Walter Hutchens’ Blog

FinanceAsia.com reports here on the IPO in Hong Kong of China Oriental, a PRC steel maker. It notes Maanshan, New Angang and Chongqing Iron & Steel are all PRC steel companies listed in Hong Kong.

Edward Steinfeld’s Forging Reform in China: The Fate of State-Owned Industry, argues that a series of reforms (giving firms greater control over prices, control over profits, greater managerial freedom) all failed to fundamentally reform the performance of SOEs (specifically, the big SOE steel makers he studied) because no hard budget constraints were imposed.

I wonder if that argument could apply to these overseas listed steel companies?

The article above mentions that China Oriental has gone through a management buy-out and become a joint venture (which sound like contradictory notions). In any event, if its majority shareholder is no longer the state, then it may now be subject to hard budget constraints as well as meaningful incentives to create value.

There have been some noteworthy PRC sec reg developments while I’ve been otherwise occupied. For one, the State Council issued a policy pronouncement on developing the mainland’s capital markets. These “Nine Articles” (available here in Chinese) have gotten a good bit of attention in the foreign press.

But I don’t think they say much that is novel. I would describe them as an administrative (or executive branch) elaboration of the ideas the Party laid out in 16th Party Congress documents and the economic policy decisions of the 16th Central Committee.

The Nine Articles do not enact any specific changes in any operational sense. They are simply general policy pronouncements. Moreover, many of the policy goals the Nine Articles articulate are in tension with each other. Indeed, the “guiding philosophy” for capital market development announced in the Nine Articles is to seek both stability and continued reform. This is a mao-dun because many contemplated reforms (a second board, FIE listings, SME/private issuer listings, liberalization of the bond markets, sell-off of state-owned shares, permitting capital outflows through a QDII system) could de-stabilize the status quo. The Nine Articles do not explain what sequence of actions will be taken or how the conflicts among goals can be reconciled.

Thus the Nine Articles are like a political stump speech in the US–lots of generalities are offered to get applause, but few specifics are offered on how all the grand goals will be realized and at what costs.

Links to articles in Chinese on the Nine Articles are available here through a People’s Daily website. The full name of the Nine Articles is something like Various Opinions of the State Council Concerning Promotion of the Reform and Opening and Stable Development of Capital Markets (国务院关于推进资本市场改革开放和稳定发展的若干意见 or Guo Wu Yuan guan yu tuijin ziben shichang gaige kaifang he wending fazhan de ruogan yijian).

I am teaching three courses this semester, just moved and am working on some projects related only to US securities law, so I’ve neglected this blog lately. Next month I should have more time for it.

Today this Dow Jones story reports that Lehman Brothers and Xinhua Financial Network are offering a new index to track PRC bonds.

That Xinhua, the official news agency of “New China” as the PRC dubbed itself after the revolution, is setting up a joint ventures to provide data about bond prices is yet another instance of rich irony in the PRC reform era. It does signal something about the depth of change over the last 20-plus years.

But it would be wrong to conclude that PRC securities markets are about to operate like Nasdaq or already do. “Bonds” and “bond index” sound like overt capitialism, but PRC securities markets are still not open to global capital flows. Indeed, they are still not open to most domestic issuers. China’s capital markets have not yet been liberated in the new “New China.”

Today’s Dow Jones story observes that, “China’s bond market, previously off limits to offshore investors due to strict cross-border currency curbs, is slowly being pried open through a year-old qualified-foreign-institutional-investor, or QFII, plan.”

Actually, QFIIs are currently prohibited from buying corporate bonds or treasury repurchase contracts. As I wrote about earlier on this blog, the headline- grabbing QFII rules permit it, but the “fine print” rules of both the Shenzhen and Shanghai exchanges prohibit it.

While appropriately identifying some important limitation of the QFII system (SAFE approval on investment quotas, limits on capital repatriation, limits on who can be a QFII), this article overlooks this flat prohibition on corporate bond purchases which, undoubtedly, is a reason why Lehman Bros. and XFN expect interest from QFIIs concerning their new bond index data product to materialize in the future. QFIIs may indeed want data on PRC bonds–once they have freedom to buy some.

China has great cuisine, which most everyone appreciates. China also has rich humor. That, unfortunately, is often less accessible because you frequently have to understand the language to “get it.” Jokes based on homonyms are a staple of Chinese humor, for example.

This China Daily story (in English) is about two related puns. One is “hai gui” which means “returned from overseas” (海归) but also “sea turtle (海龟).

The “hai gui pai” or faction of returnees at the CSRC has wielded considerable influence and sometimes been criticized for promoting policies that some people perceived (often I think wrongly) to be ill-suited to China and in fact harmful to its stock markets. The most prominent members of the “hai gui pai” to have ties to the CSRC are Gao Xiqing and Shi Meilun. Gao is a former CSRC vice minister, and Shi currently holds that status. Each of them has a U.S. law degree. Many lower-level staff members of the CSRC might also be labeled “sea turtles.”

A newer pun on the “returnees” concerns returnees who are unemployed. They are dubbed not “sea turtles” but “sea weeds,” a pun on “hai dai” (海待/海带), which is a shortened form of “hai gui dai ye” (returned from overseas and awaiting employment).