Why China’s army of retail stock investors might have a better chance of recouping losses from fraud

China’s vast army of mom-and-pop investors has long faced an uphill battle when it came to recovering losses from investments in fraudulent listed companies. This might change soon.

An amendment to the country’s securities law approved by Beijing last month has for the first time introduced class-action lawsuits, or “representative litigation” as it is termed.

The new system is likely to help China’s 12 million retail investors recoup their losses, said lawyers, as investors no longer need to file individual cases and can, instead, elect a representative to sue companies.

“This could potentially bring a huge change to the investment environment for minority shareholders in China, in terms of rights and interests protection,” said Zhu Xiahua, a lawyer at Shanghai Walson Law Firm. Zhu is also a pro bono lawyer with the China Securities Investor Services Centre, a non-profit institution under the China Securities Regulatory Commission (CSRC).

“It’s a very necessary change, because the current individual lawsuit system has created a huge burden on local courts, and led to low efficiency in loss recovery,” she said.

Before the amendment was passed, Chinese investors had to initiate legal cases against fraudulent companies on an individual basis after the securities watchdog completed its investigation and issued administrative penalties. A typical court case could last two to three years, as companies usually appealed against the first trial, lawyers said.