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Securities Markets in China

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  1. Securities Markets in China Prof. Stephen Y. L. Cheung Department of Economics & Finance City University of Hong Kong February 2003

  2. Content • Brief on Economic Development in China • Private Sector Development • Stock Markets in China • China’s Listed Companies • Problems and Regulation • Case Studies • Corporate Governance • Case Studies Securities Markets in China

  3. Country Profile: National Flag Securities Markets in China

  4. Country Profile: Brief History I • In 1949, Communist Party under leadership of Mao Tse Dong founded People’s Republic of China (PRC) • Political movements through 1950s to early 1970s e.g. Great Leap Forward, the Cultural Revolution • Economic growth was slow Securities Markets in China

  5. Country Profile: Brief History II • Deng Xiao Ping came to power and introduced a number of economic liberalization programmes • “No matter whether it is a black cat or a white black, it is a good cat as long as it catches mice.” • Reform in agricultural sector • Open-door policy to foreign investors • Special economic zones • Rapid economic growth which led to overheating and social unrest Securities Markets in China

  6. Country Profile: Brief History III • In 1993, introduced austerity measures to curb inflation which dampened economic activities • Maintained stability of Renminbi after Asian currency crisis in 1997 and economic slowdown prompted pump-priming measures to boost domestic demand Securities Markets in China

  7. Country Profile: Brief History IV • Growth due to • Modernization programmes • Open-door policy • Changed incentive system towards market-oriented economy Securities Markets in China

  8. Country Profile: Economic Structure Securities Markets in China

  9. Country Profile: Country Risk Securities Markets in China

  10. China’s Emerging Private Enterprise • Importance of the private sector in China • More than half of economic activity • More than 2/3 if agricultural and collectives enterprises are counted • During 1991-1997, output  71% and employment  41% Securities Markets in China

  11. China’s Emerging Private Enterprise Securities Markets in China

  12. China’s Emerging Private Enterprise Securities Markets in China

  13. China’s Emerging Private Enterprise Securities Markets in China

  14. China’s Emerging Private Enterprise Securities Markets in China

  15. China’s Emerging Private Enterprise • Major turning points in private sector development • Phase I – 1978-1983 • Individual business (getihu) • Phase II – 1984-1992 • Privately run enterprises (siyingqiye) • Phase III – 1993-Present • After Deng’s famous southern tour in September 1992 Securities Markets in China

  16. China’s Emerging Private Enterprise • China’s Trade Reforms in Preparation for Accession to the WTO • The elimination of import quotas by 2006 • The elimination of import tariffs on computers, semiconductors and related products by 2005 • Reduction in import tariffs on agricultural products from 22% to 17.5% • Reduction in import tariffs on industrial products from an average of 24.6% to an average of 9.4% • A reduction in import tariffs on motor vehicles from 80-100% to 25% by 2006 and 10% for parts • Permission for up to 50% foreign ownership of telecoms and insurance • Permission for importers to own domestic distribution networks • Full market access for foreign banks within 5 years of accession; foreign banks will be able to conduct local currency business with Chinese enterprises 2 years after accession Securities Markets in China

  17. China’s Emerging Private Enterprise • Problems • Unclear property rights • Hybrid forms of ownership • Rent-seeking activities • Collusion between local government and enterprises Securities Markets in China

  18. China’s Emerging Private Enterprise Securities Markets in China

  19. China’s Emerging Private Enterprise Securities Markets in China

  20. China’s Emerging Private Enterprise Securities Markets in China

  21. China’s Emerging Private Enterprise Financing private enterprise • Start-ups and younger firms • Insider finance • Trade credit • Family and friends • As the firm grows • Venture capital • Banks and finance companies • Mature stage • Public equity and debt markets Securities Markets in China

  22. China’s Emerging Private Enterprise Financing Private Enterprise • Access to bank lending • As of 1998, private sector’s loan <1% of total lending • The figure is low, compared with the sector’s contribution to employment and GDP • Policy lending Securities Markets in China

  23. China’s Emerging Private Enterprise Financing Private Enterprise • Access to private equity • Lack a developed, organized private equity market for long-term capital • China had 92 venture capital in 1999 • Insurance companies and pension fund not permitted to invest in non-listed securities Securities Markets in China

  24. China’s Emerging Private Enterprise Financing Private Enterprise • Access public equity market • Private firms have limited access to stock market • Quota system and size requirements • In 2000, 11 out of 976 companies • In 1998 & 1999, only 4 non-state IPOs Securities Markets in China

  25. Stock Markets in China: History I • Foreign securities houses in 1869 and Chinese securities dealers appeared in 1880 • Stock Association of Shanghai established in 1891 • Issue of bonds in 1894 • Commercial Association of Stocks established in 1914 in Shanghai • Shanghai market opened officially in 1920 , which mainly dealt with government bonds; thereafter stock markets established in Beijing, Tianjin, Guangzhou, Nanjing, Suzhou, Ningpo Securities Markets in China

  26. Stock Markets in China: History II • All stock markets were closed when Communist Party came into power in 1949 • In couple with open-door policy, Third Plenary Session of 11th Central Committee of Communist Party of China got idea of reestablishing securities markets in 1978 • Revised securities markets with issue of state Treasury bills in 1981 • Local enterprise bonds followed suit in 1982 Securities Markets in China

  27. Stock Markets in China: History III • State-owned financial enterprises issued financial bonds and development of primary share market began in 1984 • State enterprise corporate bonds issued and PBOC initiated and authorized over-the-counter market for secondary trading in Shanghai in 1986 • Developed market for trading state Treasury bills in Shanghai and Wuhan in 1988 • Stock Exchange Executive established to formulate development of a national stock exchange in 1989 Securities Markets in China

  28. Stock Markets in China: History IV • Securities Trading Automated Quotation System (STAQ) commenced operations in 1990 • Shanghai Stock Exchange opened in 1990 and Shenzhen Stock Exchange opened in 1991 • B shares first listed and traded in 1992 • National Electronic Trading System (NET) started operations and H shares issued in Hong Kong, and N shares listed in New York as American Depositary Receipts (ADRs) in 1993 Securities Markets in China

  29. Stock Markets in China:Securities Regulatory Framework Securities Markets in China

  30. Stock Markets in China:Index Performance (Mainland) Securities Markets in China

  31. Stock Markets in China:Index Performance (Hong Kong) Securities Markets in China

  32. Stock Markets in China: Shanghai I Securities Markets in China

  33. Stock Markets in China: Shanghai II Securities Markets in China

  34. Stock Markets in China: Shenzhen I Securities Markets in China

  35. Stock Markets in China: Shenzhen II Securities Markets in China

  36. Stock Markets in China:Market Capitalization Securities Markets in China

  37. Stock Markets in China:Number of Listed Company Securities Markets in China

  38. Stock Markets in China: Structure of Paid-Up Capital in 1996 Securities Markets in China

  39. Stock Markets in China:Categories of Shares • Shares held by the State • Nation • State enterprises which own company • Shares held by legal person • Companies, unit or communities Securities Markets in China

  40. Stock Markets in China:Comparison Between A and B Shares Securities Markets in China

  41. Stock Markets in China:Future Development • Developing regulation and securities markets • Active stock market • Active government bonds and overseas issues • Active in commodity futures but weak in financial derivatives products • QFII • QDII • CDR Securities Markets in China

  42. China’s Listed Companies • Problems and Regulation • Fall of the stock market • Most have forecast warning and losses • ‘Changing faces’ • Newly listed companies recorded losses • Examples: 銀廣廈、猴王、關百文等 Securities Markets in China

  43. China’s Listed Companies • Fast growing market in 2000 • 139 newly listed companies • Market capitalization to GDP is 54% • In mid 2001 • 169 companies have forecast warning and losses in July 2001 • 45 were IPOs or just issued additional shares Securities Markets in China

  44. China’s Listed Companies • Causes of the problem • Unsound corporate governance structure • Inadequacy of accounting standards • Poor accounting and auditing services • Lack of proper litigation system • Poor law enforcement Securities Markets in China

  45. China’s Listed Companies Main problems with listed companies • Information disclosure is untrue • Prospectus, listing, right issue, and annual reports; major left-outs, false statements, and misguiding information • Change the purpose of the funds raised • False appraisal, financial, and manipulation of share prices Securities Markets in China

  46. China’s Listed Companies Main problems with listed companies • High-risk companies • Until April 2001, 62 ST and PT companies, 6% of all listed companies • Some companies with good financial data, but very risky, example 銀廣廈 Securities Markets in China

  47. China’s Listed Companies Main problems with listed companies • Controlling shareholders • Connected parties transactions • Listed companies provide loan guarantee for controlling shareholders • ‘ATM’ machine for controlling shareholders, example 猴王事件 Securities Markets in China

  48. Corporate Governance • Characteristics of Asian Equity Markets • Single majority shareholder • Family control • Lack of institutional investors • CEO and chairman are not separated • Underdeveloped corporate control market Corporate Governance in Hong Kong

  49. Corporate Governance • A Successful Market Depends On: • ‘Good’ Regulatory Framework • Quality Listed Companies • Quality Intermediaries Securities Markets in China

  50. Corporate Governance:‘Good’ Regulatory Framework I • Small Shareholders • Look for short-term capital gain • Ignore issues of corporate governance • Do not pay attention to shareholder’s right • Inadequate shareholder protection Securities Markets in China