China gives its 160 million individual investors the green light for class action lawsuits in historic reform after scandals involving Luckin Coffee, Kingold Jewelry

Authorities recently named and shamed Kingold Jewelry, promised to punish Luckin Coffee for accounting fraud

Class action lawsuits allow individual investors to pool similar claims against a lone defendant to save cost and time, ease pressure on courts

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China’s ramped-up efforts to crack down on market excesses coincides with its latest promise to wield the big stick at Luckin Coffee. Photo: Bloomberg

Published: 6:01pm, 3 Aug 2020Updated: 8:44am, 4 Aug 2020

China will allow the nation’s army of small investors for the first time in history to file class action lawsuits in cases such as fraud and price manipulation, as policymakers stiffen penalties in the wake of scandals involving local businesses on stock exchanges at home and abroad.

The landmark decision by the country’s Supreme Court paves the way for the world’s largest group of individual investors to seek compensation for investment losses by suing a defendant or defendants en masse. Class action lawsuits, a staple of US and some European countries’ civil law, are seen as easier and less costly than pursuing compensation individually against defendants.

The Supreme Court has cleared the way by issuing regulations on Friday that formally permits the enforcement of class actions. It is a major step forward for a country with about 160 million individual stock market investors, who often find themselves without adequate legal recourse when they are ripped off.

“It’s surely great news for individual investors like us,” said Jacky Jia, a software engineer in Shanghai, who invests in shares. “It will save time and costs, and allow more individuals to take up the law as a weapon to protect their own interests.”

The move highlights the increasing importance of China’s 30-year-old stock market, as top policymakers tap the capital market to support home-grown technologies amid boiling tensions with the US. The historic move follows recent cases involving fake gold at Kingold Jewelry, and fabricated sales at Luckin Coffee that snared mom-and-pop investors and global fund managers, and fanned arguments between US and Chinese regulators.

Class action is “of great significance in protecting investors’ rights, improving the basic system of the capital market, deepening the reforms of the capital market and maintaining a healthy market,” the China Securities Regulatory Commission (CSRC) said in a statement on its website. The CSRC will target cases that are big and have a pernicious social impact, it added.

While there are no long-term historical statistics on losses tied to Chinese stock market malfeasance, the reform promises to bring local legal procedures closer to developed markets such as in the US.