Walter Hutchens’ Blog

FinanceAsia.com has a story here about China International Trust and Investment Corp. (CITIC).

China currently mandates separation between banking, insurance and securities companies, but there is discussion of relaxing this requirements in pending revisions to the 1998 Securities Law so that there may be more firms like CITIC (originally an “international trust and investment company,” which is one of the “non-bank financial institutions” now regulated by the China Banking Regulatory Commission).

Another prominent PRC investment banking operation is China International Capital Corp. (CICC). It is only a securities company, with no direct insurance or commercial banking operations like CITIC.

CICC was established as a joint venture between China Construction Bank and Morgan Stanley under special approvals long before China’s regulations on foreign investment in securities companies were promulgated in response to China’s WTO accession terms. Given its success, CCB and Morgan Stanley must be very glad they established CICC.

Levin Zhu, Carl Walter and his co-author Frazier Howie and a number of other noteworthy people have been associated with CICC. It’s offices are in the China World Trade Center in Beijing in the same tower where I used to work as a lawyer.

Is China a market economy? Consider this: bank lending in China has come to a halt because officials are concerned about overheating in the economy. A PRC financial press report is here. The South China Morning Post has a story on the halt here. A PBOC spokesperson denied that the banks did so because of any official notice. Yeah, right. A bunch of “independent” banks just all coincidentally happened to suspend lending for the same week. The PRC press story says the suspension was ordered by the China Banking Regulatory Commission. So the PBOC spokesperson was correct that the PBOC didn’t order the halt, but wrong about the amazing coincidence explanation.

Yale Law School’s China Law Center has a Workshop on Chinese Legal Reform which has invited me to give a talk next week. Here is an outline of my presentation with links to some Chinese laws and regulations I plan to discuss. I am compiling the specfic provisions I plan to focus on here.

Here is an extensive website covering the 2004 Chinese Securities Market Legal Forum. People’s University and the Yinhe Securities Company organized the forum.

The Forum was titled something like “Development & Regularization: Remaking the Securities Market’s Legal System & Interpreting the State Council’s Nine Articles.”

Some of the major speeches at the Forum have generated press coverage in the PRC. Here is a report on the speech of Jiang Bixu, a vice president of the Supreme People’s Court. He said that the current PRC Securities Law fails to adequately stress civil liability which is an important reason China’s securities markets lack regularization (bu guifan). I certainly agree with that.

However, the report says Jiang also made some comment about how the interests of individual shareholders must be considered in light of the interest of the majority of shareholders and that “in developed market economy nations such as the United states there are many limitations on individual shareholders bringing litigation because it affects the interests of other shareholders.”

Indeed there are many limits on an individual (or even group) initiating shareholder derivative litigation, but if Jiang instead meant that the interests of the majority of shareholders must be balanced against the interests of individual shareholders who bring private securities litigation, that would seem to run counter to his point that civil liability should be relied on as a restraining mechanism in markets.

NPC Standing Committee member Cheng Siwei also spoke at the forum. His remarks are covered here.

Additional discussion of amendment of the PRC Securities Law is here.

According to this story from China’s 21st Centry Economic Herald, the pressure to revalue the RMB has led to a halt in approval of new QFII applications.

Much of what I try to follow is “law and regulation.” But a number of recent “policy” documents have been issued by the PRC Communist Party and its state apparatus that concern PRC securities markets.

I thought it would be handy to put links to these in one place. In reverse chronological order, they are:

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 (State Council, Nine Articles)

中共中央关于完善社会主义市场经济体制若干问题的决定( CCP Central Committee, Decision on Various Issues Concerning Perfecting the Socialst Market Economic System)

江泽民在中国共产党第十六次全国代表大会上的报告 (Jiang Zemin’s Report to the 16th Party Congress)

New rules on the purchase of short-term “repo” agreements have been jointly promulgated by the Ministry of Finance, People’s Bank of China and China Securities Regulatory Commission.

The rules in Chinese are here, though I could not find the rules on the web site of any of the promulgating agencies.

They are titled 关于开展国债买断式回购交易业务的通知 (Guanyu kazhan guozhai maiduanshi huigou jiaoyi yewu de tongzhi or something like Notice Concerning Development of the Business of Buying Short-term Treasury Bond Repurchases).

Sample stories from the PRC financial press on the development are here and here.

In English Bei Hu writes in the South China Morning Post about the development here.

A good story here from the SCMP about Ping An Insurance, a global IPO in the pipeline from the mainland.

The Financial Times reports here that the Zhou Xiaochuan, former CSRC chairman and now head of the PBOC, has said on Chinese television that making the RMB more market driven is a “top priority.”

Interesting. I wonder if such an upgrade in rhetoric signals anything meaningful about a timetable, though. This could be pure politics. Cheney pushes; they nod. But real change? Eventually, yes. Soon? I doubt it. But enough indications of movement to make this less an issue for the Nov. U.S. elections? Perhaps.

Today I stumbled across this site from an organization called the “National Debt Association of China.”

While it may be a “national” association, the Chinese name (中国国债协会; Zhongguo guozhai xiehui) makes it clear “national” modifies “debt;” this is an association concerned with treasury bill trading in China.

Although I am just now becoming aware of the NDAC, their introductory web page says they have been around since 1991. They are a non-profit organization approved by the Ministry of Civil Affairs.

There is also an association of securities companies (investment banks and brokerages) in China. There website is here.

The Stock Issuance Examination Committee (SIEC) is a group that ostensibly approves applications to issue shares in China. PRC media are reporting that a member of the SIEC has recused himself from deliberations regarding one company whose IPO application is on the agenda at an SIEC meeting to be held April 19.

This is reportedly the first time this has happened since the rules governing the SIEC were revised.

Under the new rules, SIEC agendas and participating members are disclosed in advance. The CSRC has been diligent in making such public announcements. Indeed, SIEC notices are one of the few things the CSRC bothers to update on its website.

Previous regulations required that the identity of members of the SIEC be kept confidential. Current regulations require recusal if an SIEC member has a conflict of interest with an applicant firm.

Zhou Zhengqing answers nine questions from “average investors” in today’s People’s Daily.

Zhou is a former CSRC chairman. Currently he is a vice chairman of the Finance & Economics Committee of the National People’s Congress.

Each of the nine questions Zhou responds to corresponds to some part of the Nine Articles. The Nine Articles are a general policy document on securities market development recently adopted by the State Council, the top body in the PRC’s executive branch.

Shang Fulin is an almost recalcitrant CSRC chairman. His predecessor Zhou is much more colorful, though I am less confident than Zhou that gradual reforms will solve the fundamental problems of China’s capital markets. Zhou clearly favors reforms that boost or at least do not harm current market valuations.

Like the Nine Articles themselves, Zhou’s comments in today’s People’s Daily emphasize general goals rather than specifics of implementation.

Zhou thinks:

1. The Nine Articles are a good thing for PRC securities markets. He notes the last time the State Council opined on securities market policy was in December 1992. He harps on the notion that PRC stock market problems must be solved through or at least in tandem with market development. He disagrees with those who think it might be best or necessary to tear down the current market and start over.

2. All markets are policy dependent and so if the Chinese market’s upswing after promulgation of the Nine Articles means China has a “policy market” he sees no problem.

3. State ownership should be reduced, but because of the complexity of this problem there is no current timetable;

4. Investor returns are part of investor protection, or at least without returns they have no interests to protect. In other words, policies should support rather than depress markets.

5. Stamp taxes on stock trades can be reduced to an “appropriate level;”

6. Info disclosure and de-listing of “trash” companies are important and should be improved. He mentions however only government enforcement mechanisms for improving disclosure quality.

7. In encouraging more sanctioned funds to enter China’s securities markets, insurance funds should be allowed to go first, by increasing the 15% cap currently in place on the amount of their assets that can be put into securities investment funds, allowing them to set up asset management companies to invest in securities “directly,” or allowing insurance capital to legally enter the markets through other means.

8. A PRC growth enterprises market (GEM) can be developed in stages–first by setting up an SME Boards (small and medium enterprises board in Shenzhen, then converting that into a GEM once enough companies are on the SME Board and “all conditions are ripe.”

9. Government agencies must coordinate policies in light of their potential impact on the stock markets. Regulations on money supply, capital markets and insurance are interrelated.

The Securities Daily has an article about the People’s Daily article here.

The CSRC has issued an “urgent notice” (an “UG”) decrying certain practices related to securities and futures trading, including trafficking in the shares of unlisted companies and trading through unapproved networks.

The China Economic Times has a short story on the UG here. The Securities Times has a story on the UG here.

The CSRC has apparently fired its web page staff–the agency’s pages are extremely out of date, and today’s notice does not seem to be posted at all.

The Institute of International Finance, an association of global financial institutions, is meeting in Shanghai and published today two reports: Capital Flows to Emerging Market Economies which includes a good bit of discussion of China and another report (not available on their website) urging further reforms in China, including according to the IIF’s press release the following sound recommendations:

* Reducing state ownership
* Enhancing authority of leading stock exchanges, in particular regarding enforcement of shareholder protections
* Moving over time from “comply or explain” to a strictly enforced Code
* Strengthening the pool and quality of independent directors
* Improving information disclosure
* Lifting the quality of domestic auditing firms
* Developing an institutional investor base
* Codifying civil liabilities for insider trading and other fraudulent
activities

I agree with these recommendations. I presume the IIF report reflects that a great number of people in China already do, too. It’s not like these ideas haven’t occurred to PRC policymakers yet. In fact, I can site at least one specific policy initiative (and often several) targeted at each of these ideas that is already being implemented or at least broadly discussed in China. But getting from A to B is another matter. There are many difficult political and prudential constraints. Lack of knowledge about what they theoretically should do is not usually one of them. Still, the IIF’s report may help build political momentum, which would I imagine be welcome by some reformers inside the system.

Today the South China Morning Post has a story on the IIF here. The Financial Times covers it here.

The South China Morning Post reports here that Hong Kong is expected to adopt a law this summer allowing minority shareholders in Hong Kong to sue for “unfair prejudice” and recover legal fees if successful. As the story notes, Hong Kong’s “loser pays” system creates substantial barriers to legal activism by minority shareholders.

AFP reports that Beijing may delay China Construction Bank’s listing.

The mainland’s Xibu Film Corporation is seeking an overseas IPO, according to this story by Sidney Luk in the South China Morning Post.

According to Luk’s report the studio has received approval from the State Administration of Radio, Film and Television (SARFT) to issue A shares in Shanghai “but is still awaiting formal approval for its overseas listing.”

The article would be better if it made clear that SARFT approval will not be enough for either a domestic or overseas IPO by Xibu. CSRC approval is also required for any PRC company’s IPO. Until the CSRC approves an IPO, this story, which quoted no one outside of Xibu, is only about Xibu’s intentions and dreams.

The article has some good background on Xibu. Luk notes Xibu would be the first mainland movie studio to go public. The studio has ties to globally famous PRC directors like Zhang Yimou and Chen Kaige and has produced some successful PRC movies.

The article also indicates Xibu hopes to go public before more foreign investment is allowed in their sector in compliance with China’s WTO commitments. In this sense, an IPO for Xibu would be like the much larger IPOs of PRC insurance and banking firms as part of an apparent strategy to develop “national champions” that can better withstand foreign competition.

I suppose one of the risk factors in the prospectus will have to be “could run afoul PRC censors and be shut down.” The New York Times reports today on the troubles that have befallen people associated with Southern Weekend and Southern Metropolitan Daily, papers that had been among the most progressive in China. An earlier Washington Post story on the oppression is here. The US Embassy has some material about this oppression here.

The U.S. Congressional Executive Commission on China published this paper many months ago suggesting, inter alia, that China abolish article 306 of the PRC Criminal Law, calling it “an unnecessary provision on evidence fabrication that is often used to harass defense attorneys.”

Today the PRC’s state-supported English language newspaper the China Daily ran this article headlined “Scrapping Article 306 would make law fairer.”

Good for China. Good for the Commission, too.

Bei Hu, a reporter for the South China Morning Post who often breaks stories in the English press about PRC financial market developments, writes here that the CSRC “is organising a fund to compensate investors fleeced by unscrupulous brokerages.”

If this actually happens, I would expect investors fleeced not by miscreant brokers but by the listed companies themselves to demand similar relief.

Private securities litigation has been stalled for over a year–no court has yet granted investors relief. With that avenue closed, I cannot imagine investors will gladly accept relief going to those who lost money because a broker stole it while those who suffer because of other kinds of stock market fraud go uncompensated.

Mark O’Neill writes here for the South China Morning Post that the CSRC is encouraging debate about the fate of the anemic B share market, the section of PRC securities markets devoted to shares denominated in foreign currency. Only about 120 companies have issued B shares in contrast to the 1,400 firms that have issued A shares. Daily trading volumes are quite thin in the B share markets, too. There are two other reasons B shared are now superfluous. First, PRC citizens can now buy them with their own legally-earned foreign exchange (diluting the utility of differentiating them from A shares). Second, institutional foreign investors can now themselves buy A shares through the QDII system. So the B share market is now not only pathetic but also superfluous. I’d vote to put it out of its misery.

I wonder if years from now some of the other PRC stock market innovations will have similar fates? The QDII system is now thriving, but the recent discussion about an SME Board in Shenzhen (a 中小企业板 or zhong xiao qiye ban for small and medium enterprises) could I imagine have a similar fate if it is subjected to the same bureaucratic controls as the B share market was.

Moves on the mainland to moderate economic growth have affected stock markets in Hong Kong, according to this story from the South China Morning Post. News that mainland authorities would tighten bank reserve requirements drove down the H-share index which had been at a six year high in January, according to the article.

The PRC National Social Security Fund (NSSF) has said it will increase the portion of its assets invested in PRC stock markets.

Dow Jones reports here that the new domestic stock portfolio will be 15% of the NSSF’s assets, but a day earlier Dow Jones reported here that the figure would be 25%. The Associated Press (AP) also reports 25%. China Daily reports 15%.

In any event, it is a substantial increase from the only 5.1% of the NSSF’s assets in PRC securities market last year.

Also, some unspecified amount of NSSF can now be invested overseas, according to this AP story and this Dow Jones story.

If I was running China’s social security fund, I would love to invest some of the NSSF’s capital globally. Modern portfolio theory counsels that would only be prudent. So this announcement should make people at the NSSF happy.

AP’s description of this approval as “a potentially huge move by the government into world financial markets” struck me as overwrought, though.

“Potential” prudently softens “huge move” in a strict grammatical and logical sense, but the overall effect is not to suggest “this is a wee change that could mean something big later if lots of other things happen.”

I mean, if I leave a small tip in a restaurant, that potentially will be the seed capital for some huge industrial empire–given enough time and compounding interest.

But absent such a strained reading of “potential,” this approval for the NSSF to become something like a qualified domestic institutional investor (QDII) does not seem like a “huge move.”

Since Maoists now seem politically irrelevant in China, such an incremental reform is hardly a conceptual or ideological breakthrough. And the PRC government long ago made “huge moves” into world financial markets in the sense of becoming a principal buyer of U.S. Treasury debt.

A QDII system has been talked about for some time, and on a sufficient scale QDII scheme that allowed capital out of the PRC could indeed put competitive pressure on PRC capital markets. That would indeed be significant. But here there is no indication of the launch of a general QDII system that will threaten domestic PEs .

Also, neither the economic size or actual timetable of the specific NSSF change is revealed, so the real import of the “potentially huge move” is not clear.

In terms of the context for this move outside of China, some brokerage firm will no doubt be happy to execute the NSSF’s trades, and lots of money managers would like to advise the NSSF about where to invest those funds. But the influx of some portion of the NSSF’s USD 16 billion dollars is hardly going to cause tidal waves on Wall Street.

Also, this isn’t even assuredly a change in terms of the PRC’s rules on currency convertibility. The NSSF won’t have to convert RMB to dollars or Euros or pounds to invest abroad. It already has FOREX. The NSSF gets foreign currency from the overseas listings of state owned firms.

Earlier there was a general policy requiring that 10% of all IPOs and new issuances by listed companies be comprised of the offering of state owned shares. The proceeds from such sales were to be given to the NSSF. That policy tanked the markets and was quickly yanked back for domestic issuances. But I understand it still remains in place for overseas offerings. Thus, the NSSF should have gotten several hundred million dollars out of the China Life IPO last year. Letting it invest that money abroad is therefore neutral in terms of currency convertibility.

So the “Q” in the QDII status of the NSSF means that it is a domestic institutional investor qualified by already having buckets of foreign exchange. China’s other securities companies don’t have that kind of FOREX burning holes in their pockets, nor I imagine do most PRC insurance companies (unless the use of proceeds for China Life’s IPO is to invest in foreign securities!). PRC banks would be a different story, if they could ever become QDIIs, but again there is no indication of movement on that.

I’m glad AP reported this news, and I can only imagine the challenges reporters face in trying to discern what is important in the avalanche of stuff coming at them. But suggesting the change is a “huge move” looks like an example of a common pattern: some purported policy is trumpeted as a breakthrough in the PRC press, then the foreign press echoes this (or calls it a “potential” breakthrough). Sometimes a third-party analyst is quoted. Sometimes those people provide helpful context, sometimes not. But often the fine print, real numbers or meaningful context are absent from the PRC announcement and, more surprisingly, from the foreign reporting.

China’s currency regime remains in place, even if the NSSF gets to buy some shares of Microsoft (hey, maybe that would make them take an active interest in IPR enforcement in China…that could be a potentially huge move…).

The Dow Jones story was more temperate and focused on the potential impact in Hong Kong, where it is expected NSSF funds are likely to flow, in part for political reasons.

This China Daily story notes, “Instead of launching new joint ventures (JVs) with Chinese securities houses and holding minority shares, more large global investment banks are exploring the possibility of directly setting up their own businesses in China, insiders said. That may be done by buying an existing Chinese securities company. Those with a poor performance record, like heavily indebted firms, will likely be a target.”

That’s lovely, but these insiders will face the obstacle that Chinese law does not permit such a “direct” set up or any kind of set up (including purchase of an existing PRC securities company, whether heavily indebted or not) which gives foreign investors a majority share in a PRC securities firm.

Indeed, the Chinese partner to a JV in the securities industry must be a PRC securities firm, not an individual PRC citizen.

One often sees this kind of flippant disregard for current regulations in foreign reporting on China, but I was surprised to see it in the China Daily.

The China Daily discusses here efforts to amend the PRC Securities Law. The 10th National People’s Congress has put amendment of the Securities Law on its 5-year legislative agenda, and there have been some reports in the PRC financial press that the draft will be submitted to the NPC Standing Committee for its initial reading this year.

Interestingly, the article describes the need for clearer provision on civil liability in the law.

The US Foreign Corrupt Practices Act doesn’t get a lot of press (or much prosecutorial activity), but after an investigation of its worldwide operations (prompted by problems in Saudi Arabia), Lucent has fired its top PRC executive and some of his team. A Reuters report on it is here.

A small part of the more than USD 3 billion raised by China Life in its recent IPO is offset by the imposition of a USD 8 million fine against the company by the PRC National Audit Office.

The government’s “audit” was apparently in process prior to the IPO but was not disclosed.

Shareholder litigation and reportedly SEC investigtions are underway. The private litigation consequences could be much more serious than the PRC fine.

The China Daily reports on the development here.

This story from the Shanghai Securities Times discusses transfers of unlisted shares (in both listed and unlisted PRC companies).

China scholar and economist Barry Naughton has written this short and interesting essay for the China Leadership Monitor discussing recent financial reform steps in China, including promulgation by the State Council of the 9 Articles on reform and development of China’s stock markets.