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

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Presentation on theme: "Securities Markets in China Prof. Stephen Y. L. Cheung Department of Economics & Finance City University of Hong Kong February 2003."— Presentation transcript:

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

2 Stephen CheungSecurities Markets in China2 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

3 Stephen CheungSecurities Markets in China3 Country Profile: National Flag

4 Stephen CheungSecurities Markets in China4 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

5 Stephen CheungSecurities Markets in China5 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

6 Stephen CheungSecurities Markets in China6 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

7 Stephen CheungSecurities Markets in China7 Country Profile: Brief History IV  Growth due to Modernization programmes Open-door policy Changed incentive system towards market- oriented economy

8 Stephen CheungSecurities Markets in China8 Country Profile: Economic Structure 199719981999 GDP (Rmb b)7,607.77,955.48,191.1 Real GDP growth (%) Inflation rate (%)2.8-0.8-1.3 Population (m)1,230.01,248.11,259.1 Exports (US$b)182.7183.4194.9 Imports (US$b)136.4134.6165.7 C/A balance (US$b)29.729.515.7 External debt (US$b)159.2165.3164.8 Source: EIU, Country Report: China, 4th quarter 2000

9 Stephen CheungSecurities Markets in China9 Country Profile: Country Risk MarksWeighting (%) Political Risk15.3225 Economic Performance9.4625 Debt Indicators9.7010 Debt in Default or Rescheduled8.3610 Credit Ratings6.0410 Access to Bank Finance0.065 Access to Short-Term Finance2.325 Access to Capital Market2.805 Discount on Forfeiting2.455 Total Score56.51100 Ranking Among World September 1998 March 1999 42 45 Source: Euromoney, March 1999

10 Stephen CheungSecurities Markets in China10 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%

11 Stephen CheungSecurities Markets in China11 China’s Emerging Private Enterprise

12 Stephen CheungSecurities Markets in China12 China’s Emerging Private Enterprise

13 Stephen CheungSecurities Markets in China13 China’s Emerging Private Enterprise

14 Stephen CheungSecurities Markets in China14 China’s Emerging Private Enterprise

15 Stephen CheungSecurities Markets in China15  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 China’s Emerging Private Enterprise

16 Stephen CheungSecurities Markets in China16  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 China’s Emerging Private Enterprise

17 Stephen CheungSecurities Markets in China17  Problems Unclear property rights Hybrid forms of ownership Rent-seeking activities Collusion between local government and enterprises China’s Emerging Private Enterprise

18 Stephen CheungSecurities Markets in China18 China’s Emerging Private Enterprise

19 Stephen CheungSecurities Markets in China19 China’s Emerging Private Enterprise

20 Stephen CheungSecurities Markets in China20 China’s Emerging Private Enterprise

21 Stephen CheungSecurities Markets in China21 China’s Emerging Private Enterprise Financing private enterprise 1.Start-ups and younger firms Insider finance Trade credit Family and friends 2.As the firm grows Venture capital Banks and finance companies 3.Mature stage Public equity and debt markets

22 Stephen CheungSecurities Markets in China22 Financing Private Enterprise 1.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 China’s Emerging Private Enterprise

23 Stephen CheungSecurities Markets in China23 Financing Private Enterprise 2.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 China’s Emerging Private Enterprise

24 Stephen CheungSecurities Markets in China24 Financing Private Enterprise 3.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 China’s Emerging Private Enterprise

25 Stephen CheungSecurities Markets in China25 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

26 Stephen CheungSecurities Markets in China26 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

27 Stephen CheungSecurities Markets in China27 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

28 Stephen CheungSecurities Markets in China28 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

29 Stephen CheungSecurities Markets in China29 Stock Markets in China: Securities Regulatory Framework China Securities Regulatory Commission Shanghai / Shenzhen Stock Exchanges Shanghai / Shenzhen Securities Markets

30 Stephen CheungSecurities Markets in China30 Stock Markets in China: Index Performance (Mainland)

31 Stephen CheungSecurities Markets in China31 Stock Markets in China: Index Performance (Hong Kong)

32 Stephen CheungSecurities Markets in China32 Stock Markets in China: Shanghai I Summary Statistics 199920002001 Market Capitalization (Rmb$b)1,458.12,693.12,759.1 Market Turnover (Rmb$b)424.97848.13838.21 Number of Company Listed484572646 Market P/E (%) A Shares B Shares NA 38.13 NA 32.95 58.22 6.04 37.12 37.71 10.04 Shanghai Composite Index1,366.62,073.51,646.0 Shanghai B-Share IndexNA28.7137.91

33 Stephen CheungSecurities Markets in China33 Stock Markets in China: Shanghai II Number of Listed Securities 2002 A Shares701 B Shares54 Funds25 Treasury Bonds Spot Repurchase 16 9 Others14 Source: Shanghai Stock Exchange:

34 Stephen CheungSecurities Markets in China34 Stock Markets in China: Shenzhen I Summary Statistics 199920002001 Market Capitalization (Rmb$b)1,189.072,116.011,593.2 Market Turnover (Rmb$b)396.43760.62608.11 Number of Company Listed463514508 Market P/E (%) A Shares B Shares 41.14 37.56 NA 30.59 56.03 5.71 36.30 39.79 10.38 Shenzhen Composite Index402.18635.73475.94 Shenzhen B-Share IndexNA53.5884.66

35 Stephen CheungSecurities Markets in China35 Stock Markets in China: Shenzhen II Number of Listed Securities 2002 A Shares450 B Shares54 Funds16 Corporate Bonds3 Treasury Bonds Spot Repurchase 15 2 Source: Shenzhen Stock Exchange

36 Stephen CheungSecurities Markets in China36 Stock Markets in China: Market Capitalization

37 Stephen CheungSecurities Markets in China37 Stock Markets in China: Number of Listed Company

38 Stephen CheungSecurities Markets in China38 Stock Markets in China: Structure of Paid-Up Capital in 1996 Shanghai (m)Shenzhen (m) Negotiable: A Shares14,132.2312,712.25 B Shares4,542.773,212.39 H Shares6,984.181,403.53 Non-Negotiable: State28,355.6214,446.19 Legal Person19,373.0814,351.61 Other1,500.211,156.60 Source: Fundamental Analysis of Chinese Listed Companies 1997

39 Stephen CheungSecurities Markets in China39 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

40 Stephen CheungSecurities Markets in China40 Stock Markets in China: Comparison Between A and B Shares Differences A ShareB Share Currency-DenominatedRmbForeign Listing ApprovalCSRCSPC or SC InvestorsLocal Chinese NationalsNon-local Chinese Nationals OfferingsPublic / PrivatePrivate through Offshore Brokerage FirmsLocalAuthorized Local / Foreign Trading VolumesHighLow VolatilityHighLow SettlementT + 1T + 3

41 Stephen CheungSecurities Markets in China41 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

42 Stephen CheungSecurities Markets in China42 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

43 Stephen CheungSecurities Markets in China43  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 China’s Listed Companies

44 Stephen CheungSecurities Markets in China44  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 China’s Listed Companies

45 Stephen CheungSecurities Markets in China45 Main problems with listed companies 1.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 China’s Listed Companies

46 Stephen CheungSecurities Markets in China46 Main problems with listed companies 2.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 China’s Listed Companies

47 Stephen CheungSecurities Markets in China47 Main problems with listed companies 3.Controlling shareholders  Connected parties transactions  Listed companies provide loan guarantee for controlling shareholders  ‘ATM’ machine for controlling shareholders, example 猴王事件 China’s Listed Companies

48 Stephen CheungCorporate Governance in Hong Kong 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

49 Stephen CheungSecurities Markets in China49 Corporate Governance  A Successful Market Depends On: ‘Good’ Regulatory Framework Quality Listed Companies Quality Intermediaries

50 Stephen CheungSecurities Markets in China50 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

51 Stephen CheungSecurities Markets in China51  Example Hong Kong listed companies  75% registered overseas  Different requirements Class Action Contingency Fee Corporate Governance: ‘Good’ Regulatory Framework II

52 Stephen CheungSecurities Markets in China52 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

53 Stephen CheungSecurities Markets in China53 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

54 Stephen CheungSecurities Markets in China54  Corporate governance Independence of the Board Problem  Connected parties transactions  Information disclosure Corporate Governance: Quality Listed Companies III

55 Stephen CheungSecurities Markets in China55  Enhance independence of the Board Recruitment details of independent non- executive directors Greater transparency  Financial  Non-Financial Performance evaluation Corporate Governance: Quality Listed Companies IV

56 Stephen CheungSecurities Markets in China56  Suggestions Licensing for directors Director’s education Scorecard for corporate governance  Investors  Pressure Corporate Governance: Quality Listed Companies V

57 Stephen CheungSecurities Markets in China57  Intermediaries Accountants Auditors Lawyers Financial Analysts Corporate Governance: Quality Intermediaries I

58 Stephen CheungSecurities Markets in China58  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 Corporate Governance: Quality Intermediaries II

59 Stephen CheungSecurities Markets in China59 Corporate Governance: Quality Intermediaries III

60 Stephen CheungSecurities Markets in China60 Corporate Governance: Quality Intermediaries IV

61 Stephen CheungSecurities Markets in China61 Corporate Governance: Quality Intermediaries V

62 Stephen CheungSecurities Markets in China62  Self-Regulation Effectiveness?  Independent Investigation Committee Corporate Governance: Quality Intermediaries VI

63 Stephen CheungSecurities Markets in China63 Conclusion  Market creditability  Investor confidence  Ability for further funding  Ability to attract quality companies

64 ~ The End ~ Thank you

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