Stock Market Being Sensibly Regulated

This year, no other place in China is as hot and noisy as the stock market.

In January, China's top economists got into a heated debate on the stock market. In February, the China Securities Regulatory Commission (CSRC) appointed Hong Kong's Laura Cha as its Vice-Chairwoman and unveiled two milestone regulations, one on delisting and the other on the opening of the B-share market to domestic investors.

When pieced together, the chain of events suggests one thing £º The Chinese Government is trying all possible ways to put more sense and regulation into its 10-year-old stock market, which has been regarded by some Westerners as a cross between a casino and a children's game.

Hot Debate Cools the Market

Soon after the securities regulators started investigating the unregulated activities of some Chinese funds, China's prestigious economist Wu Jinglian appeared on CCTV on January 14 to deliver a sharp criticism of the various problems in the stock market. His points are summed up this way£º First, China's stock market is a big casino; second, it is abnormal for an entire country to get caught up in the stock market craze; and third, most of the stocks have been overvalued, with the price/earning (p/e) ratio becoming excessively high.

Wu's remarks touched the nerves of the sensitive stock market. The day after the interview was broadcast, the stock market started to tumble. In four days, the stock market value dwindled by 100 billion yuan.

This turned Wu into a target of criticism from many other economists. On February 11, five experts on securities market research, namely, Li Yining, Dong Funreng, Xiao Zhuoji, Wu Xiaoqiu and Han Zhiguo, appeared together before the media to rebuke Wu's comments.

Despite the sharp rhetoric, many people in the securities industry felt there wasn't much difference between the two sides in terms of the Chinese stock market's problems. Differences only lie in how to resolve the problems and how to put the stock market onto a more regulated track of development, they said.

"Instead of debating the stock market's failures and achievements over the past decade, it will be more meaningful to discuss how to realize the 'soft landing' of the stock market and how to develop the stock market steadily following that," said a People's Daily story.

"In any capital market, including that of the United States, there will be controversy over whether the stock market is moral or not. But this is not important. What concerns people is whether the market system is complete and effective, which enables the game to continue. That is the same in China. How China builds the market system today will determine whether the market can eliminate the existing problems in the future," said a senior financial commentator from Hong Kong.

On February 15, CSRC Chairman Zhou Xiaochuan expressed the government's stand at the annual session of the China Development Forum. He pointed out that strengthening market regulation is long-term work, and stock prices should reflect the quality of listed companies. He added that strong action will be taken against insider trading and market manipulation, and that legal construction should be intensified to clearly define what is allowed and what is not. For a stock market that is just 10 years old there naturally exists lots of unregulated and immature elements, all of which should be eliminated in the process of legal construction, he said.

Tougher Image for Regulator

On February 12, Laura Cha, a Hong Kong native with extensive stock market management experience, was appointed CSRC vice-chairwoman. This has made her the first non-mainland senior official in the Chinese Government. Many believe the unusual appointment is a major step taken by the Government to reform stock market regulation.

Cha, who has been put in charge of perfecting supervision policies and regulating market participants, has quite an impressive background to prove her ability for handling such a massive task. A doctor of law, she practiced law for many years before entering the Securities and Futures Commission (SFC) of Hong Kong in 1991. In the SFC, she worked her way up from assistant director of the Finance Department to senior director of the department, executive director and finally chief operating officer. All this has made her extremely experienced in corporate financing, market regulation and legal affairs. Cha has also gained credit for what she did in promoting the opening and raising the efficiency of the H-share market, which was launched in 1993 by the Chinese Government in Hong Kong. The SFC has been actively involved in regulating the H-share market in accordance with a memorandum on regulation cooperation signed with the CSRC.

Soon after taking the vice-chairwoman's office, Cha revealed to the media her own understanding of the problems with the Chinese stock market and the principles of regulation. She compared the current problems with the mainland stock market to those of the Hong Kong stock market in the 1970s, and called them¡°the emerging market syndrome". For a 10-year-old market, there is no way to avoid such problems, she said.

Regarding regulation, she said, "Professional regulators should come from the market. This is because they know the market's voice and language, and they know how it works. Only in this way can securities regulation be free of control by a single interest group."

In regulation, the procedure and ordinance should be clear and the execution of the ordinance should be open and fair. That will help establish public confidence in regulators, she said.

"The most fundamental principle of regulating," she continued, "is to find a balance between maintaining and protecting investors' interests and promoting market development. We should balance the interests of all sides involved, including the investors'interests.

The regulator should stand in the middle to achieve such balance, making all the people, investors and listed companies, feel confident about the market.

This will give people a feeling that the market has a good future and the regulator really knows and charts market development."

Since Cha holds a truly powerful position, many industry analysts believe she will be left enough freedom to put into practice her own ideas about regulating the mainland stock market. In addition, Cha's international working experience and connections might be able to help the CSRC and the Chinese stock market establish a more positive image featuring wider openness and tougher regulation. Many even speculate that Cha's appointment may indicate that China is accelerating the pace of opening up the securities market and establishing Sino-foreign joint funds.

Out of the Gray Area

The process of issuing stocks, which has long been seen as the biggest gray area in China's stock market, may soon become more open.

Starting March 1, in accordance with the Notice on Share-Issuing Companies Conducting Stock Promotion Through Webcast, all companies issuing new shares must inform investors of the issuance through Webcast beforehand.

Industry analysts have generally given the nod to the new regulation, which should increase public access to information on issuing new stocks, make the process of issuing stocks more open, and strengthen public supervision. It will also help establish a better awareness for regulated operations among senior management of the stock-issuing companies and create a direct communication channel between investors and listed companies.

On March 17, the CSRC started implementing a new application and approval system for issuing stocks.

The new system, built in line with market principles, eliminates excessive administrative interference in the examination and approval process and shifts more responsibilities to the underwriters. Industry analysts pointed out that the new system basically conforms to the international practice in terms of content, procedure and methods of application and approval in stock issuance.

More reforms are also taking place in other areas, such as the pricing of stocks. Starting in March the regulator stepped back from the pricing process to let share prices be totally decided by market supply and demand. In a speech made at the forum entitled "New Century Enterprises Tsinghua University Summit," CSRC Chairman Zhou Xiaochuan emphasized that the CSRC will steadfastly and resolutely push forward the process of regulating and rationalizing the pricing mechanism in the capital market. He pledged that the CSRC would try to provide better services to the future development of the capital market.

Game Over for Underperformers

It has been hard for a company to get listed, and even harder to get delisted on the Chinese stock market. This, however, became history on February 24 when the CSRC released the Implementation Measures for Suspending and Terminating the Listing of Loss-Incurring Listed Companies. The measures provide detailed stipulations on how to suspend, resume and terminate listing. The unveiling of the measures marked the launch of an exit mechanism in China's securities market.

Because of the lack of a delisting system, China's stock market for the past two years resorted to the ST (special treatment) and PT (particular transfer) systems to warn investors of the risks of investing in money-losing listed companies. However, the ST and PT systems, transitional measures intended to avoid irrational investment, have instead provoked a backlash. Because there was no risk of being delisted, the listed companies undergoing ST or PT procedures became hot spots in the market and saw their share prices soar due to the illusions of possible realignment of their assets. Many analysts pointed out that such systems mislead investors into falsely believing that the listed companies wouldn't go bankrupt and thus spur speculation in the stock market. All this has made it impossible to establish a more objective and rational standard for evaluating stocks and to put in place the market law of survival of the fittest.

By the end of 2000, the number of companies listed on the domestic stock market reached 1,088. Along with the market expansion, the number of money-losing listed companies was also on the rise. Some of these companies were losing money for three to five consecutive years. The phenomenon has put the CSRC on high alert.

In addition to increasing market risk, it has distorted the concept of investment and diminished the role of the stock market in optimizing the allocation of social resources. The CSRC hopes that by establishing a delisting mechanism that expels money-losing companies from the market, the listed companies will work harder to improve their performance.

B-Share Market Opens to Domestic Residents

In February, China's B-share market, which had been exclusive to overseas investors, suddenly opened wide its doors to domestic residents. According to a CSRC decision released on February 19, all domestic residents legally holding foreign currencies can open B-share accounts for B-share trading.

CSRC officials said the B-share market was opened to adapt to the remarkable changes in the overall foreign capital flow in the country. In addition, it was time to make necessary adjustments to the orientation, positioning, rules and role of the 10-year-old B-share market.

In the beginning, the B-share market was launched to lure foreign-currency investment from overseas and ease the country's foreign currency shortage.

Although foreign currency deposits by individuals had been another source of foreign currency loans, their volume had remained too small to meet all of the domestic demand. Things have changed a lot in recent years, especially since last year, with the volume of foreign currency deposits increasing remarkably.

By the end of January this year, the balance of foreign currency savings by mainlanders reached US$74.9 billion.

Domestic banks channeled a considerable part of these savings overseas. Such excessive capital export was considered inappropriate for China, a developing country.

Under such circumstances, the Government believed it was high time to open new investment channels to foreign currency holders, which would help improve the country's management of foreign currencies.

In addition, the B-share market was parched for funds.

Before it was opened wider, the B-share market had a mere 114 listed companies and about US$6 billion of market value.

Industry analysts generally view the opening of the B-share market as a positive move. In addition to giving a boost to the long sluggish B-share market, it will eventually lead to the convergence of the A-share and B-share markets. In their view, the co-existence of the A-share and B-share markets is a man-made separation of the securities market and causes huge differences in the price and p/e ratio for the same stock on the two markets. After the opening of the B-share market, a tremendous number of investors and foreign capital will flow in to activate the B-share market, which may help unify the prices on the two markets and thereby provide necessary conditions for their eventual convergence.






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