Penalties for fraud will increase, whistle-blower rewards will also rise

China's top securities regulator vowed on Thursday to strengthen law enforcement as part of the move to reform the nation's scandal-ridden capital markets.

In an article published in the Party-run Qiushi Journal, Xiao Gang, head of the China Securities Regulatory Commission, vowed to establish a "proactive" legislation and law enforcement system that better reflects rapid changes in the capital markets.

Penalties for malpractice will increase and cooperation with law enforcement personnel will be strengthened. Meanwhile, larger incentives will be offered for whistleblowers and compensation for victims will increase.

"Lowering market entry requirements and strengthening law enforcement is the 'inflexion point' in the transformation of China's capital market supervision," wrote Xiao in the article.

Xiao's comments come as capital market crimes in China are becoming increasingly sophisticated, involving not only the management of public companies and brokerages but also those of financial institutions, as well as government officials.

The number of cases grew 21 percent year-on-year in 2012, and criminal cases were up 40 percent year-on-year in the first half of 2013.

More than half of the cases involved insider trading, and the incidence of fraud involving securities issues and information disclosure has risen quickly.

In a high-profile case in March, Sinovel Wind Group Ltd, a leading Chinese turbine manufacturer, restated its 2011 earnings lower by 22 percent, citing an accounting error. In May, it announced that it was under investigation by the CSRC for suspected misconduct including inflating earnings and revenue.

The CSRC's law enforcement work is "challenging", said Xiao. The agency investigates about 110 cases every year, but less than 60 cases end with the imposition of penalties, and about 30 of those are ultimately referred for criminal investigation. More than half of the cases end with no further action.