In the wake of last week’s disappointing decision by MSCI to deny China’s A Shares admission into its benchmark emerging markets index, the China Securities Regulatory Commission (CSRC) is turning tough on flagrant market violations and taking a strong stand on enforcing its own rules, according to a report by Chinese news agency Caixin.

In a prime example, at last week’s press conference, China’s stock regulator said Shenzhen-listed Dandong Xintai Electric will probably get booted from the stock exchange after a preliminary probe found it guilty of fraud. That would make it the first company to be delisted from a domestic exchange for fraud, according to spokesman Deng Ge.

The CSRC is determined to crack down on speculative investments involving backdoor listings using shell companies, and will increase the scrutiny of firms seeking to go public, said Deng. So far this year, 17 companies have withdrawn their applications for initial public offerings (IPOs) in the face of stricter reviews, he said.

The new tone is a continuation of the effort begun in March, when the CSRC began to clean up the Chinese markets by reducing the manipulation and deceptive practices that had become much too common. Last week, the New York-based index company said the regulator had taken many good steps toward getting admittance into the index, but that MSCI needed more time to evaluate how the new rules hold over a longer period of time.

Many of the CSRC’s moves have been unusual and controversial. It postponed a long-awaited transition to a registration-based system for making IPOs from the current one involving lengthy reviews. It also shelved plans for a new Shanghai-based board for companies in “emerging industries of strategic significance.” This decision upset many overseas-listed firms that had hoped to leave their foreign exchanges and come home to relist in China.

The regulators also instituted more restraints on how listed companies can use capital raised from issuing new shares; and tighter rules that made it harder for private securities investment funds to list and stay on the National Equities Exchange and Quotations (NEEQ) market, often known as the New Third Board. The NEEQ is a market for the exchange of shares in non-publicly traded companies.

These moves have been met with criticism and strong resistance from market players who have capitalized on the old regime.

The regulators are trying to strike a balance to protecting the interests of retail investors, stock issuing companies, professional investment institutions and other players. Obviously, they need more time to sort out these problems. But they need to stand firm if they want to be accepted as a fair market by global investors.

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