JC Master Legal News Issue 826

Key Takeaways for This Issue
The China Securities Regulatory Commission has issued the Provisional Regulations on the Use of Securities Investment Advisory Services Provided by Hong Kong Institutions by Securities and Fund Operating Institutions.
To standardize the use of Hong Kong‑based securities investment advisory services by mainland securities and fund management institutions under the Stock Connect program and to safeguard investors’ legitimate rights and interests, the China Securities Regulatory Commission has officially promulgated the Interim Provisions on the Use of Hong Kong‑Based Securities Investment Advisory Services by Securities and Fund Management Institutions, which shall take effect as of July 1, 2018.

The risk of stock pledges among Shanghai-listed companies remains generally under control.
Recently, market volatility has been relatively high, prompting some concern about the potential implications of default resolutions in stock‑pledge repurchase transactions. Last week, the Shanghai Stock Exchange recorded an average daily default resolution value of approximately RMB 19 million for stock‑pledge financing, with no significant changes observed. Based on the nature of stock‑pledge transactions, risk‑mitigation mechanisms, and the actual situation, such default resolutions are expected to have only a very limited impact on the secondary market.

The Shenzhen Stock Exchange has released the “2017 Annual Stock Market Performance Report.”
On June 20, the Shenzhen Stock Exchange held listing ceremonies for the Fullgoal 1000 Fund and the Dongzheng Chuangyou Fund, officially launching the signing process for the revised “Fund Listing Agreement.” Relevant officials from the Shenzhen Stock Exchange attended the ceremonies.

The Shenzhen Stock Exchange is closely monitoring the “new three highs” phenomenon to prevent and mitigate high-leverage risks.
The Shenzhen Stock Exchange will closely monitor the “new three high” phenomenon, further scrutinize and identify risks associated with high leverage and excessive debt, and continuously strengthen the mechanism of “ongoing inquiries + regulatory interviews + inter‑regulatory cooperation” to ensure the stable and sound operation of the multi‑tiered capital market.

In some areas of our province, PPP projects have received commendation and incentives from the provincial government’s inspection team.
To strengthen the orientation of oversight and incentives for leading the way in high-quality development and to effectively mobilize the enthusiasm, initiative, and creativity of all levels across the province in pursuing reform and development, in 2017 the General Office of the Provincial Government issued the “Notice on Providing Complementary Incentives to Localities That Have Achieved Remarkable Results Through Earnest Efforts,” deciding to establish a mechanism for oversight and incentive work and to carry out related selection and evaluation activities centered on a number of key tasks identified by the Provincial Party Committee and the Provincial Government.

Table of Contents
Table of Contents

Finance & Capital Markets
The China Securities Regulatory Commission has issued the Provisional Regulations on the Use of Securities Investment Advisory Services Provided by Hong Kong Institutions by Securities and Fund Operating Institutions.
The China Securities Regulatory Commission has imposed administrative penalties in five cases.
The risk of stock pledges among Shanghai-listed companies remains generally under control.
The Shenzhen Stock Exchange has released the “2017 Annual Stock Market Performance Report.”
The Shenzhen Stock Exchange is closely monitoring the “new three highs” phenomenon to prevent and mitigate high-leverage risks.

Corporate & Commercial
China has released a new version of the Negative List for Foreign Investment Access in Free Trade Zones.
Li Mingzhong of the Shenzhen Stock Exchange: The development of the new economy and technological innovation is raising new demands on the stock market.
A Six-Month Review of Bond Market Defaults: Private Enterprises Account for 64%, and AAA-Rated Bonds Have Experienced Their First Default.
In some areas of our province, PPP projects have received commendation and incentives from the provincial government’s inspection team.
Last year, PPP investments under public–private partnerships totaled 72 billion yuan, with 90% of the idle funds allocated to wealth-management products.

Taxation
The draft amendment to the Individual Income Tax Law is now open for public consultation.
The Publicity Department of the CPC Central Committee and other departments have jointly issued a notice to address issues in the film and television industry, including exorbitant actor fees, “yin-yang contracts,” and tax evasion.

Litigation & Arbitration
The Supreme People’s Court has issued the Judicial Interpretation of the International Commercial Court.
The Hangzhou Internet Court has, for the first time, afofficeed the legal validity of blockchain-based electronic evidence preservation.

Other
Pinduoduo plans to list in the U.S., ushering in a new era of e-commerce.
Ministry of Commerce: The Second Amendment to the Asia-Pacific Trade Agreement officially entered into force on July 1.
Finance & Capital Markets
The China Securities Regulatory Commission has issued the Provisional Regulations on the Use of Securities Investment Advisory Services Provided by Hong Kong Institutions by Securities and Fund Operating Institutions.
To standardize the use of Hong Kong‑based securities investment advisory services by mainland securities and fund management institutions under the Stock Connect program and to safeguard investors’ legitimate rights and interests, the China Securities Regulatory Commission has officially promulgated the Interim Provisions on the Use of Hong Kong‑Based Securities Investment Advisory Services by Securities and Fund Management Institutions (hereinafter referred to as the “Interim Provisions”), which shall take effect as of July 1, 2018.
As the mutual market access mechanisms between the mainland and Hong Kong continue to deepen, the trading volume under the Stock Connect programs has steadily expanded, leading to growing demand among mainland investors for securities research reports and investment advisory services related to Stock Connect‑eligible stocks. Hong Kong‑based institutions enjoy distinct advantages in terms of the number of analysts covering Stock Connect‑eligible stocks, their research capabilities, and the ease of accessing research, enabling mutually beneficial cooperation and cross‑support with mainland securities research offices. At the same time, mainland securities and fund management offices seek to engage investment advisory teams familiar with the Hong Kong stock market to provide professional investment guidance and enhance the management of their fund products, while Hong Kong institutions aim to broaden their client base and actively participate in the two‑way opening-up of the mainland capital market. To this end, the China Securities Regulatory Commission has drafted the Interim Provisions, designed to further deepen mutually beneficial cooperation between the securities and fund industries on both sides and better meet investors’ cross‑border investment needs.
On April 20, 2018, the China Securities Regulatory Commission (CSRC) publicly solicited comments from the public on the Provisional Regulations. As of May 21, a total of 31 submissions comprising 57 individual comments had been received. Various stakeholders also put forward specific amendment proposals. After careful review and analysis, the CSRC adopted reasonable and feasible suggestions and made corresponding revisions and improvements to the relevant provisions of the Provisional Regulations.
The Provisional Regulations primarily cover the following contents:
First, the business model: Mainland securities offices or their subsidiaries that hold the requisite qualifications are permitted to forward securities research reports issued by Hong Kong institutions—providing investment analysis on Stock Connect stocks—to their clients. Additionally, mainland securities and fund management institutions may entrust Hong Kong institutions to provide investment advisory services on Stock Connect stocks for mutual funds they manage that participate in the Stock Connect program.
Second, the qualifications of participating institutions and their corresponding liabilities. The qualifications of participating institutions are clearly defined in terms of business licenses and professional experience, with corresponding provisions governing their obligations and responsibilities.
Third, the regulatory mechanism: If a mainland institution violates the Interim Provisions, the CSRC shall, in accordance with the law, impose administrative regulatory measures or administrative penalties on the relevant institution and the persons held accountable; if a Hong Kong institution violates the Interim Provisions, the CSRC and the Securities and Futures Commission of Hong Kong shall, through the cross-border regulatory cooperation mechanism, conduct investigations and take enforcement actions against the relevant institution and the persons held accountable in accordance with the law.
The China Securities Regulatory Commission, together with relevant local branches and industry associations, will urge securities and fund management institutions to utilize the Hong Kong‑based securities investment advisory services in accordance with the Provisional Regulations, conduct related business in compliance with the law, better meet investors’ cross‑border investment needs, and promote mutually beneficial cooperation and common development between the mainland and Hong Kong capital markets.

The China Securities Regulatory Commission has imposed administrative penalties in five cases.
Recently, the China Securities Regulatory Commission (CSRC) imposed administrative penalties, in accordance with the law, on one case of manipulating government bond prices and one case involving a listed company’s chairman who abused his right to propose motions to control the timing of information disclosure in order to manipulate stock prices. Meanwhile, the Beijing Securities Regulatory Bureau, also in compliance with the law, issued administrative penalties for one instance of securities practitioners illegally trading stocks and privately accepting clients’ instructions to trade securities. In addition, the Fujian Securities Regulatory Bureau imposed administrative penalties, pursuant to law, on one case of violations of information disclosure regulations and one case of trading based on non‑public information. (Details of the administrative penalty decisions can be found on the websites of the CSRC and the relevant local securities regulatory bureaus.)
In the aforementioned case involving manipulation of government bond prices, Chen Xian, through his actual control over the securities accounts of “Qiu Moumou,” “Shanghai Xinghe Investment Management Co., Ltd.,” “Gao Moufeng,” and his own account, engaged in trading among these accounts—specifically, five illiquid government bonds including “Government Bond 1507”—thereby influencing the prices of those bonds. Such conduct violates Article 77, Paragraph 1, Item (3) of the Securities Law. Pursuant to Article 203 of the Securities Law, the Commission has decided to impose a fine of RMB 1 million on Chen Xian.
Government bonds are interest-rate‑based financial instruments. Their prices typically exhibit a close inverse relationship with market interest rates, serving as an important benchmark for pricing other bonds. At the same time, they influence investors’ assessments of market liquidity and can even shape expectations about monetary policy. Consequently, price stability in government bonds plays a crucial role in ensuring the sound functioning of financial markets. Manipulating government bond prices undermines the normal market‑pricing mechanism, sends misleading market signals, and distorts market expectations—undermining, at best, the investment and financing activities of other participants and, at worst, jeopardizing market stability. Such behavior must be officely and resolutely cracked down upon.
In the case involving the chairman of a listed company who abused his right to propose motions to control the timing of information disclosure and manipulate stock prices, He Simo served as chairman, general manager, and de facto controller of Yishite Group Co., Ltd. (hereinafter referred to as “Yishite”). In February 2015, Yishite established an employee stock ownership plan, with funding sourced from employees’ own contributions as well as interest-free loans and other funds provided by Yangzhou Oriental Group Co., Ltd. (hereinafter referred to as “Yangzhou Oriental Group”), for which He Simo served as legal representative. With respect to the portion of the interest‑free loans extended by Yangzhou Oriental Group, any returns attributable to such loans—beyond the agreed‑upon yields entitled to eligible employees—were retained by Yangzhou Oriental Group. Abusing his right to propose motions, He Simo sought to drive up the stock price by controlling the timing of the submission and public announcement of the proposal for a high‑ratio share transfer and capitalization. Following the disclosure of this proposal, Yishite’s shares hit the daily upper limit for five consecutive trading days. During this period, He Simo directed the sale of 96.15% of the shares held under the employee stock ownership plan, generating profits of approximately RMB 60.77 million for the plan. At the same time, He Simo also sold shares of Yishite purchased through other persons’ accounts, realizing additional profits of about RMB 3.23 million. The total illicit gains amounted to approximately RMB 64 million. These actions violated Article 77, Paragraph 1 of the Securities Law. Pursuant to Article 203 of the Securities Law, the Commission has decided to confiscate He Simo’s illicit proceeds totaling approximately RMB 64 million and impose a fine of the same amount.
This case is a typical example of “information‑based” market manipulation perpetrated by the de facto controller of a listed company. Although “high‑ratio stock dividends and share transfers” do not materially affect shareholders’ rights, they have long been a popular theme for speculative trading. Certain major shareholders and de facto controllers of listed companies exploit this speculative sentiment to manipulate their own stocks for personal gain, seeking to turn the listed company into a “cash‑withdrawal machine” for a select few—thus gravely violating the market’s principles of fairness, justice, and transparency. Such manipulative practices are highly concealed, inflict severe damage on the market, pose significant social risks, and are deeply abhorred by investors; they must be met with strict punishment. Moreover, in this case, an employee stock ownership plan—intended as a mechanism to enhance corporate governance, strengthen employee cohesion, and boost the company’s competitiveness—was instead reduced to a tool for manipulating the market and extracting illicit profits, completely betraying the original purpose of the scheme and generating profoundly negative market repercussions. We reiterate that illegal activities such as market manipulation and insider trading leave clear traces; no matter what “disguise” or pretext is adopted, perpetrators cannot evade regulatory scrutiny or the full force of the law.

The risk of stock pledges among Shanghai-listed companies remains generally under control.
Recently, market volatility has been relatively high, prompting some concern about the potential implications of default‑resolution measures in stock‑pledge repurchase transactions (hereinafter referred to as stock‑pledge transactions). Based on the current state of stock‑pledge business at the Shanghai Stock Exchange, the scale of on‑exchange pledges has been steadily declining, and overall risks remain largely under control. As of now, the average collateralization ratio for stock pledges on the Shanghai market stands at 181%, with the total market value of pledged shares accounting for 3% of the Shanghai market’s aggregate market capitalization; among these, the share of pledged equity below the liquidation threshold represents less than 0.2% of the Shanghai market’s total market capitalization. Over the past week, the Shanghai Stock Exchange processed an average daily default‑resolution amount of approximately RMB 19 million in stock‑pledge financing, with no significant changes observed. Considering the role of stock‑pledge transactions, the risk‑mitigation mechanisms in place, and the actual market conditions, the impact of default resolution on the secondary market is expected to be very limited.
From a business‑orientation perspective, stock‑pledge financing is designed to serve the real economy and address the financing challenges faced by small and medium‑sized, as well as start‑up, listed companies. The vast majority of borrowers are major shareholders of these listed offices, and the funds are primarily used for working‑capital needs, which distinguishes this type of financing markedly from other leveraged capital that is employed to purchase equities.
From the perspective of the funding provider’s risk‑mitigation mechanisms, when a contract becomes undercollateralized due to a decline in the stock price, the lender typically does not immediately trigger liquidation. Instead, it negotiates with the borrower to address the situation through various measures, such as partial early repurchase, deferred repurchase, or the addition of underlying securities or other collateral. In particular, controlling shareholders of listed companies, seeking to maintain absolute control over the office, are even more inclined to mitigate risks by requiring additional collateral, thereby avoiding entry into default‑resolution proceedings.
For transactions that ultimately must be unwound, securities offices do not simply liquidate them on the secondary market; instead, they prefer to identify parties willing to acquire the entire equity stake and complete the transaction via negotiated transfers. If the relevant shares remain subject to lock-up restrictions, they cannot be disposed of through block trades in the short term. Even for shares that can be sold via block trades, the disposal of defaulted positions held by shareholders holding 5% or more, directors, supervisors, senior management, and certain designated shareholders must still comply with the listed company’s regulations on share reductions, including requirements regarding timing, proportion, and information disclosure. To date, there have been no instances of an abnormal shift in a listed company’s control resulting from forced liquidation in the secondary market. Overall, the risk associated with stock pledges is expected to have only a limited short-term impact on the market.

The Shenzhen Stock Exchange has released the “2017 Annual Stock Market Performance Report.”
Recently, the Shenzhen Stock Exchange released the “2017 Annual Report on Stock Market Performance,” which comprehensively and meticulously assesses the operational efficiency and quality of the Shenzhen stock market across several dimensions, including market liquidity, volatility, pricing efficiency, as well as order execution quality and execution efficiency. The report provides crucial empirical evidence to enhance market operational efficiency and promote the sound development of the market.
The report indicates that in 2017, the Shenzhen stock market maintained a high level of market performance, with overall stable operations, robust liquidity, and a marked decline in volatility. Moreover, price efficiency, order execution quality, and execution efficiency all remained at elevated levels.
First, liquidity in the Shenzhen market remained broadly stable, though some structural divergence persisted. Compared with 2016, in 2017 the main board saw a decline in impact costs, a narrowing of bid‑ask spreads, and an increase in depth, leading to improved liquidity; on the SME board, impact costs fell, spreads widened slightly, depth increased, and liquidity also improved; on the ChiNext board, impact costs declined, but spreads widened while depth contracted, resulting in a slight deterioration in liquidity.
Second, volatility in the Shenzhen market has declined significantly, with volatility increasing sequentially across the Main Board, the SME Board, and the ChiNext Board. In 2017, the return volatility and intraday volatility of A-shares on the Shenzhen Stock Exchange stood at 39 basis points and 40 basis points, respectively—both the lowest levels in the past decade.
Third, pricing efficiency in the Shenzhen market has improved, and the phenomenon of synchronized price movements has been significantly alleviated. In 2017, market efficiency across all sectors of the Shenzhen market remained at a relatively high level, with the overall stock‑price synchronicity index reaching its lowest point in five years. Consequently, the tendency for stocks to move in tandem has markedly diminished, pricing efficiency has risen, and stock price dynamics have become much better able to reflect office‑specific information.
Fourth, the quality and efficiency of order execution in the Shenzhen market have remained consistently high. Over the past decade, order execution times have generally stayed stable, with limit-order execution times remaining within the range of 260 to 360 seconds.
Going forward, the Shenzhen Stock Exchange will continue to advance initiatives that promote the sound development of the market, steadily enhancing market stability, liquidity, and performance, and providing investors with more efficient and cost‑effective trading services.

The Shenzhen Stock Exchange is closely monitoring the “new three highs” phenomenon and working to prevent and defuse risks associated with high leverage.
Recently, debt risks have erupted at some listed companies, and the risk of shareholders’ shares being liquidated has become increasingly pronounced. The underlying causes are high‑leverage acquisitions, extensive share pledges, and heavily indebted operations by both listed offices and their shareholders. This “new three highs” phenomenon has emerged as a significant factor undermining the healthy development of the capital market.
Due to a lack of long-term planning and risk awareness, some companies and shareholders have blindly expanded their operations and launched projects, driving leverage ever higher and tightening their cash flow, thereby harboring substantial risks. Should problems arise, this would not only inflict severe damage on their own operations but also seriously undermine the interests of investors and the quality of capital market functioning. In response to these issues, the Shenzhen Stock Exchange has maintained close oversight, acted swiftly, and proactively fulfilled its frontline regulatory duties, implementing a range of measures to prevent and defuse related risks.
High-leverage acquisitions involving listed companies can broadly be categorized into two types: one is shareholders acquiring control of a listed company through high leverage, and the other is a listed company using high leverage to acquire target assets.
After acquiring controlling interest in a listed company through highly leveraged transactions, shareholders typically pledge their shares. When stock market volatility intensifies, the associated risks are magnified exponentially, significantly increasing the likelihood of another change in control. Furthermore, some shareholders, once they have gained control, show little interest in managing the company; instead, they focus on manipulating the stock price and may even siphon off the company’s assets.
For instance, when the controlling interest of a listed company changed hands twice within roughly one year—both transactions being high‑leverage acquisitions—the company simultaneously disclosed a plan to increase its stake by RMB 1 to 1.5 billion, raising suspicions of stock price manipulation. The actual controller is also alleged to have siphoned off assets from the listed company through covert related-party transactions, unauthorized guarantees, and improper financial support, plunging the company into severe operational distress and saddling it with massive liabilities and numerous legal proceedings. In response, the Shenzhen Stock Exchange promptly scrutinized trading activity, conducted in-depth, “thread‑by‑thread” inquiries, and strengthened transparent oversight of funding sources, with particular focus on the origins of acquisition funds, the parties’ ability to fulfill their obligations, the authenticity of the listed company’s financial performance, and compliance with information disclosure requirements. At present, both the listed company and its actual controller have been placed under formal investigation.
High‑premium acquisitions of assets by listed companies have long been a focal point of regulatory scrutiny in the M&A and restructuring space. Overvaluation typically gives rise to substantial goodwill; when the acquired target’s profitability falls short of expectations and fails to meet performance commitments, the acquiring company faces significant goodwill impairment risks, which can sharply deteriorate its financial results. In some cases, cash‑based consideration payments lead to a sharp increase in the acquirer’s debt‑to‑asset ratio, raising the prospect of default. In practice, shareholders often leverage heavily to acquire control of listed offices, and subsequent asset acquisitions tend to be even more aggressive.
In recent acquisition cases, some listed companies have posted premium multiples exceeding 10 times, with some even reaching as high as 15 times, while the transaction values have surpassed two or three times the company’s net asset base. During post‑transaction reviews, the Shenzhen Stock Exchange focused on scrutinizing the sources of acquisition funds, financing arrangements, the reasonableness of the target’s inflated valuation, the achievability of performance commitments, the risk of substantial goodwill impairment, and changes in the listed company’s debt-to‑equity ratio following completion of the deal. Ultimately, all of these companies terminated their restructuring plans, thereby effectively addressing the potential risks associated with highly premium acquisitions.
Raising capital by pledging shares held in listed companies is a common method for shareholders to access funds. In practice, some shareholders lack risk‑management awareness and, underestimating their own financial strength, resort to highly leveraged share pledges, with pledge ratios sometimes reaching as high as 100%. When shareholders face severe liquidity pressures, a decline in the stock price often proves to be the final straw that triggers forced liquidation. The occurrence of large‑scale share pledges by controlling shareholders can give rise to liquidation risks, undermining the stability of corporate control and delivering a substantial shock to secondary‑market share prices, thereby seriously harming the interests of small and medium‑sized investors. From January 2018 to June 20, several listed companies disclosed that share pledges by their controlling shareholders or actual controllers had breached liquidation thresholds; seven of these cases have already resulted in forced liquidation, involving a total of RMB 205 million.
To avoid having their shares liquidated, some companies have applied for trading suspensions on the grounds of planning material matters, thereby sidestepping liquidation risks and disrupting normal stock trading. Between January 29 and February 7, 2018, as market volatility intensified, listed companies collectively suspended trading to deliberate on significant issues, with many doing so simply to “shelter” from risk due to an inability to replenish margin positions.
The Shenzhen Stock Exchange has long maintained close oversight of high‑ratio share pledges by shareholders and the misuse of trading suspension rights by listed companies, effectively guarding against systemic risks. To date, the Exchange has preliminarily completed the development of a stock pledge risk‑monitoring platform, leveraging technological regulatory tools to promptly track shareholder pledge activities and determine whether controlling shareholders are using spurious trading suspensions to evade forced liquidation. Since 2017, the Exchange has issued more than 350 regulatory notices, urging listed companies to remain vigilant about stock price volatility, the risk of forced liquidation of controlling shareholders’ shares, and changes in control, while also taking measures to prevent violations such as the misappropriation of funds by controlling shareholders.
In response to certain listed companies whose major shareholders have maintained pledge ratios exceeding 90% for extended periods and repeatedly sought stock trading suspensions on the grounds of planning material matters, the Shenzhen Stock Exchange has issued multiple inquiry letters and attention notices, requiring these companies to disclose updates on the progress of such matters, the sources of funds for acquisitions, the intended uses of pledged shares, the margin‑maintenance ratio, as well as the warning thresholds and liquidation prices. Ultimately, all of the aforementioned companies terminated their plans to pursue the relevant matters. Furthermore, in cases where shareholders of listed companies were subject to forced liquidation but failed to fulfill their information‑disclosure obligations under the new regulations on share reductions or otherwise violated other reduction‑related provisions, the Shenzhen Stock Exchange imposed disciplinary sanctions, including public censure.
In addition, to regulate shareholders’ high‑ratio pledge activities and strengthen risk disclosure, the Shenzhen Stock Exchange plans to leverage information disclosure by introducing requirements such as disclosing shareholders’ ability to fulfill their obligations and provide additional collateral, indicating whether pledged shares are subject to sale restrictions, and issuing special risk warnings in cases where shares may be forcibly liquidated, thereby enabling investors to gain a comprehensive understanding of the associated risks.
Leverage is a double-edged sword: when a listed company is operating well, it can generate high returns, and appropriate leverage can amplify those gains; however, when the company faces operational difficulties, leverage can accelerate the deterioration and eventual collapse of its financial condition. As of the end of the first quarter of 2018, 11 Shenzhen‑listed companies had debt-to-asset ratios exceeding 100%, while 69 others exceeded 80%; their net cash flows from operating activities remained persistently negative, leaving their production and operations in dire straits and even triggering defaults on their debts. In some cases, controlling shareholders of listed offices have encountered liquidity crises and maintain interrelated mutual guarantees with the listed companies, potentially exposing the latter to joint and several liability. Additionally, certain listed companies in the landscaping and construction sectors adopt a business model characterized by short-term debt financing for long-term investments, coupled with slow collection of accounts receivable; should their financing arrangements encounter disruptions, this could precipitate a liquidity crisis. In response, the Shenzhen Stock Exchange has deployed a comprehensive regulatory strategy—comprising ongoing inquiries, regulatory interviews, and inter‑agency coordination—to urge listed companies to maintain stable operations and proactively implement measures to mitigate the risk of debt defaults.
Companies with high debt ratios, frequent investment‑driven acquisitions, or diversified business strategies are key areas of regulatory scrutiny for the Shenzhen Stock Exchange. The Exchange closely monitors their cash‑flow conditions and operational trends, promptly issuing inquiry letters to urge offices to conduct self‑assessments for potential risks of liquidity crises and to prevent risk accumulation. In cases where a company faces insolvency, the Exchange requires timely disclosure of the amount of debt defaults, repayment plans, and remedial measures to safeguard investor interests. By reviewing companies’ responses to inquiry letters and conducting post‑hoc reviews of their periodic reports, the Exchange delves into the underlying causes of debt defaults, paying particular attention to whether there are instances of misappropriation of funds, unauthorized guarantees, legal disputes, asset freezes, or other violations.
Recently, the Shenzhen Stock Exchange convened 11 companies with debt-to-asset ratios exceeding 100% and facing risks of debt defaults, requesting them to provide detailed explanations on their debt risks, the impact of debt on profitability, production and operations, and compliant corporate governance, as well as their plans for managing these risks. The Exchange urged these companies to fully disclose their debt risks and cautioned investors to exercise prudence in making investment decisions. To gain a clearer understanding of the debt profiles, repayment capabilities, operational conditions, financial reporting integrity, and compliance practices of certain listed companies, the Shenzhen Stock Exchange conducted thorough investigations into potential material issues or clues of violations among offices with high debt risk. It promptly referred such cases to local securities regulatory authorities for attention or investigation, and, upon verification, immediately initiated disciplinary actions and other regulatory measures.

Commercial & Corporate
China has released a new version of the Negative List for Foreign Investment Access in Free Trade Zones.
On the 30th, Chinese authorities released the 2018 version of the Negative List for Foreign Investment Access in Pilot Free Trade Zones, which will take effect on July 30. Compared with the previous edition, the new list has been significantly shortened from 95 items to 45.
Compared with the national version of the Negative List for Foreign Investment Access released on June 28, the new version for pilot free trade zones further expands market access by lifting restrictions such as limiting oil and natural gas exploration and development to joint ventures or cooperative arrangements, and requiring that performance‑agency offices be controlled by Chinese investors. It also raises the foreign‑ownership cap for the breeding of new wheat and corn varieties and for seed production from no more than 49% to no more than 66%. In addition, with respect to the establishment of performing arts troupes, the restriction has been relaxed from a ban on foreign investment to a requirement that Chinese investors hold a controlling stake.
The new version of the Negative List for Foreign Investment Access in the Free Trade Zones sets out transitional periods during which certain sectors will see entry restrictions either lifted or relaxed. For example, in the securities, futures, and life insurance sectors, foreign ownership caps currently stand at 51%, but these limits will be removed by 2021; and with the exception of special-purpose vehicles and new-energy vehicles, the Chinese equity share in complete vehicle manufacturing is currently capped at no less than 50%, with the foreign‑ownership restriction on commercial vehicle production to be lifted by 2020.
Under the new regulations, foreign investors are prohibited from investing in sectors listed on the negative list of the free trade zone as off-limits to foreign investment. For investments in non‑prohibited sectors included on that negative list, foreign‑investment access approval is required. Moreover, in sectors subject to equity‑ratio restrictions, the establishment of foreign‑invested partnerships is not permitted. In recent years, China has steadily expanded the openness of its free trade zones, with the negative list being continuously shortened. The 2017 version of the negative list for foreign‑investment access in free trade zones has already reduced the number of entries by 10 and the number of measures by 27 compared with the previous edition.

Li Mingzhong of the Shenzhen Stock Exchange: The development of the new economy and technological innovation is raising new demands on the stock market.
The “2018 China Listed Companies Forum” was held in Shanghai. In his keynote address, Li Mingzhong, Deputy General Manager of the Shenzhen Stock Exchange, pointed out that the development of the new economy and technological innovation has placed new demands on the capital market. The issuance and information disclosure systems currently being explored by the capital market have accumulated valuable experience for institutionalizing and normalizing subsequent innovation pilot programs, thereby creating favorable conditions for establishing a long-term mechanism to support innovative enterprises.

Li Mingzhong argues that technological innovation begins with technology and is realized through capital, with the two being inseparable and mutually reinforcing. Against the backdrop of ongoing, deepening innovation-driven development, increasing national investment in scientific and technological innovation, and steadily strengthening China’s scientific and technological capabilities and innovative capacity, China’s capital market holds substantial room for institutional innovation in supporting technological advancement. The recently introduced pilot program allowing innovative enterprises to issue shares or depositary receipts domestically has achieved a substantive breakthrough in listing thresholds, effectively addressing and accommodating the financing needs of companies that are not yet profitable as well as those with dual-class share structures. Moreover, the regime governing information disclosure has adopted appropriately differentiated arrangements, taking into account the practical differences between domestic and international markets in areas such as information transparency and corporate governance. These initiatives have accumulated valuable experience for advancing the institutionalization and normalization of the innovation‑pilot framework, while also creating favorable conditions for establishing a long‑term mechanism through which the capital market can better serve innovative enterprises.
At this forum, Li Mingzhong also outlined the Shenzhen Stock Exchange’s efforts to support technological innovation through its multi-tiered capital market. A key aspect of these efforts has been strengthening the institutional framework underpinning such support. Li Mingzhong noted that over the past decade and more, the Shenzhen Stock Exchange has progressively established a differentiated regulatory regime tailored to technology‑driven enterprises, encompassing investor suitability management, information disclosure, trading supervision, and risk prevention and control. As a result, the exchange’s commitment to fostering technological innovation has become deeply entrenched. In particular, the ChiNext board’s investor suitability system has cultivated a cohort of investors with relatively strong risk‑bearing capacity, enabling it to effectively pool social capital, nurture innovation, tolerate failure, and diversify risk—aligning closely with the inherent characteristics of innovative companies.
According to statistics, accounts participating in ChiNext trading account for only 20.4% of all active A-share accounts on the Shenzhen Stock Exchange, with an average trading experience of 8.7 years—significantly longer than that of other A-share market segments. Moreover, accounts with assets under RMB 100,000 represent 58% of the total, far lower than the 84.3% observed across the broader Shenzhen A‑share market, indicating a notably more sophisticated investor base compared to other segments.

A Six-Month Review of Bond Market Defaults: Private Enterprises Account for 64%, and AAA-Rated Bonds Have Defaulted for the First Time
Since the first bond default in 2018—triggered by the well‑known Sichuan Provincial Coal Industry Group—the number of defaults in the bond market has surged, with a wave of defaults sweeping through the first half of the year. According to Wind Information, as of June 27, a total of 25 bonds had defaulted, involving 13 issuers; among them, seven entities experienced their first-ever credit‑bond default, namely Yiyang Group, Shenwu Environmental Protection, Fuguiniao, Zhong’an Xiao, Kaidi Ecology, Shanghai Huaxin, and Zhongrong Shuangchuang. “Debts must eventually be repaid,” remarked Wang Xiaoxiang of Guoyuan Securities’ Wealth Management Department, reflecting on the bond market’s performance in the first half. As for the reasons behind these defaults, Wang Xiaoxiang pointed out that, on the one hand, around 2015 companies issued large volumes of bonds buoyed by favorable policies; by 2018 and 2019, this massive issuance reached its repayment maturity, ushering in a concentrated period of principal and interest repayments. On the other hand, a more direct cause is that “this year, the national policy direction remains focused on deleveraging and capacity reduction. Deleveraging is not confined to real‑economy offices; financial institutions, including banks, are also continuing down this path. Consequently, during the refinancing process, even after old debts are repaid, new bonds cannot be issued, while banks’ own refinancing efforts are likewise constrained, leading to cash‑flow disruptions for many enterprises.”
Looking at historical defaults, the last wave of concentrated bond defaults in the market can be traced back to the second quarter of 2016, when a number of issuers—including Northeast Special Steel, Guangxi Nonferrous, and Sichuan Coal Group—experienced simultaneous bond defaults within a short period. In 2016, local state-owned enterprises accounted for the majority of defaulting issuers. However, in the first half of 2018, the most notable feature of bond-market defaults was, first, the relatively high concentration of private‑sector issuers among those defaulting, while the share of state‑owned enterprises showed a declining trend. Second, of the 25 bonds that defaulted in the first half of the year, 16 were issued by private offices, representing 64%. Moreover, defaults began to spread to listed private companies, with such names as Fuguiniao, Shenwu Environmental Protection, Kaidi Ecology, and Zhong’an Xiao all recording defaults.
Among them, Shenwu Environmental Protection, Zhong’an Xiao, and Kaidi Ecology are domestically listed companies; Fuguiniao is a Hong Kong‑listed company; and Shanghai Huaxin is not listed on any stock exchange, though its subsidiary, Huaxin International, is listed on the Shenzhen Stock Exchange’s ChiNext board. Listed companies account for nearly 70% of the total, a substantial increase from the previous period. Furthermore, among the defaulting listed offices—such as Zhong’an Xiao and Shenwu Environmental Protection—their shareholders are facing tight cash flows and have pledged large portions of their holdings in these listed stocks. Several industry insiders interviewed by reporters agree that the sharp rise in defaults this year is largely attributable to the tightening financing environment.
Shanghai New Century Ratings stated that, from an external perspective, the tightening financing environment under intense regulatory pressure has made it increasingly difficult for companies to refinance, which is the primary reason behind the recent surge in default events. From an internal standpoint, most issuers that have defaulted have maintained high levels of capital expenditures in recent years, with short-term debt structures and mounting liquidity pressures; meanwhile, certain issuers exhibit shortcomings in compliance management, further eroding their ability to refinance and ultimately leading to defaults.
Another key feature of bond market defaults in 2018 was the marked decline in debt‑repayment risks among industries plagued by overcapacity, with cyclical sectors no longer the primary hotspots for defaults. Instead, defaults have increasingly shifted to counter‑cyclical industries, sectors facing tight cash flows, and diversified conglomerates. For instance, previously prominent defaulters such as Northeast Special Steel and Dalian Machine Tool operated in highly cyclical sectors like steel, construction and engineering, and building materials. By contrast, since the beginning of this year, issuers like Dandong Port, Shenwu Environmental Protection, and Kaidi Ecology have been active in less cyclical areas such as utilities and transportation; meanwhile, entities like Wuyang Construction and Huhua Xin belong to industries like commercial trade and architectural decoration.
Shanghai New Century Ratings stated that, unlike in the previous period, these industries have not yet experienced large-scale risk events. In other words, defaults triggered by a broad downturn in industry conditions remain relatively rare. Although some sectors inherently face tight cash flows, such defaults are more often attributable to office-specific factors.
In addition to the spread of bond defaults to listed companies, the most notable feature of 2018 was the inclusion of high‑rated bonds among those in default. Notably, the default of Shanghai Huaxin shattered the precedent of an initially AAA‑rated bond being the first to default, leading to severe scrutiny of rating agencies. According to statistics, as of June 27, among the 25 bonds that defaulted in 2018, the issuers’ credit ratings at issuance were mostly AA or higher; only Shenwu Environmental Technology Co., Ltd. had an initial issuer rating of AA−. Specifically, Dandong Port and Sichuan Provincial Coal Industry Group both carried an initial issuer rating of AA+, while the remaining defaulting issuers all held AA ratings.
In addition, among these 25 bonds, 15 were rated by United Credit Rating Co., Ltd., accounting for 60%; three defaulted bonds were rated by Shanghai New Century Credit Rating Investment Service Co., Ltd. Meanwhile, Pengyuan Credit Rating Co., Ltd., CCXI International Credit Rating Co., Ltd., and Dagong International Credit Rating Co., Ltd. each assigned ratings to two defaulted bonds, while Orient Golden Credit International Credit Rating Co., Ltd. rated one defaulted bond.
Although the number of bond market defaults has risen markedly this year and exhibits many new characteristics, the “normalization” of bond defaults appears to have become a growing consensus among investors. Despite the current surge in defaults, the overall default rate remains relatively low. According to data released by the People’s Bank of China on June 18, 2018, as of the end of May 2018, the outstanding principal amount of corporate credit bonds that had defaulted but remained unpaid totaled RMB 66.3 billion, accounting for 0.39% of the total outstanding balance.
A wave of defaults is unfolding and shows no sign of abating, while investors are facing even tougher challenges. According to CICC’s estimates, non‑state‑owned corporate bonds maturing in the second half of 2018 total approximately RMB 370 billion, with an additional RMB 380 billion entering the put‑option period, for a combined RMB 750 billion—accounting for 23% of all maturing and puttable corporate bonds in the second half of the year. By contrast, among bonds maturing in 2016 and 2017, non‑state‑owned issuers accounted for less than 12%.

In some areas of our province, PPP projects have received commendation and incentives from the provincial government’s inspection team.
Recently, the General Office of the Provincial Government issued a notice stating that Xuzhou City, Suqian City, and Gaoyou City in our province have demonstrated proactive efforts and achieved notable results in promoting the public‑private partnership (PPP) model, earning them recognition as exemplary regions for earnestly implementing major policies and measures with tangible outcomes in 2017. This follows the earlier acknowledgment—through State Council inspections and incentives—of PPP initiatives in Nanjing City and Pei County, marking another round of high-level endorsement for PPP work in several parts of our province. Such recognition underscores the provincial Party Committee and the provincial government’s strong support for PPP development and will serve as a significant incentive to advance high‑quality PPP implementation across the province.
To strengthen the orientation of oversight and incentives for leading the way in high-quality development and to effectively mobilize the enthusiasm, initiative, and creativity of all levels across the province in pursuing reform and development, in 2017 the General Office of the Provincial Government issued the “Notice on Providing Complementary Incentives to Localities That Have Achieved Remarkable Results Through Earnest Efforts” (Suzhengbanfa [2017] No. 61), deciding to establish a mechanism for oversight and incentive work and to carry out related selection and commendation activities centered on a number of key tasks identified by the Provincial Party Committee and the Provincial Government.
As an important measure to enhance the capacity and quality of infrastructure and public service provision, advance government streamlining and delegation of powers, stimulate private-sector investment, and deepen reform of the investment‑financing system, PPP has been designated as one of the key indicators for oversight and incentive programs. In this evaluation, the Provincial Department of Finance conducted an objective assessment of the actual effectiveness of each city and county in promoting the PPP model, considering factors such as “basic PPP work, the standardized development of projects, project promotion and demonstration efforts, project implementation, and participation by private investors.” Based on the scoring results and nomination criteria, the department formally submitted its recommendations to the provincial government; following approval, these entities were officially recognized as recipients of commendation.
Going forward, under the sound leadership of the Provincial Party Committee and the Provincial Government, our province’s PPP initiatives will forge ahead with determination, take proactive measures, pursue practical results through diligent effort, and work tirelessly with a spirit of meticulous attention to detail. We will closely align our efforts with the major strategic plans of the Provincial Party Committee and the Provincial Government, vigorously advance the “Six High‑Quality” development goals, and resolutely win the “Three Critical Battles,” thereby making an even greater contribution to the province’s high‑quality economic and social development.

Last year, PPP investments under public–private partnerships totaled 72 billion yuan, with 90% of the idle funds allocated to wealth-management products.
At the end of 2015, China’s Ministry of Finance vigorously promoted a public‑private partnership (PPP) model to attract private capital, aiming to help local governments sidestep future debt risks. In theory, under this framework, the government and private enterprises establish a special-purpose vehicle (SPV) to jointly develop urban infrastructure projects or provide certain public goods and services.
The government grants the SPV a specific type of concession—for example, in joint‑venture metro projects, it may confer the right to collect revenue from metro ticket sales—while the SPV raises capital from financial institutions and private investors. On this basis, multiple stakeholders collaborate to advance project implementation. At present, PPP projects in China are predominantly concentrated in large‑scale fixed infrastructure and capital‑intensive sectors such as transportation, water conservancy, and energy.
As of the end of 2017, the total committed capital of China’s public‑private partnership (PPP) investment funds stood at approximately RMB 72.04 billion. However, according to a recent central government budget and audit report issued by the National Audit Office, 88.7% of this amount—roughly RMB 63.9 billion—was not allocated to specific investment projects but was instead used to purchase wealth‑management products, leading the Ministry of Finance to classify it as “irregular management of investment funds.” The audit report did not specify which wealth‑management products the PPP funds had acquired. For instance, a one‑year book‑entry treasury bond yields around 3.5% annually, while a relatively safe bond‑type fund posted a peak return of about 9% last year.
Ji Fuxing, director of the Center for Public Economics and Investment‑Financing at the Chinese Academy of Social Sciences, said in an interview with the 21st Century Business Herald that PPP projects are required to align with policy priorities, which narrows the scope of eligible investment areas. Moreover, high‑tech projects—already relatively scarce—are highly sought after by all parties, further increasing the difficulty of securing contracts.
Moreover, since May 2017, the Ministry of Finance has successively issued policies such as the “Notice on Further Regulating Local Government Debt‑Financing Activities” and the “Notice on Resolutely Prohibiting Illegal and Non‑Compliant Financing by Local Governments Under the Guise of Government‑Purchased Services,” thereby strengthening oversight of PPPs and government‑purchased services. This has, on the one hand, made PPP financing more challenging, and on the other, led to increasingly stringent requirements for projects selected under these frameworks.
In fact, in April 2017, the Ministry of Finance issued a notice to terminate 30 PPP projects totaling RMB 30.02 billion, citing their non-compliance with PPP regulations. According to data compiled by Huachuang Securities and Orient Securities, although the total value of PPP transactions has continued to grow year over year, the growth rate slowed sharply after June 2017, dropping from around 700% to approximately 200%. As of February this year, the Ministry of Finance had released four batches of PPP demonstration projects. In the fourth batch announced in February, the number of projects decreased from 516 in the third batch of 2016 to 396, while the total investment fell from RMB 1.1708 trillion to RMB 758.8 billion.
Moreover, China’s sluggish fixed‑asset investment and the dwindling number of projects suitable for PPP financing may be mutually reinforcing. Since 2013, the growth rate of domestic fixed‑asset investment has been on a downward trajectory, falling to 14.93% by 2017; meanwhile, the growth rate of manufacturing fixed‑asset investment declined to 3.08%, and real estate fixed‑asset investment further decelerated to 3.29%. At the same time, PPP funds themselves incur certain operating costs, and raising capital for projects often requires paying banks interest rates of 4% or even higher—expenses that are unavoidable.
Taxation TAXATATION
The draft amendment to the Individual Income Tax Law is now open for public consultation.
According to the website of the National People’s Congress of China, the Third Session of the Standing Committee of the 13th National People’s Congress reviewed the “Draft Amendment to the Individual Income Tax Law of the People’s Republic of China.” The draft is now published on the NPC website, where the public may submit their comments directly by logging in at www.npc.gov.cn, or by mailing their views to the Legislative Affairs Commission of the Standing Committee of the National People’s Congress (No. 1 Qianmen West Street, Xicheng District, Beijing, Postal Code: 100805; please clearly mark “Comments on the Draft Amendment to the Individual Income Tax Law” on the envelope). The deadline for submitting comments is July 28, 2018.

The Publicity Department of the CPC Central Committee and other departments have jointly issued a notice to address issues in the film and television industry, including exorbitant actor fees, “yin-yang contracts,” and tax evasion.
Recently, the Publicity Department of the CPC Central Committee, the Ministry of Culture and Tourism, the State Taxation Administration, the National Radio and Television Administration, and the China Film Administration jointly issued a notice, calling for strengthened oversight of issues in the film and television industry such as exorbitant actor fees, “yin-yang contracts,” and tax evasion. The notice aims to curb unreasonable remuneration, promote compliance with tax laws, and foster the healthy development of the industry.
The Notice points out that in recent years, China’s film and television industry has grown rapidly, generally maintaining a positive momentum. At the same time, it has also exposed such problems as exorbitant actor fees, “yin-yang contracts,” and tax evasion. These issues not only drive up production costs, undermine the overall quality of creative works, and disrupt the industry’s healthy ecosystem, but they also foster materialism, mislead young people into blindly idolizing celebrities, and distort societal values. Therefore, effective measures must be taken to address these problems in a thorough and resolute manner.
The Notice emphasizes the need to formulate and implement remuneration standards for film and television productions, setting clear caps on the maximum fees that actors and program guests may receive. At this stage, existing regulations must be strictly enforced: for each film, TV series, or online audiovisual program, the total remuneration paid to all cast and guests shall not exceed 40% of the production’s total cost, and the remuneration of principal actors shall not exceed 70% of the total. The competent authorities in the film and television sector are required to strengthen oversight, regulating the participation of film and television stars in variety shows, parent–child programs, reality‑style shows, and other similar formats. They must rigorously enforce the approval system for online audiovisual content, strictly standardize the management of remuneration contracts for films, TV series, and online audiovisual works, and impose stricter penalties for tax evasion and avoidance. Television stations, film and television production companies, cinema chains, online audiovisual platforms, and private film and television distribution and exhibition offices are prohibited from engaging in cutthroat competition or inflating prices when acquiring broadcasting rights to films and TV programs. Any practice of lavishly inviting celebrities or competing to secure their appearances must be officely curbed. Furthermore, government funds and tax‑exempt public welfare funds may not invest in highly entertainment‑oriented, commercially driven films, TV series, or online audiovisual programs that encourage excessively high remunerations.
The Notice requires that social benefits be given top priority and officely rejects the pursuit of box office success, viewership ratings, or click-through rates alone. It calls for strengthening the credit‑recording system in the film and television industry, enhancing the organizational and managerial capacity of industry associations, improving the regulatory framework for talent agencies and agents, and intensifying education and oversight of industry professionals. Media outlets at all levels and of all types are to bolster public awareness‑raising and media scrutiny, tighten overall control over the volume of entertainment news coverage, and foster a favorable public‑opinion environment conducive to the sound development of the film and television sector.
LITIGATION & ARBITRATION
The Supreme People’s Court has issued the Judicial Interpretation of the International Commercial Court.
Recently, the Supreme People’s Court promulgated the “Provisions on Several Issues Concerning the Establishment of the International Commercial Court” (hereinafter referred to as the “Provisions”; the full text is available on page three), providing interpretations on matters such as the scope of cases accepted by the Supreme People’s Court’s International Commercial Court, the definition of international commercial cases, and the methods for resolving disputes. The Provisions shall take effect as of July 1, 2018.
It is understood that, in order to adjudicate international commercial cases in a lawful, impartial, and timely manner, to ensure equal protection of the legitimate rights and interests of both domestic and foreign parties, to foster a stable, fair, transparent, and convenient rule-of-law‑based international business environment, and to support and safeguard the Belt and Road Initiative, the Supreme People’s Court has decided to establish the International Commercial Court, which will serve as a permanent judicial body of the Supreme People’s Court.
According to the Provisions, the International Commercial Court shall accept the following categories of cases: first-instance international commercial cases in which the parties, pursuant to Article 34 of the Civil Procedure Law, have agreed to submit to the jurisdiction of the Supreme People’s Court and the amount in dispute is RMB 300 million or more; first-instance international commercial cases under the jurisdiction of a Higher People’s Court that, upon review, are deemed by the court to require adjudication by the Supreme People’s Court and have been so authorized; first-instance international commercial cases of significant national importance; and cases involving applications for interim measures in arbitration, or applications for the setting aside or enforcement of international commercial arbitration awards, as provided for in Article 14 of these Provisions.
With regard to the definition of international commercial cases, the Regulations expressly provide that a case shall be deemed an international commercial case if: one or both parties are foreign nationals, stateless persons, foreign enterprises, or foreign organizations; the habitual residence of one or both parties is located outside the territory of the People’s Republic of China; the subject matter of the dispute is situated outside the territory of the People’s Republic of China; or the legal facts giving rise to, modifying, or terminating the commercial relationship occur outside the territory of the People’s Republic of China.
According to the Regulations, cases heard by the International Commercial Court shall be adjudicated by a collegial panel consisting of three or more judges, and the panel shall apply the principle of majority rule in deliberating and rendering its decision.
The Regulations stipulate that, in hearing cases, the International Commercial Court shall determine the substantive law applicable to the dispute in accordance with the provisions of the Law of the People’s Republic of China on the Application of Laws to Foreign-related Civil Relations. Where the parties have chosen the applicable law pursuant to statutory requirements, such chosen law shall apply. When the International Commercial Court is required to apply foreign law, it may ascertain such law through channels including the parties, Chinese and foreign legal experts, legal fact-finding service agencies, and relevant embassies and consulates.
Under the Regulations, the Supreme People’s Court will establish an International Commercial Experts Committee and designate qualified international commercial mediation institutions, international commercial arbitration institutions, and international commercial courts to jointly build a dispute-resolution platform that seamlessly integrates mediation, arbitration, and litigation, thereby establishing a “one-stop” mechanism for resolving international commercial disputes.
The Regulations stipulate that the International Commercial Court supports parties in resolving international commercial disputes through a dispute‑resolution platform that seamlessly integrates mediation, arbitration, and litigation, enabling them to choose the method they deem most appropriate. Where, following mediation conducted under the auspices of a member of the International Commercial Experts Committee or an international commercial mediation institution, the parties reach a settlement agreement, the International Commercial Court may, in accordance with the law, issue a mediation statement. If the parties have agreed to submit their dispute to an international commercial arbitration institution, they may, prior to filing an arbitration application or after the commencement of arbitral proceedings, apply to the International Commercial Court for interim measures concerning evidence, property, or conduct. With respect to judgments, rulings, and mediation statements rendered by the International Commercial Court that have legal effect, the parties may apply to the Court for enforcement.

The Hangzhou Internet Court has, for the first time, afofficeed the legal validity of blockchain-based electronic evidence preservation.
On June 28, the Hangzhou Internet Court delivered a public judgment in a dispute over infringement of the right of information network dissemination of works, marking the first time it has afofficeed the legal validity of electronic data preserved through blockchain technology.
In this case, to prove that the defendant had published works protected by the plaintiff’s copyright on its website, the plaintiff utilized a third-party evidence‑preservation platform to automatically capture infringing webpages and extract the source code of those pages. The plaintiff then uploaded a compressed file containing these two types of evidence, along with call logs and other relevant data, to both the Factom blockchain and the Bitcoin blockchain using appropriate technical means. Blockchain technology is an internet‑based database system, also known as distributed ledger technology. It is characterized by decentralization, openness, and, in principle, the immutability of stored data.
After reviewing the case, the Hangzhou Internet Court held that the electronic data in question was obtained through a highly reliable automated scraping process that captured web page screenshots and extracted source code, thereby ensuring its authenticity. Furthermore, blockchain technology compliant with relevant standards was employed to securely preserve and authenticate the aforementioned electronic data, thus guaranteeing its reliability. On the condition that technical verification conoffices consistency and the evidence can be corroborated by other supporting materials, such electronic data may serve as the basis for establishing infringement in this case.
In recent years, blockchain technology has experienced rapid growth. Owing to its ability to ensure data authenticity and integrity, it has emerged as a new trend in the development of electronic evidence. According to a responsible official at the Hangzhou Internet Court, electronic data that is preserved and fixed using blockchain and other technological means should be assessed on a case-by-case basis, with an open and neutral approach. Neither should such data be excluded or subjected to stricter evidentiary standards simply because blockchain and similar technologies are novel and complex; nor should the evidentiary threshold be lowered merely because these technologies are resistant to tampering and deletion. Instead, their probative value should be determined through a comprehensive evaluation in accordance with relevant laws governing electronic evidence.
Other
Pinduoduo plans to list in the U.S., ushering in a new era of e-commerce.
On June 29, Eastern Time (June 30, Beijing Time), Pinduoduo, a “new‑e‑commerce” platform that was founded just three years ago and has consistently maintained rapid growth, formally filed its prospectus with the U.S. Securities and Exchange Commission (SEC). The IPO is jointly underwritten by UBS, Goldman Sachs, and CICC, and the listing exchange has not yet been finalized.
Pinduoduo, the pioneer of the “group‑buying” model, positions itself as a rapidly growing “new‑e‑commerce” platform, aiming to offer buyers “high‑quality, low‑price products and an engaging, interactive shopping experience.” According to its prospectus, Pinduoduo’s annual active users reached 295 million over the 12 months ending March 31, 2018, compared with 245 million over the same period in 2017—representing a quarterly increase of 50 million users. Since launching its advertising system in April 2017, this new revenue model has generated a snowball effect, driving exponential growth in the platform’s revenue. In the three months ended March 31, 2017, Pinduoduo reported RMB 37 million in revenue; by the same period in 2018, that figure had surged to RMB 1.385 billion, a 37‑fold increase.
Platform revenue is primarily derived from online advertising and transaction commissions, aligning with the business models of other e‑commerce platforms today. In terms of platform governance, Pinduoduo adopts policies that are stricter than those of traditional e‑commerce players, such as a “tenfold compensation for counterfeits” and batch‑level indemnification. According to the prospectus, under the agreements between the platform and merchants, if a merchant engages in practices like selling counterfeit goods, delaying shipments, or making false shipment claims, any consumer compensation deducted from the merchant will be fully reimbursed to the affected consumers in the form of platform‑wide vouchers. The platform’s own revenue remains entirely separate from these consumer compensation payouts.
According to the prospectus disclosed on the U.S. SEC’s website, Pinduoduo recorded a quarterly GMV of RMB 66.2 billion (USD 10.6 billion), with full-year GMV in 2017 totaling RMB 141.2 billion (USD 22.6 billion). For the full year 2017 and Q1 2018, Pinduoduo’s total order volume stood at 4.3 billion and 1.7 billion, respectively. The company currently partners with leading Chinese third-party online payment providers, including WeChat Pay, QQ Wallet, Alipay, and Apple Pay, enabling consumers to enjoy a seamless and efficient payment experience. Meanwhile, over the 12 months ended March 31, 2018, Pinduoduo’s platform hosted more than one million active merchants, offering customers a full range of product categories.
According to the prospectus disclosed on the U.S. SEC’s website, since its founding in 2015, Pinduoduo has maintained rapid revenue growth. In 2016, its revenue stood at RMB 505 million; by 2017, annual revenue had surged to RMB 1.744 billion. Net losses for 2016 and 2017 were RMB 292 million and RMB 525 million, respectively. In Q1 2018, Pinduoduo reported revenue of RMB 1.385 billion, a year-over-year increase of 37 times. To support its aggressive market expansion, the company’s sales and marketing expenses reached RMB 1.217 billion in Q1 2018, resulting in a quarterly net loss of RMB 201 million. Thus, over just over three years since its inception, Pinduoduo’s cumulative losses (including stock-based compensation) totaled only RMB 1.312 billion as of Q1 2018. As of the end of the first quarter of 2018, Pinduoduo held approximately RMB 8.634 billion (USD 1.377 billion) in cash and cash equivalents, an impressive quarterly increase of RMB 5.576 billion.
According to the prospectus, as of December 31, 2017, Pinduoduo had 1,159 employees, with an average age of 26. In the same periods of 2015 and 2016, the company employed 455 and 531 people, respectively. As of December 31, 2017, the platform recorded a total of 4.3 billion orders placed via its mobile app, with a GMV of RMB 141.2 billion and 245 million annual active buyers. This means that, on average, each Pinduoduo employee supported 3.7 million orders and RMB 120 million in GMV, serving approximately 200,000 consumers.
According to the prospectus disclosed on the U.S. SEC’s website, the company’s founder, chairman, and CEO, Colin Huang, holds a 50.7% stake in Pinduoduo, giving him absolute control over the company. Tencent holds a 18.5% stake, Gaorong Capital holds 10.1%, and Sequoia Capital holds 7.4%. Pinduoduo was founded in 2015 by Colin Huang, a post‑80s Hangzhou native, and his team. Huang graduated from the Zhu Kezhen College of Zhejiang University in 2002, earned a master’s degree in computer science from the University of Wisconsin in 2004, joined Google, and left the company in 2007 to embark on a series of entrepreneurial ventures.
According to the prospectus disclosed on the U.S. SEC’s website, Pinduoduo Chairman and CEO Colin Huang plans, following this offering, to establish a private charitable foundation using 2.3% of his company shares to advance corporate social responsibility. The company will set up a governing committee composed of senior executives and employees selected through Pinduoduo’s partnership system, which will oversee the allocation of funds and manage the foundation’s day-to-day operations. In addition, Huang intends to establish another private charitable fund to support research in cutting-edge fields such as science and medicine.

Ministry of Commerce: The Second Amendment to the Asia-Pacific Trade Agreement officially entered into force on July 1.
On July 1, the Fourth Round Tariff Reduction Outcome Document of the Asia-Pacific Trade Agreement—the Second Amendment to the Asia-Pacific Trade Agreement (hereinafter referred to as the “Amendment”)—officially entered into force. The Agreement’s six member states—China, India, the Republic of Korea, Sri Lanka, Bangladesh, and Laos—will reduce tariffs on a total of 10,312 tariff lines, with an average tariff cut of 33%. In addition, China, the Republic of Korea, India, and Sri Lanka have granted preferential tariff treatment to Bangladesh, the least developed country party to the Agreement, for 1,259 products, and to Laos for 1,251 products, with average tariff reductions of 86% in both cases.

JC Master Law Office
Address: 9th Floor, National Water Resources Building, No. 70 Qingjiang South Road, Nanjing City
Postal Code: 210036
Phone: 025-84503333
Fax: 025-84505533
Website: www.jcmaster.com
This legal notice is provided solely for informational purposes and does not constitute legal advice or a legal analysis of any specific case. The transmission of this legal notice does not establish an attorney–client relationship between JC Master Law Office and the user or reader. JC Master Law Office assumes no responsibility for any third-party content accessible via the internet. If you do not wish to receive this legal notice, please notify us by email at jcm@jcmaster.com.
The copyright of this legal information is owned by JC Master Law Office ©. Without written permission, no organization or individual may reproduce, publish, or cite it in any form.