Walter Hutchens’ Blog

This story discusses the collaboration of Standard & Poors and CITIC Securities to promote two new PRC stock indices–an A-share 300 and an A-share 50.

Yesterday CSRC chairman Shang Fulin signed 《证券公司客户资产管理业务试行办法》 (Zhengquan gongsi kehu guanli yewu shixing banfa, “Experimental Measures on Securities Companies’ Client Assest Management Business), according to this aticle from the Shanghai Securities Journal.

This story from FinanceAsia.com provides information on the launch this week of the PRC’s first public money market fund. The article makes it clear the international financial firm ING partnered with the PRC firm Merchants in launching the fund. It will be an open-ended fund.

This article is a nice intro to blogging with a good collection of links at the end.

This Xinhua story indicates the Shanghai property rights exchange will engage in “trustee management of stock rights of non-public listed companies.”

An exchange. Handling transfers of shares. But not shares of “listed” companies.

This phenomenon is apparently fairly common on in China.

Andrew Collier of the South China Morning Post recently reported on share trading on these “unofficial” exchanges. He’s written about a thriving exchange in Chengdu and comments by Li Rongrong, head of the State-owned Assets Supervision and Administration Commission (SASAC), that these exchanges might be a way to sell down government stakes in SOEs

There has even been talk of developing these property rights exchanges into a kind of OTC market, a “third board” (with the Shanghai and Shenzhen boards being the “main board” and some yet-created high tech Nasdaq-like exchange being the “second board). This PRC article discusses the effort to unite local property rights exchanges into a nationwide network.

But what is the legal basis for share trading on these exchanges?

Article 153 of the Company Law requires CSRC or State Council approval for a public listing. Presumably these are characterized as negotiated transfers, “xieyi zhuanrang,” not the spot transactions that occur on stock exchanges.

Still, Article 144 of the Company Law requires that share transfers (without any qualifiers about listed or unlisted shares) shall be conducted through stock exchanges established in accordance with law. Article 95 of the Securities Law requires the State Council to approve establishment of stock exchanges. So, are these property rights exchanges approved as stock exchanges by the State Council? I am not aware that they are.

It has of course been common for practice to gallop ahead of law in China and elsewhere. But here it seems we have flagrant disregard for legal texts concerning a kind of property right that only exists as a legal creation. Very strange.

In the “not taking yourself too seriously department,” here is an amusing commentary on blogging by Andrew Codrescu. After several introductory minutes on a spider in his back yard, he calls blogs the “grapho-ego maniac’s perfect outlet.” Mei cuo.

Also, I just ran across this Blog China site.

I’ve expressed skepticism on a few occasions (here and elsewhere) about the notion that institutional investors or foreign investors will affect Chinese stock markets to the extent that some PRC policy makers hope because I think the structure of the markets, not the origin or organizational form of the investor, is mainly what affects investor behavior, and that institutional or foreign investors are likely to adopt behaviors similar to “irrational” or “overly speculative” PRC investors when placed within the same environment.

Yesterday this China Daily story quoted Michael Allen Pettis, a former Bear Sterns banker now teaching at Qinghua, making the same basic points.

It’s good to see this institutional economics perspective gaining exposure in the PRC

Prices for the transfers of state-owned shares in listed companies must at least be equal to the portion of the company’s net asset value represented by the shares, according to new rules that PRC media have announced. The full Chinese text of the rules is here.

The Financial Times also reported this news today. FT continues to do a first-rate job covering policy changes in China’s stock markets.

The South China Morning Post also covered the news here.

Dow Jones reports “China Shares End Down On Govt Share Sale Jitters” on the day this news broke, noting that the new policy alarmed some investors about possible impending sell-offs of state-owned shares.

As the Financial Times reported earlier (Shen Yiming, Money-market funds to be launched in China, Dec 11, 2003), the CSRC has approved three “money market” investment funds. This story form the China Economic Times identifies Hua’an, Merchants and Boshi as the three fund management companies approved to offer these funds.

Trading in the Hau’an money market investment fund commenced today. ICBC is the selling agent.

Under the PRC law on securities investment funds that goes into effect on June 1, 2004, a fund can invest in listed stocks, bonds or other things approved by the CSRC. These money market funds are obviously the “other” category.

A 5-year legislative agenda for China’s National People’s Congress has been approved by the Central Committee of the Communist Party, according to this PRC news report.

While not as headline-grabbing as the capture of Sadam or even Wen Jiabao’s visit to the U.S., this is important stuff. The ambitious agenda calls for 76 new or amended pieces of legislation. These legal changes will affect business, social security, administrative procedures, public health, agriculture and a variety of other critical areas in China.

The business law agenda includes laws on torts, enterprise bankruptcy, state-owned assets, anti-dumping, anti-monopoly, futures trading, foreign exchange, anti-money laundering, enterprise taxation and taxation generally.

The business law agenda also calls for amendment of the Company Law, Partnership Law, Securities Law, Law Against Unfair Competition, PBOC Law, Commercial Bank Law, Audit Law, Individual Income Tax Law, Foreign Trade Law, Construction Law and Land Administration Law.

A number of things strike me:

• That the Party approves the legislature’s agenda is a reminder that “putative” or some other adjective of circumspection is appropriately placed before the word “legislature” when describing the National People’s Congress.

• That they make 5-year legislative plans, while perhaps quite helpful, echoes of the central planning used in the “old” PRC economy. This is the 5-year plan for the production of legislation. NPC, go forth and meet the goals set by the central planners!

• Those things aside, this shows increasing reliance on law to govern China.

• The revision of all the tax laws means, among other things, the favors granted to foreign-invested enterprises are likely to sunset in the foreseeable future.

• The revision of the Company Law and Securities Law might herald liberalization of the capital formation process, making it more market driven rather than government approval driven.

• The agenda mentions an administrative procedures law and a law on public government information. Administrative law reform may be of enormous practical and political importance in China.

• Law is likely to continue to be a growth industry in China.

One thing I’d really like to know is how much this agenda is driven by the Party and how much of it is driven by NPC staff with Party sign-off. Or does such a distinction even make sense in the PRC?

This China Daily article discusses the reforms to the SIEC issued this week. Interestingly, it refers to the SIEC as part of the CSRC (as “its” issuance approval committee). Actually, the idea of the SIEC is that it is largely to be made up of people outside of the CSRC. But here it is conceived as essentially a subordinate part of the CSRC, and the reforms to the SIEC are described as an effort of the CSRC to “bolster itself!”

Next week’s China Life IPO is making headlines, being called the year’s biggest IPO. Bloomberg’s story is here.

Dow Jones’ James Areddy reports here on the first IPO of a foreign-invested company on China’s stock markets.

It is a small company. I expect that while we will see a few more such “experiments,” it will be a long time before IPOs of foreign-invested enterprises (FIEs) are common in the PRC. But this is noteworthy as a start. It represent a crack in the wall.

New rules have been released concerning the Stock Issuance Examination Committee. The Chinese text of the rules is available here. A PRC press story announcing promulgation of detailed operational rules for the SIEC is here.

I’ve discussed the SIEC and these expected rule changes a few times here already. The changes appear to be as expected–reducing the size of the SIEC and making its membership and deliberations matters of public record.

The proper Chinese name of this committee is the 股票发行审核委员会 or Gupiao faxing shenhe weiyuanhui. This can be literally translated as the Stock Issuance Examination & Verification Committee. I usually shorten the translation of shenhe to just “examination” and refer to the committee as the SIEC. The Wall Street Journal today called it the “Public Offering Assessment Committee.” Caijing magazine recently gave it the delightful name “the Public Offering Review Committee (PORC).” In a sense, it is a pork committee, since it decides which state-owned enterprises can obtain a windfall from issuing securities.

Whatever it is called, my reaction to these new rules is that this is not an “overhaul” of anything. Today’s WSJ headline “China Considers an Overhaul Of Stagnant Equities Market” ran over a story on the SIEC rule changes and other matters, some of which are more significant than the SIEC changes. The SIEC changes simply do not overhaul how China controls the issuance of securities. This is merely tweaking one body involved in that process. It doesn’t change the SIEC’s mandate to review IPO applications. It is of marginal importance how many people are on this committee and whether its membership list is a public record or not. Although more sunlight should make the committee more accountable, the real issue is why should China have a committee selecting who can issue shares in the first place? An approval committee suggests such a committee will do a better job than investors. I don’t think experience has proven that. Moreover, the SIEC votes on applications brought to it by the CSRC, not by investment banks or hopeful IPO applicants themselves. Thus the SIEC is part of a system that keeps the issuance process under government control.

I recall some earlier PRC rah-rah that the fact that shenhe or examine and verify is some kind of liberalization. Shenhe is assertedly less onerous than pizhun or “approve.” I guess the idea is that to shenhe means to make sure an applicant meets the objective requirements for issuing securities in China’s 1993 Company Law and 1998 Securities Law. But in practice shenhe does not seem to have been less vexatious than pizhun. Certainly not every company meeting the criteria of the Company Law can conduct an IPO in China, and the IPOs of many companies that do not meet its requirements would probably be welcome by investors if the decision were up to them, not the PRC government.

The SIEC should probably be eliminated, not tweaked.

Caijing magazine’s web site includes a section in English with very well-done translations of some Caijing articles.

Here is the current draft of a brief article I am writing on China’s new Securities Investment Funds Law (证券投资基金法). I’d like to develop this into a law review article eventually. But initially it is just for a Hong Kong-based magazine primarily aimed at practicing lawyers. Comments on this draft are welcome (via email; Blogger does not have a comment system, and I’ve obviously never gotten around to installing a third party one on this site). I’m posting it in HTML, which does not alas handle superscript for footnote references well. I wanted to post a PDF file but realized I don’t have the distiller, and Adobe’s site is sluggish right now.

The magazine will publish a translation of the new law along with my article, but I have not yet seen their translation and do not know the whereabouts of any other English translation. The Chinese text of the new law here and many Chinese press stories about it are here.

After finishing a draft of a short article on China’s new Securities Investments Funds Law, I did a Google search to see if anything else on the topic happens to be out there already in English. I discovered that “Biz China,” a show on China Radio International, has a segment about the new law that can be listened to online. Although it is from the PRC’s “official press,” I found many of the points I made in the article are included in the show, which is accessible here.

Indeed, the China Daily story on the new law was not a one-sided rah rah. Its lead acknowledged the law is not as comprehensive as many had hoped. (This may have only been in the Hong Kong edition, though).

This “fair and balanced” reporting is not limited to PRC sources published for English speakers. For example, this story from 2002 contained many criticisms of the draft law.

So, both technically and substantively, media is changing in China. Is there still a long way to go? God, yes. Has real progress already been made? Sure.

A weakness of these examples is that they do not connect the new law with past fund scandals or the current depressed conditions of the markets. But they do at least acknowledge a diversity of opinions about the value of the new law and at least mention several issues the law failed to address.

While I don’t expect to see a frank discussion of Jiang Zemin’s “three representations” in PRC mass media anytime soon, examples of critical reporting in the financial press are not uncommon. So long as the topics don’t touch particularly sensitive political nerves (e.g., Zhou Zhengyi), PRC media can sometimes see substantially unfettered.

China’s foreign exchange regulator, SAFE, has announced that the investment quota approved for CSFB as a QFII will be USD 50 million, per this announcement on the SAFE website. This brings the QFII total up to USD 1.7 billion. As usual, ChinaOnline is on the spot with this announcement in English and a running tally of QFIIs approved by the CSRC and their investment qutoas approved by SAFE.

Of the approximately 1,400 PRC listed companies, 200+ of them are part of the 189 firms being handled by the State-owned Assets Supervision and Administration Commission (SASAC), according to this article from the 21st Century Economic Herald.

“Huh?” was my first reaction. But I presume some of the 189 SASAC firms are group companies with subsidiaries that are listed, with the group still controlling a majority of the shares. Hence it is possible for more than 200 PRC listcos to belong to the list of 189 firms under SASAC direction.

Of course, when regulatory agencies overlap coordination problems and even outright conflicts can arise, and apparently the CSRC and SASAC have experienced some friction over how to handle state-owned shares in listed firms.

According to the article, the CSRC would like to conduct experiments in finding ways for the unlisted, illiquid shares of some companies to become liquid through a process that would allow listed companies to devise their own solution(s), rather than having the CSRC impose a one-size-fits-all reduction plan for state-owned share as it previously attempted. Holders of currently illiquid shares would work with an intermediary (such as an investment bank) and propose to all shareholders a way to make their shares liquid. A supermajority of all shares would have to be voted in favor of the plan, and, importantly, at least 50% of the listed shares would have to be voted in favor of the proposal. Such a class vote would protect the minority shareholders–the holders of liquid (listed) shares–from being abused by the majority (holders of illiquid, state-owned shares).

However, as the article notes, transfers of state-owned shares of listed companies now require SASAC approval.

The article quotes a banker noting that local governments are more eager than the SASAC to divest holdings in state-owned enterprises, and that if they had approval authority for such transfers divesting would occur more rapidly.

The article notes the CSRC could go around the SASAC by conducting experiments with listed firms whose illiquid shares are not state-owned shares or seek support from the State Council.

This China Daily article is less detailed but hints at a CSRC-SASAC disagreement. It refers this other recent article in Chinese on the subject, from the Economic Observer.

While several foreign-invested fund management companies have been set up, fewer firms seem interested in setting up foreign-invested investment banks (underwriters) in China. But BNP Paribas Peregrine is one exception, according to this story from the English-language China Daily. BNP’s partner in a foreign-invested securities company is Changjiang Securities. BNP’s press release is available here. Both FI-FMCs and FI-SCs are allowed under the terms of China’s WTO accession.

The list of legal ways foreign capital can participate in PRC securities markets now includes the following alphabet soup:

B shares
QFIIs
FI-FMCs
FI-SCs

Each of these “reforms” provides some limited workaround to China’s currency controls and limits on foreign investment, with emphasis on “limited.”

FIE listings in China are another possible avenue, though no material progress exists on that front.

Of course, one could also invest in the PRC securities sector by buying shares of companies with PRC-focused businesses that are listed outside of China (Red Chips if the entity is still registered in China but listed in Hong Kong; H, N, L o r S shares if it is incorporated within China and just listed abroad in Hong Kong, New York, London or Singapore).

BNP will face a challenge with its new venture. PRC securities companies have struggled recently, with less deal flow from IPOs and secondary offerings. They have also had less income from proprietary trading and brokerage commissions, but FI-SCs are mostly shut off from those revenue streams anyway.

Recently I was prompted to think about some very basic questions concerning the CSRC. For example, what is the legal basis for its power?

The 1999 Securities Law (an English translation is here) explicitly enables a generic “securities regulatory authority of the State Council” to regulate China’s national securities markets:

Article 7　　The securities regulatory authority under the State Council shall, in accordance with law, implement centralized and unified regulation of the securities market nationwide.
The securities regulatory authority under the State Council may, where necessary, establish offices which shall perform the regulatory functions as authorized.

第七条 国务院证券监督管理机构依法对全国证券市场实行集中统一监督管理。

国务院证券监督管理机构根据需要可以设立派出机构,按照授权履行监督管理职责。

There are aditional references to the CSRC (under generic name) throughout the law, and Chater 10 compiles and list of what the CSRC is generally empowered to do:

Chapter X　Securities Regulatory Authority

　　Article 166 　　The securities regulatory authority under the State Council shall regulate the securities market according to law, maintain order of the securities market and ensure the lawful operation of the same.

　　Article 167　　The securities regulatory authority under the State Council shall perform the following functions in regulating the securities market:
　　(1) to formulate, according to law, rules and regulations concerning regulation of the securities market and to lawfully exercise its power of examination and approval or verification;
　　(2) to regulate, according to law, the offering, trading, registration, custody and clearing of securities;
　　(3) to regulate, according to law, the securities business activities of the issuers of securities, listed companies, stock exchanges, securities companies, securities registration and clearing institutions, securities investment fund management institutions, securities investment consulting organizations, credit - rating institutions, and those law firms, public accounting firms and asset appraisal organizations that are engaged in securities business;
　　(4) to formulate, according to law, the qualification criteria and code of conduct for persons engaged in securities business, and to see that these are observed;
　　(5) to supervise and inspect, according to law, the disclosure of information in connection with securities offering and trading;
　　(6) to guide and supervise the activities of the Securities Industry Association according to law;
　　(7) according to law, to investigate and deal with violations of laws and administrative regulations concerning the regulation of the securities market; and
　　(8) other functions prescribed in laws and administrative regulations.

　　Article 168　　When performing its functions according to law, the securities regulatory authority under the State Council shall have the power to adopt the following measures:
　　(1) to enter the site where an illegal act is committed to investigate and collect evidence;
　　(2) to question the party concerned and any unit or individual connected with the event under investigation, and to require them to give explanations concerning matters connected with the event under investigation;
　　(3) to inspect and make copies of the securities trading records, records of registration of change in ownership, financial and accounting information and other relevant documents and materials of the party concerned and any unit or individual connected with the event under investigation, and to seal up documents or materials likely to be removed or concealed; and
　　(4) to examine the fund accounts and securities accounts of the party concerned and any unit or individual connected with the event under investigation, and if there is evidence to substantiate signs that illegally obtained funds or securities have been removed or concealed, to apply to a judicial organ to freeze the same.

　　Article 169 　　When members of the securities regulatory authority under the State Council conduct supervision, inspection or investigation during the lawful performance of their duties, they shall produce the relevant papers and be obligated to maintain the confidentiality of the commercial secrets of units or individuals which they become aware of .

　　Article 170　　Members of the securities regulatory authority under the State Council shall perform their duties faithfully, do their work according to law and be impartial and honest. They may not take advantage of their positions to seek illegitimate gains.

　　Article 171 　　When the securities regulatory authority under the State Council performs its functions according to law, the units and individuals under inspection or investigation shall cooperate and provide truthful relevant documents and materials.Such units and individuals may not refuse to cooperate, obstruct inspection or investigation or conceal relevant documents or materials.

　　Article 172　　The rules and regulations and the regulatory work systems formulated according to law by the securities regulatory authority under the State Council shall be made public.

　　Decisions made by the securities regulatory authority under the State Council, on the basis of the results of its investigations, to impose penalties on illegal acts involving securities shall be made public.

　　Article 173 　　If, during the performance of its functions according to law, the securities regulatory authority under the State Council suspects that an illegal act involving securities discovered by it may constitute a criminal offense, it shall hand the case over to a judicial organ for it to handle.

　　Article 174　　No members of the securities regulatory authority under the State Council may concurrently hold a position in an organization that is under the regulation of the authority.

第十章 证券监督管理机构

第一百六十六条 国务院证券监督管理机构依法对证券市场衽监督管理,维护证券市场秩序,保障其合法运行。
第一百六十七条 国务院证券监督管理机构在对证券市场实施监督管理中履行下列职责:
(一)依法制定有关证券市场监督管理的规章、规则,并依法行使审批或者核准权;
(二)依法对证券的发行、交易、登记、托管、结算,进行监督管理;
(三)依法对证券发行人、上市公司、证券交易所、证券公司、证券登记结算机构、证券投资基金管理机构、证券投资咨询机构、资信评估机构以及从事证券业务的律师事务所、会计师事务所、资产评估机构的证券业务活动,进行监督管理;
(四)依法制定从事证券业务人员的资格标准和行为准则,并监督实施;
(五)依法监督检查证券发行和交易的信息公开情况;
(六)依法对证券业协会的活动进行指导和监督;
(七)依法对违反证券市场监督管理法律、行政法规的行为进行查处;
(八)法律、行政法规规定的其他职责。
第一百六十八条 国务院证券监督管理机构依法履行职责,有权采取下列措施:
(一)进入违法行为发生场所调查取证;
(二)询问当事人和与被调查事件有关的单位和个人,要求其对与被调查事件有关事项作出说明;
(三)查阅、复制当事人和与被调查事件有关的单位和个人的证券交易记录、登记过户记录、财务会计资料及其他相关文件和资料;对可能被转移或者隐慝的文件和资料,可以予以封存;
(四)查询当事人和与被调查事件有关的单位和个人的资金帐户、证券帐户,对有证据证明有转移或者隐慝违法资金、证券迹象的,可以申请司法机关予以冻结。
第一百六十九条 国务院证券监督管理机构工作人员依法履行职责,进行监督检查或者调查时,应当出示有关证件,并对知悉的有关单位和个人的商业秘密负有保密的义务。
第一百七十条 国务院证券监督管理机构工作人员必须忠于职守,依法办事,公正廉洁,不得利用自己的职务便利牟取不正当的利益。
第一百七十一条 国务院证券监督管理机构依法履行职责,被检查、调查的单位和个人应当配合,如实提供有关文件和资料,不得拒绝、阻碍和隐瞒。
第一百七十二条 国务院证券监督管理机构依法制定的规章、规则和监督管理工作制度应当公开。
国务院证券监督管理机构依据调查结果,对证券违法行为作出的处罚决定,应当公开。
第一百七十三条 国务院证券监督管理机构依法履行职责,发现证券违法行为涉嫌犯罪的,应当将案件移送司法机关处理。
第一百七十四条 国务院证券监督管理机构的工作人员不得在被监管的机构中兼任职务

More recently, the Securities Investment Funds Law (passed at the end of October; effective June 1, 2004) provides a basis for the CSRC to regulate China’s funds industry:

第十一条 国务院证券监督管理机构依法对证券投资基金活动实施监督管理。

Other provisions of the funds law confer approval rights for various specific matters, and the CBRC (again under a generic name) is enabled to approve fund custodians in conjunction with the CSRC.

However, both these “enabling acts” are post-hoc; they confrim rather than create the CSRC’s power. The CSRC has been regulating the funds indsutry for some time. Likewise, the CSRC existed before the 1999 Securities Law, even though it may have still had some border disputes with the PBOC, Ministry of Finance, local governments and the exchanges that the Securities Law helped settle. (Both Stephen Green and Carl Walter discuss the history of the CSRC and regulatory truf battles surrounding its creation).

While I can point to “enabling legislation” for the CSRC, I still need to better understand how its operations are goverened (constraints on rule making, powers of appointment), both legally and in practice.

Dan Slater at FinanceAsia.com has written about the proposed reforms to the SIEC that I’ve discussed here a few times.

To oversimplify, I think this is the ritual for PRC economic policy formulation: the Party meets. It elects leaders and sets policy. Then the National People’s Congress is convened to appoint people (that have been selected in advance by the Party) to “government” positions (the PRC “government” is the Party-state, but here I mean the ostensible national government, the state, as opposed to the Party). Then there are conferences where Party and “government” leaders affirm and elaborate policy directions for specific sectors. Hence last week the Central Economic Work Conference met and “laid down guidelines for economic work in 2004.”

Shortly after or in conjunction with the central economic conference, there is I think another conference on the financial system and securities markets.

After that, I assume Shang Fulin convenes the Party committee in the CSRC to “earnestly study and grasp” the policy directions set through this process.

Of course, I am sure some policy formulation flows the other way–say from expert staff in the agencies or NPC back to the Party. But if you start at the top–say reading the Third Plenum of the Central Committee of the Communist Party’s decision on economic system reform, then I think you can clearly see the downhill flow; the progressively lower level meetings genuflect to the top-level rhetoric.

Still, sometimes officials make speeches at these conferences that reveal upcoming (or at least contemplated) policy directions, and so one must keep an eye open, which is hard to do when vapid sloganeering is the predominant mode of discourse.

QFIIs can be “coaches” that will help PRC securities markets mature; they are not “wolves” that will eat PRC “lambs,” according to Gao Huiqing, an economist with the PRC State Information Center. Gao made the speech at a financial and securities markets conference in Beijing, according to this PRC news story.

Gao offered many reassurances that QFIIs cannot cause harm. He noted there are many constraints on who may become a QFII and how much capital they may bring into or take out of China’s securities markets. He noted that QFII investment will contribute a modest net increase to the capital in China’s stock markets. Nonetheless he claimed the QFII system will have a big upside, promoting “survival of the fittest” and greater reliance on market mechanisms and legality in China’s securities markets. He said the biggest difference between PRC institutional investors and QFIIs is not in capitalization but in how QFIIs choose investments. He said the indirect influence of foreign investment concepts and practices will be greater than the direct impact of QFIIs and that QFIIs will contribute to the development of “equity culture” (guquan wenhua) in China.

I was in China for most of the first eight months of this year and was surprised by how much intense attention was given to the QFII system. The first trades of the first QFII to enter the market were widely noted, and many analysts on the nightly financial news shows discussed the attractiveness of various stocks to QFIIs. Thus, Gao seems right that the “demonstration effect” of QFIIs will be substantial. I also agree the system will not allow QFIIs to create a “giant sucking sound” of capital flowing out of the markets, since QFIIs are limited in how quickly they can exit.

Still, I find curious this oft-repeated PRC belief that QFIIs will help rationalize trading behavior. I presume PRC investors are rational. They trade the way they do because that’s what is rational to do in the environment. While foreign investors know how it is done elsewhere, why will they necessarily apply those practices to China? Isn’t it more likely they will adopt a “when in Rome…” attiutde? As Gao explicitly observed, the possibility of currency appreciation–something related to government policy, not particular market or company performance per se–has been a big driver of QFII interest. In other words, it seems QFIIs are replicating the prevailing “policy market” behavior, not helping establish a “market market” or build some other “culture.”

Gao says QFIIs will be more rational than PRC institutional investors. But the policy of developing PRC institutional investors has itself long been touted as a way to rationalize investment and trading behavior! So it seems it matters not whether money is institutionally managed or foreign in origin. What matters is what the investment environment is like–what kinds of behaviors are possible and will be economically rewarded. Since the quality of disclosure in China is reportedly low and there are few mechanisms to enforce the disclosure requirements of PRC securities laws, I don’t see why QFIIs will rely on such disclosure to make investment decisions to any greater extent than PRC investors do. Thus I am more skeptical than Gao about the positive influence of QFII “coaches.”

Gao noted the time between introduction of a QFII system in Taiwan and “complete opening” of their security markets was six years.