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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 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 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 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 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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