Nearly a month ago Nasdaq-listed Luckin rocked the market with the disclosure of an internal investigation that found chief operating officer Liu Jian had drastically fabricated sales and turnover between the second and fourth quarters of 2019.

The China Securities Regulatory Commission (CSRC) has been in talks with the US Securities and Exchange Commission (SEC) on regulatory cooperation, and has received a positive response from the SEC, it said in a statement published on its website Monday evening.

The regulators’ move on Monday to investigate Luckin shows that the scandal has caught the attention of the central government leadership. The CSRC has pledged to increase the scrutiny of publicly traded companies’ accounts and applicants of initial public offerings, as the coronavirus pandemic and the Luckin Coffee scandal risk shattering investors’ confidence in the world’s second-largest stock market.

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Dai Ming, a fund manager at Hengsheng Asset Management in Shanghai, said that economic transformation needs a healthy stock market and taking steps to prevent a systemic risk is necessary to stop it from going into a free fall.

Although the CSRC did not reveal specific measures, the stability of the US$7.2 trillion stock market is important to top-level policymakers, as global investors question Chinese firms’ accounting practices and the nation’s economy reported its first ever quarterly contraction.

The CSRC said it will come down heavily on accounting fraud, stiffen punishment for related people and agencies, strengthen requirements for information disclosures and hold intermediary organisations more accountable, according to two separate statements posted on the regulator’s website.

The statements came more than a week after Vice-Premier Liu He convened a meeting of the financial stability development commission, an agency that was created after the 2015 stock market crash and designed to coordinate the industry oversight among financial regulators. Liu emphasised the importance of the stock market in serving the real economy and investors, called for better investor protection and criticised accounting scams by some companies without naming them.

With China’s growth shrinking by 6.8 per cent in the first quarter, a repeat of the meltdown that erased US$5 trillion in market capitalisation in 2015 is the last thing Beijing wants to see. China has 148 million individual investors, or 10 per cent of its population of 1.4 billion.

So far, China’s stock market has held up relatively well. The Shanghai Composite Index is the world’s only major benchmark that has not slipped into bear territory. It has slipped 7.7 per cent this year, beating a 12 per cent decline in the S&P 500 Index and a 25 per cent drop in Euro Stoxx 50.

The CSRC has investigated 22 listed companies for accounting frauds since 2019, penalised 18 companies and devolved six people to the police, the statement said. It specifically mentioned Shenzhen Soling Industrial, a carmaker that was found to have inflated overseas sales and forged payments for three years through 2018, and Zangge Holding, an investment company that colluded with hundreds of clients to fabricate commodity trades.

The regulator also conducted on-field checks of 84 companies that have applied for listing on the mainland’s bourses since June last year. Some 30 companies have retracted their listing applications because of problems spanning from weak internal control to improper recognition of sales, it said.