Transcript Seminar: Securities Markets and Business Regulation in the PRC

Financial Reforms in China
The Chinese Securities Markets
An Overview
Anthony Neoh
Wharton School, Apr. 2002
Disclaimer
The views expressed here are personal
and do not necessarily represent the
views of any public or private
institution in or out of the People’s
Republic of China.
Table of Contents
Fundamental ideas behind securities laws – functions
of securities markets.
Structure of securities markets.
Rationale for regulation.
Objectives of regulation.
Pre-conditions for effective regulation.
Historical perspectives of the Chinese Securities
Market.
Core issues for the future.
Recent regulatory steps.
Performance of the market.
Functions of Securities Markets
The Theory
1. Facilitate accumulation of capital and higher
productivity, thus promoting economic development.
Functions of Securities Markets
The Theory
2.
Allocate savings by way of investments in
businesses and public enterprises which create the
optimal expected returns (presumption of the ‘risk
averse’ investor).
Rr =Rrf + β(Rm – Rrf )
Rr = Required Return
Rrf = Risk Free Return
Rm = Expected Market Return
β = Volatility of Investment over Market Volatility
Functions of Securities Markets
The Theory
3. Provide price formation mechanisms and
set benchmarks for value in the economy.
Functions of Securities Markets
The Theory
4. Promote efficiencies in businesses and public
enterprise (presumption of the rational
manager who is aware of his cost of capital).
Functions of Securities Markets:
The Practice
1. They do facilitate accumulation of capital, but that
does not always result in higher productivity, but
the ‘wealth effect’ of a growing market spurs
consumption and creates economic growth in the
short term.
Functions of Securities Markets:
The Practice
2. Risk aversion is displaced by stories which turns out to
be pipedreams (“The emperor’s new clothes
syndrome” prevails over the presumption of “risk
aversion” in a rational order).
Functions of Securities Markets:
The Practice
3. They do provide benchmarks for valuation when the
markets are mature, but even then, “apples with
apples” comparisons are needed but are not often
heeded.
=
Functions of Securities Markets:
The Practice
4. Awareness of the cost of capital only arises when
investors require it.
A test on Market Function
P roduc tivity
US
8
Ja pa n
6
China (Ex HK a nd Ta iwa n)
3
Alloc a tive Va lua tion Awa re ne s s of
Effic ie nc y Be nc hma rk Cos t of Ca pita l
8
6
8
6
5
6
3
2
3
Structure of Securities Markets:
The World Trend
1.
2.
3.
4.
5.
Open architecture of investment instruments: All kinds of
obligations can be transformed into transferable securities.
Open architecture of risk transfer: All kinds of future and option
obligations are permissible.
Open architecture of trading, clearing and settlement: All
kinds of price discovery and trading systems can be linked to all
kinds of clearing and settlement systems.
Open architecture of authorisation: Multi-jurisdictional
authorisation of public offerings and collective investments in sight,
as are mutual recognition of qualifications of practitoners. The
European passport is a case in point.
Open architecture in intermediation: Financial service
providers are offering all kinds of financial services regardless of
traditional classifications.
The Structure of Securities Markets:
Emerging Markets
1.
2.
3.
4.
5.
Closed architecture of investment instruments: Individual
instruments require prior authorisation by different public
authorities.
Closed architecture of risk transfer: Prior authorisation of
individual instruments required and few are generally authorised.
Closed architecture of trading, clearing and settlement:
Monopolistic arrangements are usually in place in the name of
better supervision.
Closed architecture of authorisation: Strict requirements
often favoring domestic entities.
Closed architecture of intermediation: Although strict
Glass-Steagall type walls are falling, there is still institutionally
divided regulation which makes it difficult for intermediaries to
offer a wide range of financial services.
A Test on market structure
Ra nge of
Ra nge of ris k
Ra nge of tra ding,
Ra nge of
ins trume nts tra ns fe r ins turme nts c le a ring a nd s e ttle me nt inte rme dia rie s
US
9
9
8
8
Ja pa n
6
6
5
6
China (E x HK a nd Ta iwa n)
3
3
3
3
The rationale for regulation
1.
The self regulation argument : That has prevailed in many
2.
The public law intervention argument: The industry is too
3.
4.
markets. In London it survived till 1986.
self interested to police itself and so public law has to intervene
to protect consumers among the general public.
The merit vs. disclosure argument: Those for “merit”
protection argue that they should judge the quality of the
products that should be unleashed on the public. Those for
“disclosure” argue that the public should judge for themselves so
long as the disclosures are full.
The private and public enforcement argument: few stand
on opposite sides of this argument, but many emerging markets
do not have the legal systems capable of private enforcement.
The IOSCO Objectives and Principles
of Securities Regulation
1. Protection of Investors.
2. Ensure fair, efficient and transparent
markets.
3. Reduce systemic risks in the financial
system.
Protection of Investors
1. From misleading, manipulative or fraudulent practices,
2.
3.
4.
5.
including insider trading, front running clients and
misuse of client assets.
Ensuring full disclosure of information material to
investors’ decision, a key part being accounting and
financial forecast information.
Ensuring only qualified persons are allowed as
intermediaries by a system of prior authorisation.
Exercising adequate supervision over intermediaries.
Enforcing the rules effectively.
Ensuring fair, efficient and
transparent markets
1. Ensuring prior authorisation of marker operators.
2. Ensuring fair competition in the operation of
3.
4.
markets.
Ensuring timely and widespread dissemination of
trading information and that such information is
fully reflected in the securities prices.
Ensuring transparency of all trading information.
Reducing systemic risk to the
Financial System
1. Reduce the risk of failure of intermediaries.
2. Knowing at all times the risks undertaken
by firms and ensuring that they have
adequate systems to manage risks.
3. Ensuring that there are workable
procedures to isolate single failures from
contaminating the whole financial system.
UK Financial Services and Markets
Act 2000 : Objectives
Promote confidence in the financial system.
Promote public awareness of the financial
system.
Protection of consumers of financial services.
Reduction of financial crime through better
supervision of intermediaries and vigilant
enforcement of the prohibition against
unauthorized activities.
US 1933, 1934 Acts: Objectives
Provide full and fair disclosure of the character of
securities sold in interstate and foreign commerce,
and prevent frauds in the sale thereof (1933).
Provide for the regulation of securities exchanges and
of over-the-counter markets operating in interstate
and foreign commerce and through the mails, to
prevent inequitable and unfair practices on such
exchanges and markets (1934).
Chinese Securities Law: Objectives
To regulate the issue and trading of
securities.
To protect the legal rights of investors.
To promote the development of a socialist
economy
The necessary conditions for
effective securities regulation
1.
Openness and fairness: In allowing competition and
2.
Cost benefit assessment : Ensuring that the benefit of
3.
4.
5.
application of the rules.
regulatory measures is proportionate to the burdens placed
on the market.
Effective legal system: With a commercial and civil code
sufficient to deal with most contractual and tortious issues
and a wide range of private and public law remedies.
Effective tax system: Effective collection and tax rates
inculcating effective incentives.
Effective accounting framework: Allowing meaning to
disclosures.
The necessary conditions for effective
securities regulation (Cont’d)
6.
7.
8.
9.
Effective banking system: Allowing effective payment and
custodian systems and firms to get short and long term
capital.
Effective pensions and insurance systems: Allowing
firms to manage the issue of retirement of their staff and
their general risks.
Effective Companies and Bankruptcy laws: Allowing
markets to nurture high standards of corporate governance
and protection of shareholders and creditor rights.
Effective Dispute Resolution System: Both within and
without the judiciary
A test on regulatory environment
c os t be ne fit
Compe titive ne s s a na lys is
US
9
8
Ja pa n
6
6
China (Ex HK a nd Ta iwa n)
3
2
pe ns ions a nd
ba nking s ys te m ins ura nc e
US
7
9
Ja pa n
4
5
China (Ex HK a nd Ta iwa n)
2
2
le ga l
s ys te m
ta x
s ys te m
8
6
2
a c c ounting
fra me work
8
8
5
5
2
3
c ompa ny a nd
dis pute
ba nkruptc y la ws re s olution
8
8
6
6
3
3
US
Productivity
10
dispute resolution
Allocative Efficiency
Valuation Benchmark
company and bankruptcy laws
Awareness of Cost of Capital
pensions and insurance
Range of instruments
0
banking system
Range of risk transfer insturments
accounting framework
Range of trading, clearing and settlement
tax system
Range of intermediaries
legal system
Competitiveness
cost benefit analysis
Japan
Productivity
10
dispute resolution
Allocative Efficiency
Valuation Benchmark
company and bankruptcy laws
Awareness of Cost of Capital
pensions and insurance
Range of instruments
0
banking system
Range of risk transfer insturments
accounting framework
Range of trading, clearing and settlement
tax system
Range of intermediaries
legal system
Competitiveness
cost benefit analysis
China (Ex HK and Taiwan)
Productivity
10
dispute resolution
Allocative Efficiency
Valuation Benchmark
company and bankruptcy laws
Awareness of Cost of Capital
pensions and insurance
Range of instruments
0
banking system
Range of risk transfer insturments
accounting framework
Range of trading, clearing and settlement
tax system
Range of intermediaries
legal system
Competitiveness
cost benefit analysis
Market Capitalization
(100 million Yuan)
60000
50000
40000
30000
20000
10000
0
1992
1993
1994
1995
1996
1997
1998
Total Market Capitalization
Total Cap
Market Float
1996
1999
2000
2001
Market Float
1992
1993
1994
1995
1048.13
3531.01
3690.61
3474.28
9842.38 17529.24 19505.64 26471.17 48090.94 43522.20
1997
861.62
968.89
938.22
2867.03
5204.42
1998
5745.59
1999
2000
2001
8213.97 16087.52 14463.17
No. of Listed Companies
1400
1200
1000
800
600
400
200
0
1992 1993
1994 1995 1996
1997 1998
Domestic(A、 B share）
Domestic(A、B share）
Overseas（H share）
1992
53
1993
182
6
1999 2000 2001
Overseas（ H share）
1994
291
15
1995
323
18
1996
530
25
1997
745
42
1998
851
43
1999
949
46
2000
1088
52
2001
1160
55
Money raised in the Market
(100 million Yuan)
2500
2000
1500
1000
500
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
0
Total Money raised
Total raised
Domestic
Foreign
Domestic（ A Share）
1992
1993
1994
1995
1996
1997
94.09 375.47 326.78 150.32 425.08 1293.82
50 276.41 99.78 85.51 294.34 853.06
44.09 99.06
227 64.81 130.74 469.53
Foreign（ B、 H Share）
1998
841.52
778.02
63.5
1999
2000
2001
944.56 2103.08 1168.61
893.6 1665.22 1097.9
47.17 576.21
70.2
Money raised by Red chips
(100 million US dollars)
160
140
120
100
80
60
40
20
0
1993
Money raised
1994
1993
23.42
1995
1994
12.86
1995
7.07
1996
1996
23.2
1997
1997
123.15
1998
1998
14.155
1999
2000
1999
36.6
2001
2000
142.74
2001
19.2
Global Market Comparison
Order
Market
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
NYSE
Nasdaq
Tokyo
London
Paris
Frankfurt
Toronto
China (HongKong)
China (domestic)
China (Taiwan)
Market Capitalisation
USD billion
11,535
3,597
2,962
2,475
1350
1186
756
624
622
237
Concentration
Turnover velocity
57.1%
75.9%
70.5%
78.3%
86.2%
45.3%
75.5%
65.4%
2.73%
52.9%%
87.7%
383.9%
58.8%
69.3%
268.8%
128.6%
75.0%
60.9%
500%
259.3%
Notes:
1.
2.
3.
4.
5.
All figures (except the figures relating to China’s domestic exchanges are taken
from http//:www.fibv.com, the web site of the international organisation of
stock exchanges.
The figures relating to China’s domestic exchanges are taken from CSRC’s
own database.
All figures relate to the period 1 January to 31 December 2000.
Concentration means the total turnover of the companies making up 5% of the
total market capitalisation expressed as a percentage of the total turnover of the
whole market for the year. If liquid market capitalisation is taken into account,
concentration is about 5% in China’s domestic markets.
Turnover velocity is the total turnover for the year expressed as a percentage of
the total market capitalisation. Turnover velocity has in fact climbed down
from the 1996 high of 913% in Shanghai and 1350.3% in Shenzhen.
Low quality demand is visible
in the after market
Investor behaviour (“flipping”) analysis for selected A-share stocks
5-day turnover after the IPO
date/IPO size (Non lock-up portion)
151%
5%
Shanghai Pudong
Development Bank
13%
66%
Shanghai Port
Container
Sinopec
122%
123%
China Minsheng Bank
Huaneng Power
Bao Steel
Investor behaviour (“flipping”) on selected H-share/Red-chip stocks
5-day turnover after the IPO
date/IPO size (Non lock-up portion)
32%
8%
10%
PetroChina
Sinopec
16%
18%
20%
China Unicom
China Mobile
CNOOC
Source: Bloomberg, Bondware, JPMorgan estimates
China Aluminum
Core issues for the future
Creation of better regulatory
environment.
Create a more complete market
structure.
Dealing with pensions and life
insurance.
China (Ex HK and Taiwan)
Productivity
10
dispute resolution
Allocative Efficiency
Valuation Benchmark
company and bankruptcy laws
Awareness of Cost of Capital
pensions and insurance
Range of instruments
0
banking system
Range of risk transfer insturments
accounting framework
Range of trading, clearing and settlement
tax system
Range of intermediaries
legal system
Competitiveness
cost benefit analysis
US
Productivity
10
dispute resolution
Allocative Efficiency
Valuation Benchmark
company and bankruptcy laws
Awareness of Cost of Capital
pensions and insurance
Range of instruments
0
banking system
Range of risk transfer insturments
accounting framework
Range of trading, clearing and settlement
tax system
Range of intermediaries
legal system
Competitiveness
cost benefit analysis
Savers and Dis-savers
Prime Savers
(40-59 yrs)
35%
United Kingdom
30%
Dissavers
(60+ yrs)
United States
30%
20%
25%
20%
40%
2000
2010
2020
2030
2040
2050
Japan
10%
35%
1950
1970
1990
2010
2030
2050
China
35%
25%
30%
25%
15%
20%
15%
35%
1990
2000
2010
2020
2030
2040
2050
Australia
35%
25%
15%
5%
1990
2000
2010
2020
2030
2040
2050
Canada
25%
1990
2000
2010
2020
2030
2040
2050
15%
2000
2010
2020
2030
2040
2050
Source: US Census Bureau
The Pensions System
Pillar I : A Publicly administered defined benefit basic
retirement benefit to all workers to be funded though
a social security tax.
Pillar II: A Publicly administered defined contribution
retirement benefit based on contribution by workers
to their own individual accounts.
Pillar III: Privately run retirement supplementary
schemes.
Social Security Fund
Set up to invest Government assets, including
proceeds from IPOs, Government owned
shares (to be sold thru ETFs or individually).
Initial investment restricted to risk free assets.
Will in time need to loosen restrictions to
achieve reasonable return.
Bank Deposits by individuals
(in units of 100 million RMB)
Total
Cities
Farmers
20
00
98
96
94
92
90
88
86
84
82
80
78
70
62
52
70000
60000
50000
40000
30000
20000
10000
0
Outstanding Government Bonds
(100 million Yuan)
16000
14000
12000
10000
8000
6000
4000
2000
0
86 987 988 989 990 991 992 993 994 995 996 997 998 999 000 001
9
1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2
Recent Regulatory Steps
State Council in Feb. 2001, allowed Chinese residents with
foreign exchange deposits to buy and sell B shares.
CSRC cracking down on market manipulation and insider
trading.
Central Bank crack down on illegal loans for stock market
speculation. Article 133.
CSRC crackdown on guaranteed investment return schemes by
stock brokers. Article 143.
CSRC crackdown on stock investment by listed companies.
CSRC from July 2001 approving 7 public offerings of Govt.
owned shares, but stopped in October 2001.
CSRC requiring double audits (by PRC CPAs and international
‘Big 5” CPAs) for companies listing and making secondary
offerings.
Performance of the A and B share
markets Jan.1999 to Jan.2002
.SSEA, Close(Last Trade) [Line] .SSEB Daily
04Jan99 - 01Feb02
Pr
USD
Pr
CNY
220
2200
200
2100
180
2000
160
1900
1800
140
1700
120
1600
100
1500
80
1400
60
1300
40
20
Jan99 Mar
1200
May
Jul
Sep
Nov Jan00 Mar
May
Jul
Sep
Nov Jan01 Mar
May
Jul
Sep
Nov Jan02
Comments welcomed
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