THE PACIFIC : China Drafts Regulations, Stiffer Penalties for Fraud : Securities: Legislation is aimed at boosting confidence in markets.

China is drafting laws that allow five-year jail terms for securities fraud and better regulation of foreign investors’ shares, to boost confidence in its slumping stock markets, major papers reported.

The national regulations for B-shares, traded only by foreign investors, should be issued before the end of the year, the official China Daily reported Sunday. The laws will improve the issuing and trading of these shares, it said.

Foreign investors say their confidence has been hit by poor disclosures by listed companies, especially in interim reports, and too many companies diversifying into fields unrelated to their main businesses.

Meanwhile, the official China Securities newspaper reported Saturday that a supplement to China’s criminal law had been submitted to the parliament’s standing committee, listing tough jail terms for stock market crimes.

China’s two infant stock markets in Shanghai and Shenzhen have slumped this year, as Chinese people have turned to low-return investments like treasury bonds and bank deposits, complaining that stock markets are too risky.

The Shanghai composite index fell 7.4% last week to close at 458.37 points, down from 1,600 points last February. Shanghai B-share prices have slipped about 25% this year.

The criminal law supplement lists jail terms for a string of crimes China has encountered in its three-year experiment with stock markets, China Securities said.

The proposed penalties include two years for spreading false rumors; three years for fraud in applying for a company license, lying in a prospectus or colluding to manipulate share prices; and five years for issuing stock without approval, insider trading or embezzlement.

Currently, the China Securities Regulatory Commission, the securities industry watchdog, is armed with fewer than 100 staff and a set of sketchy, provisional securities regulations to control often chaotic trading. The drafting of a national securities law has been repeatedly delayed.