Walter Hutchens’ Blog

As Alexis de Tocqueville noted long ago, it seems there is a privately-organized association for almost every area of American life (including now even an association for association executives!).

For that subset of academics like me who teach law in business schools, there is the Academy of Legal Studies in Business (the ALSB). I have gone to the ALSB’s annual meeting for the last two years. Each time I made a brief presentation about my research.

The first ALSB meeting I attended was held in 2002 in Las Vegas. (Is it odd that my first trip to Vegas was made to attend an academic conference . . . to talk about Chinese securities regulation?) I had just moved back to the US from Beijing where’d I’d been a practicing lawyer. That year I discussed the PRC’s rules allowing foreign investment in securities companies (investment banks or brokerages) and rules allowing such investment in fund management companies.

In 2003 the ALSB meeting was in Nashville. That time I talked about private shareholder litigation in China, the subject of my first law review article. Earlier this month I made another presentation on this topic at the annual meeting of the Association of Asian Studies (which is a much grander affair than the ALSB conferences).

The ALSB also has regional meetings–geographically-themed subsets of its membership. Tomorrow the Mid-Atlantic region of the ALSB will be meeting here at the University of Maryland. I will make a brief presentation, again about some aspect of PRC securities regulation. This time I’ll be talking about deregulation in China’s securities markets.

In 2001 the State Council launched an initiative to eliminate some of China’s ubiquitous government approvals. A first batch of eliminated approvals was announced in 2002 and a second batch in 2003. Both times, the CSRC took part in the initiative, eliminating 32 and 27 approval items on the respective occasions.

China’s annual “two meetings”–the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC)–have concluded for this year.

As expected, the NPC approved changes to the PRC Constitution. They added something about the protection of private property, respecting human rights and Jiang Zemin’s “three represents” theory.

The anti-climactic vote approving these amendments came on Sunday, the last day of the annual meeting. Below I have already opined about how the amendment on private property will not become immediately meaningful to shareholders in PRC listed firms.

Chris Buckley’s New York Times story does on the amendments a nice job covering them adequately without misreading their importance. It notes, “China’s constitution is subordinate to the party and is amended often to reflect changes in official ideology.” Alexa Olsen writing for the Associate Press called these amendments “symbolic steps” and correctly named the NPC as a “figurehead legislature.”

As time goes on and the current PRC constitution gets larded with new slogans, it becomes ever more bizarre. The chain of slogans about guiding ideology now includes “Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory and the Three Represents important thought.” These “bodies of thought” are of course substantially at odds with each other. Their concatenation combined with the new language about the protection of private property and human rights only makes reading the Constitution more surreal.

Still, one cannot say these are bad changes. They are just slogans. But they are better slogans than ones that would be antagonistic to notions of human rights and private property. Even the turgid “Three Represents” is emblematic of a move away from class struggle to the CCP being a party of economic development. I wish the PRC Constitution gave PRC citizens “trump rights” against the state that could actually be raised through some institutional mechanism like litigation and judicial review. I also wish they would delete the cant about Maoism. But while awaiting those changes, I can hardly complain about the new additions.

Only the full NPC can approve changes to the Constitution. The full NPC also can enact laws in the technical sense of “falu,” but the NPC Standing Committee can and does enact laws until the full NPC reconvenes (likely in March 2005). Meanwhile, regulations governing stock markets will continue to emanate from the CSRC.

Semiconductor Manufacturing International Corp. (SMIC) plans to issue shares in New York and Hong Kong next week. The Financial Times has a good story on this IPO here.

In the next day or so, the National People’s Congress will vote to amend the PRC Constitution, implementing changes determined earlier by Party leaders. Among the changes to be enacted is an addition of words concerning the status of private property.

Adding slogans to the PRC Constitution about the protection of private property is a significant act of political symbolism, particularly given that an original aim of the Chinese Communist Party was the abolition of private property.

However, in practice what it means to have private property in China continues to be an evolving matter. For example, millions of PRC citizens now have property rights through the ownership of shares in listed companies.

But the protection of these rights is sometimes anemic at best. Last year the Supreme People’s Court issued these rules allowing shareholders to sue listed companies for disclosure fraud. But to date no court in China has handed down a judgement in one of these cases, and the court’s rules themselves contain many obstacles to such lawsuits.

So in that context and others the protection of private property has a long way to go before it becomes more than an aspirational slogan, even as one acknowledges that China has made enormous progress since the Party moved away from its disastrous goal of eliminating private property.

The current edition of Nature notes, “Despite such continuous development, and despite major expenditure on science by the Chinese government, China is not yet fulfilling its scientific potential[.]” The full text is available here.

Of course, the principal reason China under-contributes to global human progress in science and technology is not that China lacks smart people. Nor is it I think even mainly that China lacks sufficient numbers of educated people. Rather, the PRC has not developed institutions that help all the smart, educated PRC citizens contribute to human progress. The PRC lacks a financial and legal system that facilitates getting money to entrepreneurs and that sufficiently protects intellectual and other forms of property so that there are strong incentives for such exertion.

Of course there are other factors. And I expect significant improvement in my lifetime, so that China will come to be a source for many important breakthroughs. But for now the topic of this blog is one of the important factors holding China back.

The Chinese Academy of Social Science has released a report on US trade polices, firing back at criticism of China as a closed market. The China Daily announced the report here. The report is excerpted here in English at the website of the Ministry of Commerce.

AFP reports on the CASS report here.

The CASS website has more expressions of exasperation about US trade policy here.

Bloomberg reports here that China International Capital Corp. has received the “mandate” as bankers say to underwrite the overseas IPO of China Construction Bank. This is not surprising, given that Construction Bank is a shareholder in CICC.

Levin Zhu, the son of former PRC prime minister Zhu Rongji, is also affiliated with CICC. Carl Walter worked there before moving on to JPMorgan. CICC’s offices are in the same building in Beijing where I used to work as a lawyer, and one of my former colleagues become the chief in-house counsel for CICC.

I suspect Morgan Stanley and Construction Bank have both done very, very well with their investments in CICC. It is one of the–perhaps the–leading underwriters for domestic PRC IPOs and has gotten a big share of outward-bound IPOs like this one of Construction Bank.

The article also discusses the way important people like Henery Kissinger, Robert Rubin and Gerhard Schroeder have been deployed–literally–by firms that want to get this business. That suggests a couple of things. One is how important getting this business is believed to be by global investment banks. Second, it prompts one to wonder how guanxi is fitting in to the issuance of securities in China and how that might compare with the role of guanxi in getting IPO mandates in other contexts.

This Bloomberg story discusses the competition among underwrites for the IPO of Shenhua Group, a big PRC coal company.