THE Shanghai and Shenzhen stock exchanges have stepped up scrutiny of listed companies to address corporate governance concerns, amid a push to further open up China’s capital markets.

The two stock exchanges sent out a total of at least 1,149 queries to listed companies in the first five months of this year, up 23 percent from the year-earlier period and 62 percent more than the 2017 tally. The questions mainly focused on irregularities in the firms’ financial results, inadequate information disclosure and relations with controlling shareholders.

The number of regulator queries on company disclosures have risen as China further opens up it’s capital markets to foreign investors, for whom corporate governance concerns have been a sore spot.

Yi Huiman, chairman of China’s securities regulator, last month warned listed companies and managers not to release fake information or harm the interests of these firms. The moves precede the expected opening of the new board for technology companies.

“While in the short-term investors may have concerns that this increased scrutiny is indicative of a deterioration in corporate governance, in the longer term this should enhance corporate governance and the reliability of financial reporting in China, and encourage investors,” said Keith Williamson, managing director of Alvarez & Marsal in Hong Kong.

The queries are aimed at boosting transparency in information disclosure at listed companies and they don’t necessarily mean those firms have violated laws or rules, the Shanghai exchange said.

The China Securities Regulatory Commission will continue to step up law enforcement on disclosure of false information, and urge listed companies and major shareholders to “tell the truth,” according to a press release from the securities watchdog dated Wednesday last week.

As China is internationalizing its capital markets, the regulators would like to be seen to be more proactive and supportive of the reforms in the country, according to Cimi Leung, risk assurance the Chinese mainland and Hong Kong markets leader, PwC China.

The increased scrutiny has helped bring accounting inaccuracies to the fore. Following a regulator probe, one of China’s largest listed drugmakers, Kangmei Pharmaceutical Co., admitted to have overstated its 2017 cash holdings by 29.9 billion yuan (US$4.3 billion). The amount was unprecedented in China, according to a securities lawyer.

The list of companies being probed has grown in the past few weeks to include the likes of Tahoe Group Co., Tunghsu Optoelectronic Technology Co. and Dr Peng Telecom & Media Group Co. They received queries from the two stock exchanges over their debt size, business operations and capital transfers.

“Particularly after recent cases reported on companies, investors will get more cautious especially when cash balances go missing in Chinese names,” said Raymond Chia, head of credit research for Asia excluding Japan at Schroder Investment Management Ltd. “Chinese regulators are increasing their efforts to scrutinize companies and punishment can help improve governance over the long term.”

While regulations are improving, the penalties are too low to be deterrent, according to a report from S&P Global Ratings last week. Under China’s securities law, companies can be fined up to 600,000 yuan for providing false or materially insufficient information, which is “minuscule compared with potential gains from overstating financial performance,” S&P said.

“We believe tougher regulations and consistent enforcement will be crucial to improve the credibility of China’s capital markets for international investors, and the sustainability of domestic financial markets,” the ratings firm said in the note.

(SD-Agencies)