The effectiveness of judicial and public enforcement of regulation on related-party transaction in China

ABSTRACT This article examines how China, a developing country with relatively weak judicial capacity, regulates related-party transactions (RPTs). Although Chinese courts can block unfair RPTs that involve non-financial assets, they generally lack the capacity to evaluate the fairness of RPTs involving financial assets. In recent years, China has developed new regulatory strategies, including shareholder litigation brought by the Chinese Securities Investor Service Center, ex ante approval and ex post administrative sanctions by the Chinese Securities Regulatory Commission, and letters of concern issued by the stock exchanges. While the public regulators have strong expertise in reviewing RPTs, empirical evidence shows that these regulatory measures have not been frequently implemented, suggesting that their effects are likely limited due to the lack of public resources and information. Adopting regulatory strategies that enhance the capacity of regulators and improvement of internal governance mechanisms are thus necessary.