Securities Markets in China
description
Transcript of Securities Markets in China
Securities Markets in China
Prof. Stephen Y. L. CheungDepartment of Economics & Finance
City University of Hong Kong
February 2003
Stephen Cheung Securities Markets in China 2
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
Stephen Cheung Securities Markets in China 3
Country Profile: National Flag
Stephen Cheung Securities Markets in China 4
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
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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
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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
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Country Profile: Brief History IV
Growth due to
• Modernization programmes• Open-door policy• Changed incentive system towards market-
oriented economy
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Country Profile: Economic Structure
1997 1998 1999
GDP (Rmb b) 7,607.7 7,955.4 8,191.1
Real GDP growth (%) 8.8 7.8 7.2
Inflation rate (%) 2.8 -0.8 -1.3
Population (m) 1,230.0 1,248.1 1,259.1
Exports (US$b) 182.7 183.4 194.9
Imports (US$b) 136.4 134.6 165.7
C/A balance (US$b) 29.7 29.5 15.7
External debt (US$b) 159.2 165.3 164.8
Source: EIU, Country Report: China, 4th quarter 2000
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Country Profile: Country RiskMarks Weighting (%)
Political Risk 15.32 25
Economic Performance 9.46 25
Debt Indicators 9.70 10
Debt in Default or Rescheduled 8.36 10
Credit Ratings 6.04 10
Access to Bank Finance 0.06 5
Access to Short-Term Finance 2.32 5
Access to Capital Market 2.80 5
Discount on Forfeiting 2.45 5
Total Score 56.51 100
Ranking Among World• September 1998• March 1999
42
45
Source: Euromoney, March 1999
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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%
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Number of Registered Private Firms in China
0
200
400
600
800
1000
1200
1991 1992 1993 1994 1995 1996 1997
Th
ou
sa
nd
sChina’s Emerging Private Enterprise
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Employment in Registered Private Firms in China
0
2
4
6
8
10
12
14
16
1991 1992 1993 1994 1995 1996 1997
Mill
ion
sChina’s Emerging Private Enterprise
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Output of Registered Private Firms in China
0
500
1000
1500
2000
2500
1991 1992 1993 1994 1995 1996 1997
Bill
ion
s o
f R
MB
China’s Emerging Private Enterprise
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Net Foreign Direct Investment Flows to China
0
5
10
15
20
25
30
35
40
45
50
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Bill
ion
s o
f U
SD
China’s Emerging Private Enterprise
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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
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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
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Problems
• Unclear property rights• Hybrid forms of ownership• Rent-seeking activities• Collusion between local government and
enterprises
China’s Emerging Private Enterprise
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Employment Growth Rates by Type of Employment
-40
-20
0
20
40
60
80
100
120
140
160
1991 1992 1993 1994 1995 1996 1997 1998
Pe
rce
nta
ge
SOECollectivesForeignDomestic Private
China’s Emerging Private Enterprise
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Share of Private Sector in Total Industrial Output in China
0
5
10
15
20
25
30
35
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Per
cent
age
China’s Emerging Private Enterprise
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Share of Private Sector in Total National Employment in China
0
2
4
6
8
10
12
14
16
18
20
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Per
cent
age
China’s Emerging Private Enterprise
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Financing needs/ Level of risk
Time
High risk
Bank finance
Low risk
Growth
Going public IPO
Development finance
Early stage finance
Seed capital
Family
Idea development
Business creation
Business development
Industrial production
SME Large Company
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
companies3. Mature stage
• Public equity and debt markets
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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
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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
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Financing Private Enterprise
3. Access public equity market Private firms have limited access to stock m
arket 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
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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
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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
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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
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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
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Stock Markets in China:Securities Regulatory Framework
China SecuritiesRegulatory Commission
Shanghai / ShenzhenStock Exchanges
Shanghai / ShenzhenSecurities Markets
State Council
State Council Securities Policy Committee
Shanghai / ShenzhenSecurities Regulatory Office
People’s Bank of China
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0
500
1,000
1,500
2,000
2,500
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Ind
ex
-100%
-50%
0%
50%
100%
150%
200%
Pe
rcen
tag
e C
han
ge (
Ba
se Y
ear
: 199
2)
Shanghai "A" Index Shanghai "B" Index Shenzhen "A" Index Shenzhen "B" Index
Shanghai "A" Index % Change Shanghai "B" Index % Change Shenzhen "A" Index % Change Shenzhen "B" Index % Change
A Shares B Shares
Stock Markets in China:Index Performance (Mainland)
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0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
1993 1994 1995 1996 1997 1998 1999 2000 2001
Inde
x
-90%
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
Per
cent
age
Cha
nge
(Bas
e Y
ear:
199
3)
HK Red Chip Index HK H-share Index HK Red Chip Index % Change HK H-share Index % Change
Red Chip
H Share
Stock Markets in China:Index Performance (Hong Kong)
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Stock Markets in China: Shanghai I
Summary StatisticsSummary Statistics 1999 2000 2001
Market Capitalization (Rmb$b) 1,458.1 2,693.1 2,759.1
Market Turnover (Rmb$b) 424.97 848.13 838.21
Number of Company Listed 484 572 646
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 Index 1,366.6 2,073.5 1,646.0
Shanghai B-Share Index NA 28.71 37.91
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Stock Markets in China: Shanghai II
Number of Listed SecuritiesNumber of Listed Securities 2002
A Shares 701
B Shares 54
Funds 25
Treasury Bonds• Spot• Repurchase
16
9
Others 14
Source: Shanghai Stock Exchange: www.sse.com.cn
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Stock Markets in China: Shenzhen I
Summary StatisticsSummary Statistics 1999 2000 2001
Market Capitalization (Rmb$b) 1,189.07 2,116.01 1,593.2
Market Turnover (Rmb$b) 396.43 760.62 608.11
Number of Company Listed 463 514 508
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 Index 402.18 635.73 475.94
Shenzhen B-Share Index NA 53.58 84.66
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Stock Markets in China: Shenzhen II
Number of Listed SecuritiesNumber of Listed Securities 2002
A Shares 450
B Shares 54
Funds 16
Corporate Bonds 3
Treasury Bonds• Spot• Repurchase
15
2
Source: Shenzhen Stock Exchange
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0
5,000
10,000
15,000
20,000
25,000
30,000
Do
llars
(10
0 M
illio
n lo
cal c
urr
ency
)
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Shanghai A Shanghai B Shenzhen A Shenzhen B Red-chips H-shares
Stock Markets in China:Market Capitalization
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Stock Markets in China:Number of Listed Company
0
100
200
300
400
500
600
700
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Nu
mb
er
Shanghai A Shanghai B Shenzhen A Shenzhen B Red-chips H-shares
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Stock Markets in China: Structure of Paid-Up Capital in 1996
Shanghai (m) Shenzhen (m)
Negotiable:
A Shares 14,132.23 12,712.25
B Shares 4,542.77 3,212.39
H Shares 6,984.18 1,403.53
Non-Negotiable:
State 28,355.62 14,446.19
Legal Person 19,373.08 14,351.61
Other 1,500.21 1,156.60
Source: Fundamental Analysis of Chinese Listed Companies 1997
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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
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Stock Markets in China:Comparison Between A and B Shares
DifferencesDifferences A Share B Share
Currency-Denominated Rmb Foreign
Listing Approval CSRC SPC or SC
Investors Local Chinese Nationals Non-local Chinese Nationals
Offerings Public / Private Private through Offshore
Brokerage Firms Local Authorized Local / Foreign
Trading Volumes High Low
Volatility High Low
Settlement T + 1 T + 3
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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
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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
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Fast growing market in 2000• 139 newly listed companies• Market capitalization to GDP is 54%
In mid 2001• 169 companies have forecast warning and loss
es in July 2001• 45 were IPOs or just issued additional shares
China’s Listed Companies
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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
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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
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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, b
ut very risky, example 銀廣廈
China’s Listed Companies
Stephen Cheung Securities Markets in China 47
Main problems with listed companies
3. Controlling shareholders Connected parties transactions Listed companies provide loan guarantee fo
r controlling shareholders ‘ATM’ machine for controlling shareholders,
example 猴王事件
China’s Listed Companies
Stephen Cheung Corporate 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
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Corporate Governance
A Successful Market Depends On:
• ‘Good’ Regulatory Framework• Quality Listed Companies• Quality Intermediaries
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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
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Example
• Hong Kong listed companies 75% registered overseas Different requirements
• Class Action
• Contingency Fee
Corporate Governance:‘Good’ Regulatory Framework II
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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
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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
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Corporate governance
• Independence of the Board
• Problem Connected parties transactions Information disclosure
Corporate Governance:Quality Listed Companies III
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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
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Suggestions
• Licensing for directors
• Director’s education
• Scorecard for corporate governance Investors Pressure
Corporate Governance:Quality Listed Companies V
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Intermediaries
• Accountants
• Auditors
• Lawyers
• Financial Analysts
Corporate Governance:Quality Intermediaries I
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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
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Corporate Governance:Quality Intermediaries III
Yue Fung International Holdings HK965
0
5
10
15
20
25
20
01
/1
20
01
/3
20
01
/5
20
01
/7
20
01
/9
20
01
/11
20
02
/1
20
02
/3
20
02
/5
20
02
/7
20
02
/9
20
02
/11
$12
$1.05
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Corporate Governance:Quality Intermediaries IV
Gold Wo International Holdings HK090
0
1
2
3
4
5
6
20
01
/4
20
01
/5
20
01
/6
20
01
/7
20
01
/8
20
01
/9
20
01
/10
20
01
/11
20
01
/12
20
02
/1
20
02
/2
20
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20
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/4
20
02
/5
20
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/6
20
02
/7
20
02
/8
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/9
20
02
/10
20
02
/11
20
02
/12
$0.836
$0.08
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Corporate Governance:Quality Intermediaries V
Fu Cheong International Holdings HK916
0
0.05
0.1
0.15
0.2
0.25
20
02
/3
20
02
/4
20
02
/4
20
02
/5
20
02
/5
20
02
/6
20
02
/6
20
02
/7
20
02
/7
20
02
/7
20
02
/8
20
02
/8
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02
/9
20
02
/9
20
02
/10
20
02
/10
20
02
/11
20
02
/11
20
02
/12
$0.198
$0.038
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Self-Regulation• Effectiveness?
Independent Investigation Committee
Corporate Governance:Quality Intermediaries VI
Stephen Cheung Securities Markets in China 63
Conclusion
Market creditability
Investor confidence
Ability for further funding
Ability to attract quality companies
~ The End ~
Thank you