Walter Hutchens’ Blog

Two more firms listed on the Shenzhen SME board on Tuesday, the board’s third day of operations.

The firms are:

Jiangsu Miracle Logistics System Engineering (天奇股份)
Zhejiang Transfar (传化股份)

This brings the total number of companies listed on the SME board to 10.

Interestingly, many of these 10 firms are from Zhejiang or Jiangsu. These provinces are next to Shanghai, home of the other PRC stock exchange. SMEs are abundant in that region, but the predominance of firms based there among these early SME board IPOs may also signal that they are making it a point to reach out and list firms located near Shanghai, suggesting this new SME board will not be a special vehicle for Shenzhen-based firms (or firms based in Guangdong province) to list, that the distinction between the SME board and the main boards is functional, not geographic. That would fit in with the idea of eventually consolidating the main boards in Shanghai, leaving Shenzhen only with this SME board and any PRC GEM (aka “second board”) that may grow out of it.

The Shenzhen SME Board was launched on Friday, and share prices of the eight companies debuting on it shot up by 133% on average (the range was from 37% to 335%). But today (Monday in China) all eight have already stopped trading because they decreased 10% almost immediately after opening.

The eight companies traded on the SME Board (with the Chinese names abbreviated) are:

Zhejiang NHU (新和成)
Jiangsu Qionghua High-tech (江苏琼花) (packing materials)
Zhejiang Weixing Industrial Development (伟星股份) (apparel)
Chongqing Huapont Pharma (华邦制药)
Elec-Tech International (德豪润达)
Zhejiang Jinggong Science & Technology (精工科技)
Hualan Biological Engineering (华兰生物)
Han’s Laser Technology (大族激光)

A report on Friday’s trading, with the statistics I mentioned above, is here.

A report on Monday’s halted trading is here.

Very intriguing story in the Wall Street Journal last week about China Development Bank, which has apparently managed to act like a real bank in China. The article is available here.

Merrill Lynch is looking for a partner for a joint-venture investment bank in China, Bloomberg reports.

Interestingly, a PRC banker quoted in the article states that big PRC investment banks (termed “comprehensive securities companies” in China’s laws & regulations) don’t want foreign investment because that would limit their ability to go public.

That’s something I foresaw when I wrote an article on China’s joint-venture investment banking regulations in 2002 in the China Business Review. PRC securities companies accepting foreign investment (which is capped at 33%) must be limited liability companies, according to article 4 of the PRC’s rules on JV I-banks. Under China’s Company Law only joint stock companies (not LLCs) may publicly issue shares.

Often foreign investors have made substantial investments PRC insurance companies and banks prior to or in anticipation of their international IPOs, but PRC rules prohibit securities companies from taking foreign investment and issuing shares publicly. Why this prohibition exists is not clear to me.

The Bloomberg story says Goldman Sachs are in talks with Fang Fenglei to create a JV investment bank. Fang may be a great partner, but under the same rules he cannot form a JV I-bank with Goldman by himself. The rules require that one of the Chinese investors holding at least 1/3 of the entity be a PRC securities company.

The article also says Deutsche Bank “is in talks to buy” a PRC securities company. Again, the foreign investment in a PRC securities company is capped at 33%, so Deutsche Bank cannot “buy” one under current regulations; it can only buy into one.

Reuters reports that “Citigroup Suspends Two in China.” Margaret Ren (任克英), the daughter-in-law of Zhao Ziyang and another banker named Earl Yen have been “suspended” for giving false information to Citigroup and its regulators, according to the article which reflects an internal Citigroup memo. The story is also covered by the Financial Times here, Bloomberg here.

The Reuters story observes two related things. First, that “Fast-growing China has been the world’s hottest IPO market since late 2003, and is expected to generate about US$26 billion worth of overseas listings this year[.]” Second, “The ranks of top China investment bankers are dotted with the relatives of China’s ruling elite.”

Levin Zhu, son of former premier Zhu Rongyi, has been prominently involved in CICC, the China Construction Bank-Morgan Stanley joint venture.

I don’t know the full roster of princelings involved in investment banks doing PRC business. Such a list would have to include princelings working for PRC banks, foreign banks and PRC-foreign joint ventures. Also, the involvement of princelings in the securities sector would be a broader list, extending to listed companies and perhaps regulatory organizations.

Many investment bankers in China are I imagine not the children of top leaders, and outside China it is not unusual to find the children of elites entering investment banking. Indeed, I think overall markets (including but not limited to securities markets) are anit-hegemonic. In the long run developing securities markets in China should be politically positive. They could create sources of power outside the state. But especially in this transitional (I hope) period, these ties between the children of ruling families and the securities industry (”one family, two systems” as they say) suggest the embeddedness of the securities sector in the PRC political structure. This Citigroup story, like the recent stories about the firing of some Lucent China executives for corrupt activities, may also show the tension between “traditional” Chinese ways of doing business and the expectations of multi-national companies.

The PRC’s new law on investment funds became effective June 1. Now the CSRC has released a number of supplementary regulations governing funds.

These include:

general rules on the disclosure requirements for funds,

rules for fund offering annoucements,

rules on fund annual reports,

rules for semin-annual fund report and

rules for the notes to financial statemetns of funds.

A China Life vice president said in a Hong Kong press conference on Friday that the company is not worried about litigation brought by shareholders in the United States, according to this story by Bei Hu in the South China Morning Post.

The article said:

China Life does not plan to make a provision for class-action lawsuits in the United States, which allege that its management failed to disclose a state audit into its unlisted mainland parent before the IPO.

“We believe the plaintiffs’ evidence won’t stand,” said another China Life vice-president, Li Liangwen. “We are confident about winning.”

Shandong has established its provincial-level State-Owned Assets Supervision and Administration Commission (Shandong SASAC), according to this Xinhua report from the China Securities Journal website.

Zeng Zhaoqi is the director of Shandong SASAC. Wang Renyuan, a lieutenant governor of the province, will be the Shandong SASAC’s Communist Party secretary. (Perhaps tellingly, the Party Secretary is named before the director).

Shandong SASAC is the 5th largest provincial SASAC in China in terms of assets, according to the article.

The commission will be based in the provincial capital of Jinan and has 74 people on its staff.

Han Yuqun is the current governor of Shandong.

The national SASAC is headed by Li Rongrong.

Blackboard, a company that makes online course software, went public on Nasdaq last week, as reported here by the Washington Post. I couldn’t help thinking for a moment about Blackboard from two perspectives–first as an observer of PRC securities markets, second as a professor in the US who used Blackboard in my teaching.

If Blackboard had been a Chinese company, it would have faced some serious challenges. Of course, the technical challenges Blackboard has dealt with in the U.S. would be about the same in China. Competition from other firms could be expected in both environments, too. But the PRC regulatory environment would add special challenges. Indeed, if Blackboard had been a PRC company, it might have had great difficulty being founded and getting to the IPO milestone it hit yesterday.

Like so many dot com IPOs, Blackboard is an innovative company lacking profits. The PRC Company Law requires that IPO candidates have a record of three years of continuous profits. They must also assure that they will make profits after the IPO. Blackboard would not have met those requirements. Thus, if Blackboard were a PRC company, it could not have conducted yesterday’s IPO. Without that IPO, the hypothetical PRC incarnation of Blackboard might be unable to continue expanding and developing.

Indeed, a PRC incarnation of Blackboard might not have gotten to the current development stage of the US Blackboard. Without a foreseeable IPO, it probably would be harder for a promising but unprofitable start-up to attract investors and employees. Having an IPO on the horizon gave them incentives to put in capital and “sweat equity.”

Finally, without the IPO prospect, would the founders of Blackboard have been as attracted to the ideas behind the company? Might they not have instead sought more secure jobs in government or large existing companies?

The corporate finance implications are not the only differences. If Blackboard were a Chinese company, it might have had a hard time just getting started.

First, it would have been classified as a telecommunications business. That would make it subject to approval from the Ministry of the Information Industry. The maximum percentage of foreign ownership in telecom firms is also capped by PRC law.

Ministry of Education approvals would I think also be required.

Once established, the chat room functions of Blackboard would probably be subject to censorship in the PRC.

All these reasons explain I think why Blackboard is not a PRC company.

On a more local level, the business school in which I teach uses Blackboard software. It is what we use to build and operate course web sites.

While such sites help professors in some ways, I think student expectations are the main reason for their existence. Most contemporary undergraduates are children of the digital age. For most of them, web interaction is the norm.

Besides student expectations, another factor speeding adoption is that textbook publishers provide ancillary content that can be loaded on to Blackboard sites (or in competing products such as WebCT). Such ancillary content typically includes on-line quizzes and chapter summaries in outline form and in PowerPoint slides.

My experience is that few students use this stuff. I do post test grades through Blackboard, and I use the group email feature to distribute announcements and relevant news clippings throughout the semester. And of course I post the syllabus on Blackboard.

However limited my utilization of its features, Blackboard software allows me to maintain a course website with little more than basic “surfing” skills.

While FrontPage or some other HTML editor could be used to construct a course website, I think many academics need even more hand holding. Plus there are some special aspects of course websites (gradebooks, integration with existing registration programs, differing levels of access for various users) so that using a specifically tailored tool like Blackboard makes sense.

The CSRC, China’s regulatory authority for publicly traded securities, now provides a general introduction to China’s securities markets on its website. They have provided the report in both Chinese and English.

This is nice and a little surprising. The CSRC in recent months has done little to update its website. Thus I’m a pleasantly surprised to suddenly see there a document not required by law. Also, given the mostly domestic focus of the CSRC’s work, it rarely provides documents in English (unlike say the Ministry of Commerce or its predecssor MOFTEC, which because of their foreign trade focus have extensive English language websites).

Foreign attention to PRC stock markets is probably on the rise globally, given the general growth of the PRC economy and the increasing number of ways foreigners can and do participate in PRC securities markets.

Sanctioned channels for foreign capital to participate in mainland securities markets include:

B-share market
Possibility of listing a foreign-invested enterprise (FIE)
Joint venture Investment Banks
Joint venture fund management companies
Owning un-listed shares in a listed company (but not to FIE level)
QFII scheme

That’s in chronological order, based on the time when the legal basis for such participation was created.

There are some more tangential ways for foreigners to participate, too. Foreign firms could provide accounting services to PRC listed companies, or foreign firms might own shares of a PRC firm listed in Hong Kong or New York that also has shares traded inside the PRC mainland.

There are also assorted un-sanctioned methods of foreign participation. Sometimes a foreign party might “hold” shares in a PRC listed firm through a PRC “trustee” shareholder. This might be done when foreign investment is not allowed in a sector. But it is a legally precarious appraoch. Because there’s no legal basis for it, the nominee shareholder can deny that he or she (or it) owns the shares on behalf of anyone else. In the absence of law, guanxi and personal trust are critical

At any rate, there are more and more reasons foreigners might want an overview of PRC securities markets (besides, um, academic interest), and the CSRC has endeavored to provide one.

The CSRC report is dated April 2004, but it was added to their website just a few days ago. It runs about 60 pages.

While this CSRC overview provides a quick lay of the land and offers some useful data, the Walter/Howie and Green books remain extremely useful for those wishing to go beyond this CSRC introduction. (I notice Amazon is now offering them as a bundled set; not sure they ran that by the authors first).

Newbridge Capital has acquired 18 percent of Shenzhen Development Bank, according to PRC and foreign media, including this Dow Jones story, this Washington Post story and this story in Chinese from the China Securities Journal

Hu Shuli, the feisty editor of Caijing magazine, China’s best financial sector publication over the last several years, is profiled in the current Economist.

The first time I went into Hu Shuli’s office she was on the phone screaming at some printer. She is an intense, energetic woman. She continuously spouts ideas, and she is on the leading edge of changes in Chinese media. I admire Hu Shuli and her crew of young reporters very much.

I got to know Hu slightly because I volunteered to do a little work in the Caijing offices in 2003. I had been reading Caijing for a while, and when Hu gave a speech for an event organized by the American Chamber of Commerce in Beijing, I made sure I went. After her talk I said hello to her, then spoke to a Caijing staff member explaining that I was in Beijing for a few months with some extra time and would, as a big Caijing fan, be happy to help out if I could.

To my surprise, they called. Hu at that time wanted to start an English language newsletter. She imagined, I think, that there might be some income and glory in leveraging the Caijing brand into an English publishing venture.

Already she had employed a few ivy league interns to “polish” translations of Caijing articles done by the magazine’s staff. At that time they were distributing these by email to a few foreign readers. Now they are putting such translations on the magazine’s website, calling it an English language “newsletter”.

Great as Caijing is, there are some problems with creating a commercially viable version of the magazine in English.

The first is that it would be aimed at a very different market than the Chinese magazine. Caijing stands out in the PRC media landscape because it is visually appealing, does investigative journalism, treats contemporary social issues in some depth and sometimes publishes politically daring content.

But the contrast between Caijing and English language media is less stark than the contrast between Caijing and PRC media. English readers are simply not as starved for frank, thorough reporting. They already read news from sources not constrained by PRC censors. Thus, content that feels exhilarating in Caijing may seem much less fresh or dramatic in the context of foreign media.

Style exacerbates this situation, I think. Caijing’s prose is different than typical styles of foreign reporting. Caijing writers, perhaps in order to be more daring, often use an almost baroque style. Literary, allusional, indirect Chinese may be helpful for skating around censors, but when translated it can seem quite odd–distracting if not jarring when people expect straightforward reporting.

Plus, as a fortnightly publication Caijing is not ideal for conveying timely news, particularly if there is a delay for translation. (On the other hand, Caijing sometimes treats stories in greater depth than faster media.)

And finally there is an issue about the size of the target audience. Those of us passionately interested in China’s financial sector adore Caijing, but that audience–though substantial and growing–is not yet one to attract mass media.

Perhaps the best reason for an English reader to read Caijing is to see what’s happening with Caijing, not to learn what’s happening in China’s financial sector. Reading Caijing is one way to monitor press openness in China.

Caijing’s offices are characterized in the Economist piece as “dingy.” I’ve seen a lot of dingy stuff in China, but comparatively speaking the SEEC offices are actually in a relatively new building in a nice section of Beijing. Certainly by local standards the appointments are good. Clearly, though, more money has been put into computers and other high-tech gizmos than furniture. The typical disarray of a newsroom predominates. Aesthetic effort is saved for the magazine. I’d say the approach is working; in terms of both appearance and content Caijing gives me hope for China’s future.

The PRC’s first law on investment funds–the PRC Securities Investment Funds Law (中华人民共和国证券投资基金法 or Zhengquan touzi jijin fa)–became legally effective today.

The National People’s Congress Standing Committee passed the law back in October 2003. An English translation of the law and a brief commentary on it by me were published by China Law & Practice in January of this year.

The Securities Association of China just held a conference in Beijing on implementation of the new law, as described here.

Speakers at the “international” forum included CSRC Chairman Shang Fulin and Zhou Zhengqing, a former CSRC chairman who is now on the NPC’s Finance & Economics Committee.

Shang mostly spoke in generalities and platitudes, as is his custom. He did mention a few statistics on the funds industry, including a statement that 11% of the value of the A-share market is now held by funds. Shang also said that a set of regulations related to the Funds Law will be promulgated soon. Other stories in the PRC financial press have indicated these new rules will eliminate a requirement that a fund keep 20% of its assets in bonds.

Shang also said there is a 9-agency working group on implementing the State Council’s Nine Articles on PRC securities market development.

Zhou Zhengqing, who seems to be very active now in shaping policy for PRC securities markets, said in his speech that the role of fund management companies in retirement funds, including individual retirement accounts, should be developed.