Walter Hutchens’ Blog

The bid of CITIC Securities, a division of financial conglomerate CITIC, to acquire the smaller GF Securities company will apparently be blocked, according to this report from the China Daily, a PRC-based English language paper. First the employees of the target and now some other shareholders are resisting the bid.

The China Daily is not independent of the PRC government. Indeed, no PRC papers are in the sense that censors can influence all of them. But the China Daily nonetheless publishes some stuff of value. This story for example candidly notes:

CITIC’s move is regarded by some observers as a rare market-driven acquisition attempt in the domestic securities industry, which is facing troubles in making profits and improving efficiency.

Normally such mergers and acquisitions follow administrative orders, but the market is lacking commercial cases of this nature.

The article includes a lot of good detail on the current takeover battle and also notes CITIC Securities is the first PRC securities firm to have conducted its own IPO.

The CSRC has revised and reissued its regulations on fund management companies (FMCs) and their executives as reported here in Chinese.

The rules continue to prohibit natural persons from being shareholders in an FMC. Remembering this prohibition, I once mistakenly opined that Fang Fenglei could not be a holder of shares in a joint venture investment bank, but such a venture is of course not an FMC, and the rules are different for foreign invested securities companies (FI-SCs, as opposed to FI-FMCs). I have since written a good bit on the Fang Fenglei-Goldman Sachs transaction, which has many surprising features.

These new rules are:

证券投资基金管理公司管理办法 or Zhengquan touzi jijin guanli gongsi guanli banfa, and

证券投资基金行业高级管理人员任职管理办法 or Zhengquan touzi jijin hangye gaoji guanli renyuan renqi guanli banfa.

I can only imagine the challenges faced by journalists working in China. It would overwhelm me to try to keep up with the breadth and pace of changes; I feel overwhelmed just trying to follow a small sector of China’s reform saga. China correspondents need, beyond the normal skill set of reporters, extensive knowledge of a complicated place, plus they must master a language (or maybe several dialects of it) that is famously difficult. Even so equipped, information gathering is not easy in the PRC. When I briefly was a lawyer in Beijing, I found it comical how hard it was to get companies to participate in due diligence, even when as usual our client had signed a confidentiality agreement with them and was doing the due diligence as a prelude to investing enormous sums in the Chinese firm.
Despite all the difficulties they face, I generally think that the international English-language press does a good job covering the PRC. Indeed, academic observers get much of what we know about China from journalists.

That said, I am surprised how often little errors creep into reporting on Chinese securities markets. Several examples have popped up in relation to reporting on the draft investor protection regulations I wrote about yesterday.

Dow Jones, the South China Morning Post, the Financial Times, the China Economic Review’s daily news update and other media covered the development. That this coverage exists at all is impressive in some sense; a proposed regulation isn’t obviously hot news, so it’s a credit to these news organizations that they realized the draft reg is important.

However, consider the following. As I mentioned previously, Dow Jones suggested the new rules require that certain actions be approved by general meetings of the shareholders at which more than 50% of the liquid shares are in attendance. The draft reg would be very anemic if that were true; the proposal is actually to require that half the liquid shares represented at a meeting approve certain actions.

The Financial Times reported that “The CSRC on Monday posted on its website [the draft reg].” The FT may have seen it on Monday, but the CSRC actually posted it Sunday night.

The SCMP reported that under the draft reg “Public companies will be required to hire independent directors[.]” That’s literally true, but it’s not what’s new in the draft reg. Listed firms have been require to have independent directors since 2001. The SCMP also quoted Liu Hongchuan, a securities lawyer with Broad and Bright in Beijing, saying “only companies and not individuals are permitted to sue companies.” That is flat wrong. The Supreme People’s Court’s rules on shareholder litigation clearly permit individuals to sue companies, and judgments in favor of individual plaintiffs have been issued recently against Daqing Lianyi. This is either a misquote, or Lawyer Liu is badly mistaken.

Hey, nobody’s perfect. I wouldn’t produce much if I couldn’t send out email, post blog entries and even publish articles with errors. It’s just part of the process. Plus, most readers will not catch these errors, and none of the problems (except perhaps the DJ one) go to the heart of the story. The key fact is that there’s a new draft reg on investor protection in China. Anybody who really cares will dig beyond the news reports anyway. I admittedly am not the typical reader of these stories. I first read the news in Chinese, and I follow PRC sec reg closely. But seeing these small errors reminds me that I should be circumspect about reliance on all the other news I read, especially given how little I know about most of the things these reporters are covering.

The CSRC has posted for public comment a remarkable draft regulation that will require listed companies to obtain the approval of listed shareholders as a class for certain significant corporate actions. The draft reg requires approval of more than half of all public shares (shehui gongzhong gu) represented at a shareholders’ general meeting for approval of secondary share offerings, issuance of convertible bonds, overseas listings of subsidiaries and some other material changes. The reg also encourages firms to allow internet voting by public shareholders.

Often I find myself arguing that some reform initiative is only marginal and will likely have little real impact. But a quick glance at this draft reg knocks me off that stance. Because most shares of most listed firms remain unlisted, trampling of the interests of public shareholders has been a common complaint. If adopted, this kind of class voting regulation could be revolutionary with regard to some of those problems.

Query: even if class voting of public shareholders is a great idea, if this reg is adopted, is the CSRC amending the Company Law?

The proposed reg also seeks to strengthen the role of independent directors, requires firms to put their dividend policy in their articles of association and to reduce dividends payable to controlling shareholders if they’ve used corporate funds in a manner inconsistent with what had been disclosed.

Comments are requested by Oct. 15.

Dow Jones has a story on the draft reg available to subscribers through their website here. It is good for Dow Jones to cover this. However, they write, “The draft rule would require that for major plans, such as fund raising or major asset restructuring, the plans would have to be passed at shareholders meetings with more than 50% of the votes of tradeable shareholders attending the meeting, according to the China Securities Regulatory Commission’s announcement posted on its web site late Sunday.”

Actually, it appears to me the draft reg requires not that 50% of public shares attend the meeting but that 50% of the public shares attending the meeting approve certain actions. The difference is critical because in the typical PRC listed firm you’d have say 66 non-tradeable shares voting and 33 tradeable shares that could vote. If the draft reg only requires that half of the public shares attend, they still could always lose (even if 100% of the public shares are represented at the meeting) because they are still voting against the 66 non-tradeable shares. If on the other hand the public shares vote as a class on certain items, then they have a real veto power over the majority unlisted shares. So I think Dow Jones got this wrong, or at least wrote it in a way that could be misleading. I think I’ll drop them a note about it.

Shang Fulin will leave the CSRC, and Huang Qifan will become its new chairman according to this report in the Financial Times and this report in the South China Morning Post.

Today the market continued to rally. Apparently investors expect that market-boosting policies are in the offing.

Shang never charmed me, but as one PRC source told the FT, “Simply appointing a new boss doesn’t get to the point. What really works is a radical reformation of the system.” Precisely.

China’s stock markets rose steeply on Tuesday after Premier Wen Jiabao said three sentences about China’s securities markets in a meeting of the standing committee of the State Council. PRC press stories about Wen’s comments are here and here.

Wen said China should implement the State Council’s 9 Articles (a policy paper on China’s securities markets), protect the interest of the masses of investors, and promoted the stable, healthy development of capital markets. China’s leaders do not often comment on the stock market, and apparently traders took it as a good sign. Rumors that some market-favorable policies (such as another reduction in stamp taxes and maybe class voting for listed companies) will be promulgated soon also helped bolster the rally.

Attention to China’s stock markets from the highest levels of PRC government is probably a good thing, but I don’t know what Wen can do to solve the fundamental problems of China’s markets without causing pain to the status quo. Conversely, if policies are adopted that will boost the status quo, I fear those actions may not be in the best interest of fundamental reform.

Laura Cha (aka 史美伦, Shi Meilun) has resigned as vice chair of the China Securities Regulatory Commission, according to news today from the PRC press (and now here in English).

Among high PRC officials Cha has been unusual in that she was not a career Party cadre or even mainland native. She spent much of her career in Hong Kong and once held a US “green card.” She holds a US law degree and formerly was vice chair at the Hong Kong Securities and Futures Commission. Her CSRC appointment was part of an initiative by Zhu Rongji to hire world class talent. Reportedly she was paid an exorbitant salary like those of Hong Kong officials, though she apparently declined funds not used for her Beijing living expenses and directed that they be spent on CSRC staff development.

Cha struck me as temperate and even cautious in her public pronouncements, but sometimes she has been a target of critics of the “hai gui pai” or returnees faction. Some argued her policy initiatives were “too foreign” and not suited to PRC conditions. At times there may have been some truth to that. She was I think a big backer of the initiative to require all listed companies to have independent directors–a nice idea, but one probably too aggressive in its implementation (where could they have gotten enough qualified independent directors in time to meet the original schedule?). But some of the criticism of Cha was based on the school of thought that it is the job of the regulators to boost the market. In contrast Cha thought it was the job of the regulators to regulate impartially, to build a transparent market for the long term, not to worry much about short term index fluctuations. My view: amen to that.

I guess I am not surprised that she’s leaving; rather, I’m surprised she hung in there as long as she did, given that the CSRC’s current “line” seems to be that “stable development” (稳定发展, wending fazhan) is the foundation for “reform and opening” (改革开放, gaige kaifang). I take that to mean that the “regulators must boost the market” school of thought is in the ascendancy. In this current climate of gridlock over fundamental reforms, I doubt she could accomplish much. Indeed, as tepid as Cha sometimes seems to be, she could seem like a “hair on fire” radical in comparison to current CSRC chairman Shang Fulin. Shang Fulin may in fact be the Mandarin translation of soporific.

When Cha and Gao Xiqing were both at the CSRC, it had two “commissioners” (vice chairs in PRC parlance) with US law degrees. I am not aware of any US JDs remaining at that level. No doubt there are many gifted and dedicated officials still in the CSRC, some purely PRC-trained and some with foreign degrees and experience. Some there must have bold visions and the tenacity to pursue them. I am sure Cha wishes them well. For those in the anti-hai gui faction happy to see her go, I would suggest that even if “sea turtles” become extinct at the CSRC, PRC stock markets will not flourish until current structural problems (unlisted shares, government selection of issuers, inadequate monitoring mechanisms) are resolved.

The CSRC has approved establishment of Beijing Gao Hua Securities Company. The approval also states that the CSRC “approves in principle” Gao Hua’s establishment with Goldman Sachs Asia (高盛（亚洲）有限公司) of a foreign invested securities company (外资参股证券公司).

The shareholders of Gao Hua are as follows, each holding RMB 268,000,000 of the firm’s RMB 1.72 billion in registered capital.

Lenovo Group (联想控股有限公司)

Beijing Houfei Growth Enterprises Investments Company (北京厚丰创业投资有限公司)

Beijing Gaowang Growth Enterprises Investment Company (北京德尚创业投资有限公司)

Beijing Desheng Growth Enterprises Investment Company (北京德尚创业投资有限公司).

According to earlier news reports, Goldman Sachs has through loans indirectly provided most of the capital for Gao Hua and will consequently have through contractual mechanisms some kind of control rights over Gao Hua, and hence Goldman will have control over the now approved-in-principle venture Guo Hua will directly establish with Goldman, even though Goldman will under Chinese securities regulations be limited to owning only one-third of the shares in that venture. The CSRC’s approval provides no details, but states that loans form foreign sources should be registered and otherwise handled in compliance with China’s forex regulations.

The approval is dated August 10, but it was released on September 8 along with a batch of other CSRC approvals.

Since promulgation of the PRC Administrative Licensing Law, the CSRC has organized its website so that its numerous approval actions are provided according to various category (issuances, institutions (where the Goldman document is posted), listings, funds, futures, accounting, and overseas listings).

Paying close attention to stock markets in China used to be the pursuit of only a few foreigners. But international media have been paying more attention since the introduction of the QFII scheme, joint venture investment banks and fund management companies and other means for foreigners to participate in the China’s securities markets.

Dow Jones has for a while had a daily report on the RPC markets, and now they’ve launched a joint-venture index project. The China Economic Review reports:

Dow Jones launches Shanghai-Shenzhen index

In a challenge to the mainland’s incumbent Xinhua-FTSE index, Dow Jones yesterday launched a new A-share market index in a joint venture with Shanghai Media Group’s CBN unit. The Dow Jones CBN 600 Index tracks an estimated 70% of the 600 largest A-share companies on the Shanghai and Shenzhen exchanges. Dow Jones’ other index products are the China Blue-Chip 88 and an all-share index, both of which lacked the clout of a strong media group on the mainland. Its association with China Business Network is expected to give its latest index launch needed lift.

Dow Jones reports on itself here:

Dow Jones Indexes, CBN Launch Broad China Index

DOW JONES NEWSWIRES
September 6, 2004 4:45 a.m.

Edited Press Release

LONDON — Dow Jones Indexes, a global index provider, and China Business Network Co Ltd (CBN), a professional financial-media company, Monday launched the Dow Jones CBN China 600 Index, a broad Chinese benchmark index.

The Dow Jones CBN China 600 Index is an authoritative index covering both Shanghai and Shenzhen security markets.

The Dow Jones CBN China 600 Index, which is calculated in the local currency, Chinese Renminbi, provides a rules-based index methodology consistent with the Dow Jones Global Index family, which has proven popular with market participants using the Dow Jones STOXX 600 Index.

The 600 A-share stocks included in the Dow Jones CBN China 600 Index are the largest companies listed at the Shanghai Stock Exchange and Shenzhen Stock Exchange.

Companies included in the Dow Jones CBN China 600 are selected according to float-adjusted market capitalization. The indexes’ free-float market capitalization is $107.35 billion as of Aug. 31, 2004, which is 70% of China’s total market capitalization.

The base value of the Dow Jones CBN China 600 Index is 20,000 at Dec. 31, 2000.

The CSRC and PBOC have enacted rules on money market funds, titled 货币市场基金管理暂行规定 or Huobi shichang jijin guanli zanxing guiding (Provisional Regulations on the Administration of Money Market Funds). The South China Morning Post carries a story on it here. The rules state they were enacted on August 16, but apparently they have just been publicly released. It seems they still are not posted on the CSRC website (they update it very sporadically), but the PBOC has posted the new regulations here. A long discussion in Chinese of money market regulation is here.

Money market funds cannot invest in stocks, convertible corporate bonds and bonds with maturities longer than a year, so this might be called “capital market regulation” but is not directly pertinent to the regulation of China’s Shanghai and Shenzhen securities markets.