Securities markets in china
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Securities Markets in China. Prof. Stephen Y. L. Cheung Department of Economics & Finance City University of Hong Kong February 2003. Content. Brief on Economic Development in China Private Sector Development Stock Markets in China China’s Listed Companies Problems and Regulation

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Securities markets in china

Securities Markets in China

Prof. Stephen Y. L. Cheung

Department of Economics & Finance

City University of Hong Kong

February 2003


Content

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


Country profile national flag

Country Profile: National Flag

Securities Markets in China


Country profile brief history i

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


Country profile brief history ii

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


Country profile brief history iii

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


Country profile brief history iv

Country Profile: Brief History IV

  • Growth due to

    • Modernization programmes

    • Open-door policy

    • Changed incentive system towards market-oriented economy

Securities Markets in China


Country profile economic structure

Country Profile: Economic Structure

Securities Markets in China


Country profile country risk

Country Profile: Country Risk

Securities Markets in China


China s emerging private enterprise

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


China s emerging private enterprise1

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise2

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise3

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise4

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise5

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


China s emerging private enterprise6

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


China s emerging private enterprise7

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


China s emerging private enterprise8

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise9

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise10

China’s Emerging Private Enterprise

Securities Markets in China


China s emerging private enterprise11

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


China s emerging private enterprise12

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


China s emerging private enterprise13

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


China s emerging private enterprise14

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


Stock markets in china history i

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


Stock markets in china history ii

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


Stock markets in china history iii

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


Stock markets in china history iv

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


Stock markets in china securities regulatory framework

Stock Markets in China:Securities Regulatory Framework

Securities Markets in China


Stock markets in china index performance mainland

Stock Markets in China:Index Performance (Mainland)

Securities Markets in China


Stock markets in china index performance hong kong

Stock Markets in China:Index Performance (Hong Kong)

Securities Markets in China


Stock markets in china shanghai i

Stock Markets in China: Shanghai I

Securities Markets in China


Stock markets in china shanghai ii

Stock Markets in China: Shanghai II

Securities Markets in China


Stock markets in china shenzhen i

Stock Markets in China: Shenzhen I

Securities Markets in China


Stock markets in china shenzhen ii

Stock Markets in China: Shenzhen II

Securities Markets in China


Stock markets in china market capitalization

Stock Markets in China:Market Capitalization

Securities Markets in China


Stock markets in china number of listed company

Stock Markets in China:Number of Listed Company

Securities Markets in China


Stock markets in china structure of paid up capital in 1996

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

Securities Markets in China


Stock markets in china categories of shares

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


Stock markets in china comparison between a and b shares

Stock Markets in China:Comparison Between A and B Shares

Securities Markets in China


Stock markets in china future development

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


China s listed companies

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


China s listed companies1

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


China s listed companies2

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


China s listed companies3

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


China s listed companies4

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


China s listed companies5

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


Corporate governance

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


Corporate governance1

Corporate Governance

  • A Successful Market Depends On:

    • ‘Good’ Regulatory Framework

    • Quality Listed Companies

    • Quality Intermediaries

Securities Markets in China


Corporate governance good regulatory framework i

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


Corporate governance good regulatory framework ii

Corporate Governance:‘Good’ Regulatory Framework II

  • Example

    • Hong Kong listed companies

      • 75% registered overseas

      • Different requirements

    • Class Action

    • Contingency Fee

Securities Markets in China


Corporate governance quality listed companies i

Corporate Governance:Quality Listed Companies I

  • A successful market does not depend on:

    • Number of listed companies

    • Market capitalization

  • Depends on:

    • Number of good listed companies

    • Liquidity

    • Ability to attract funds

Securities Markets in China


Corporate governance quality listed companies ii

Corporate Governance:Quality Listed Companies II

  • Relation between director’s pay and company’s performance

    • Sample period: 1991-1995

    • 10% director’s pay > company’s earnings

    • No relation

Securities Markets in China


Corporate governance quality listed companies iii

Corporate Governance:Quality Listed Companies III

  • Corporate governance

    • Independence of the Board

    • Problem

      • Connected parties transactions

      • Information disclosure

Securities Markets in China


Corporate governance quality listed companies iv

Corporate Governance:Quality Listed Companies IV

  • Enhance independence of the Board

    • Recruitment details of independent non-executive directors

    • Greater transparency

      • Financial

      • Non-Financial

    • Performance evaluation

Securities Markets in China


Corporate governance quality listed companies v

Corporate Governance:Quality Listed Companies V

  • Suggestions

    • Licensing for directors

    • Director’s education

    • Scorecard for corporate governance

      • Investors

      • Pressure

Securities Markets in China


Corporate governance quality intermediaries i

Corporate Governance:Quality Intermediaries I

  • Intermediaries

    • Accountants

    • Auditors

    • Lawyers

    • Financial Analysts

Securities Markets in China


Corporate governance quality intermediaries ii

Corporate Governance:Quality Intermediaries II

  • Example

    • A News on 23 December 2002

    • 3 listed companies were involved over a suspected scam of making bogus business transactions and inflated revenue

    • Arrested by the ICAC

    • Including accountants and financial consultants

    • Inflated turnover

Securities Markets in China


Corporate governance quality intermediaries iii

Corporate Governance:Quality Intermediaries III

Securities Markets in China


Corporate governance quality intermediaries iv

Corporate Governance:Quality Intermediaries IV

Securities Markets in China


Corporate governance quality intermediaries v

Corporate Governance:Quality Intermediaries V

Securities Markets in China


Corporate governance quality intermediaries vi

Corporate Governance:Quality Intermediaries VI

  • Self-Regulation

    • Effectiveness?

  • Independent Investigation Committee

Securities Markets in China


Conclusion

Conclusion

  • Market creditability

  • Investor confidence

  • Ability for further funding

  • Ability to attract quality companies

Securities Markets in China


The end

~ The End ~

Thank you


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