 324 days. Total attendance stood at 1.448 billion, up 19% year over year. Domestic films accounted for RMB 26.2 billion, or 52.4% of the total, while imported films generated RMB 23.8 billion, representing 47.6%. A total of 82 films—both Chinese and foreign—earned over RMB 100 million at the box office, with 13 of them exceeding RMB 1 billion.

Taxation TAXATATION

The Ministry of Finance and the State Taxation Administration have issued the “Resource Tax Law of the People’s Republic of China (Draft for Public Comment).”
On November 20, 2017, the Ministry of Finance and the State Taxation Administration issued the “Resource Tax Law of the People’s Republic of China (Draft for Public Comment)” (hereinafter referred to as the “Draft”), inviting public input. With respect to tax items and tax rates, the Draft, apart from making appropriate adjustments to the rate ranges for certain specific items, largely maintains the existing methods for determining tax rates and the current rate levels. The “Table of Resource Tax Items and Rates” sets out either fixed rates or rate ranges for each tax item. At the same time, most taxable products are subject to ad valorem taxation, while a small number of taxable products may be taxed either on an ad valorem or a specific‑quantity basis; the specific method is proposed by the provincial government and submitted to the standing committee of the people’s congress at the same level for decision.
The Draft for Soliciting Opinions specifies four tax‑exemption and reduction scenarios: first, crude oil extraction and the use of oil and gas for heating during the transportation of crude oil within oilfield premises are exempt from tax; second, a 30% reduction in the resource tax is applied to oil and gas extracted from deepwater oil and gas fields; third, mineral products mined from mines in the depletion stage, as certified by the competent authorities such as the Ministry of Natural Resources, are subject to a 30% reduction in the resource tax; and fourth, mineral products recovered through mining and processing from low‑grade oil and gas fields, low‑grade ores, tailings, and waste rock, upon certification by the competent authorities including the Ministry of Natural Resources, are eligible for a 20% reduction in the resource tax.

The State Taxation Administration has issued an announcement regarding issues related to the scope of aggregation for the pre-tax additional deduction of R&D expenses.
To further ensure the effective implementation of the preferential policy on pre‑tax additional deductions for R&D expenses and to address the issues arising in its application, the State Taxation Administration issued, in 2017, an Announcement on Relevant Issues Concerning the Scope of Aggregation for Pre‑Tax Additional Deductions of R&D Expenses (hereinafter referred to as the “Announcement”).
The announcement focuses on the scope of R&D expense allocation, refining and clarifying certain criteria for accounting for R&D expenses—building on existing regulations and informed by practical implementation—and ensuring a greater degree of systematicity and comprehensiveness in its structure. Specifically, it standardizes several areas, including: further specifying the criteria for personnel labor costs; further specifying the criteria for direct input costs; further specifying the criteria for depreciation expenses; further specifying the criteria for amortization of intangible assets; and clearly defining the criteria for expenses related to new product design, the development of new process specifications, clinical trial costs for new drug development, and field‑trial costs for exploration and development technologies.

Litigation & Arbitration

The State Taxation Administration has announced seven typical cases of tax fraud and illegal invoice issuance.
On November 21, 2017, in the context of a special campaign to combat tax fraud and the fraudulent issuance of invoices, the State Taxation Administration, together with public security and other relevant authorities, announced seven typical cases of tax fraud and fraudulent invoicing. The total amount involved in these seven cases approached RMB 5 billion. Specifically, they include: the Beijing “November 1” case of issuing false special VAT invoices; the Jiangxi “June 16” case of issuing false special VAT invoices; the Gansu “April 11” case of issuing false special VAT invoices; the Sichuan “April 27” case of issuing false ordinary VAT invoices; the tax fraud case involving Hainan Huataifeng Investment Co., Ltd.; the tax fraud case involving Hebei Tianyi Trading Co., Ltd. and two other enterprises; and the tax fraud case involving Henan Xuchang Jingying Arts & Crafts Co., Ltd. All seven cases have now been referred to the judicial process.

*St. Kunji’s financial fraud scheme exposed: the company may face massive compensation claims
Recently, *ST Kunji announced that it had received a “Pre‑Notice of Administrative Penalty and Market Ban” from the China Securities Regulatory Commission (CSRC). The CSRC imposed the maximum fine of RMB 600,000 on *ST Kunji, and all 28 former senior executives were also subject to administrative penalties. The CSRC held that every director, supervisor, or senior executive who signs a listed company’s annual report bears the obligation to ensure that the information disclosed by the company is true, accurate, and complete. Such executives are required to fulfill their duties of conofficeation and review with respect to relevant disclosure matters; failure to exercise due diligence will result in sanctions. In addition, the CSRC determined that Wang Xing, then chairman, was the principal architect and organizer of the financial fraud at issue, and accordingly imposed a lifetime ban from the securities market on him.
The China Securities Regulatory Commission has determined that, from 2013 to 2015, *ST Kunji engaged in financial fraud primarily through three methods: recognizing revenue across accounting periods, falsely inflating reported revenue, and artificially increasing contract prices, resulting in a total overstatement of revenue amounting to RMB 480 million over the three-year period. At the same time, the company also boosted its profits by under‑provisioning for employee termination benefits and executive compensation, by RMB 29.608 million. Furthermore, the company’s inventory records contained false entries. According to reports, between 2013 and 2015, *ST Kunji overstated operating costs and understated year‑end inventories by manipulating off‑book finished‑goods warehouses, fabricating production transactions, and falsely reducing actual product manufacturing costs, thereby inflating its reported profits by RMB 228 million.
In light of the aforementioned financial fraud, *ST Kunji may face large-scale investor claims in the future.

Other

The capital markets continue to closely monitor the escalating fallout from the Red Yellow Blue “child abuse” incident.
On November 22, 2017, the Honghuanglan Xintian Di Kindergarten in Beijing’s Chaoyang District was exposed for child abuse, and the individuals involved were subsequently placed under criminal detention by public security authorities. Although the final investigation results have yet to be released, Honghuanglan (RYB.N), already mired in a public‑relations crisis over child‑abuse allegations, has suffered a severe blow in the capital markets. At the close of trading on the 25th local time, Honghuanglan (NYSE: RYB) plunged 38.41%, closing at $16.45—below its IPO price of $18.5—and saw its market capitalization shrink by roughly $290 million, equivalent to nearly RMB 1.94 billion.
Meanwhile, at least two New York law offices have formally launched class-action investigations into the company’s alleged violations of securities laws.

In the A-share market, 70% of listed companies have shareholders involved in share pledge arrangements, with 816 such pledges already reaching the warning or liquidation thresholds.
According to data from Choice, as of November 23, a total of 2,288 listed companies on the Shanghai and Shenzhen stock exchanges had pledged their equity, with a combined 537.6 billion shares pledged, representing a total market value of RMB 5.88 trillion. The aggregate market value of these pledged shares accounted for 9.29% of the total market capitalization of A‑share listed companies. Approximately 70% of listed companies have shareholders who have engaged in equity pledges; moreover, based on the ratio of pledged shares to total share capital, 122 companies have pledged more than 50% of their outstanding shares. In addition, nearly 9% of pledged shares have already reached either the warning threshold or the liquidation threshold.
Meanwhile, among the 2,288 listed companies with pledged shares, 45 have pledged equity accounting for more than 60% of their total share capital. Among these, Tianmao Group, Hilitai, and Shuangxing New Materials each have cumulative pledged shares exceeding 100% of their total share capital, at 109.19%, 106.34%, and 100.09%, respectively. The latest market values of their pledged shares stand at RMB 55.461 billion, RMB 35.364 billion, and RMB 8.159 billion, respectively. In addition, Guanghui Auto, *ST Honggao, and Dangdai Oriental each have pledged shares representing over 90% of their total share capital, at 98.97%, 90.63%, and 90.07%, respectively. Furthermore, 77 companies have pledged shares accounting for 50% to 60% of their total share capital.

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