Walter Hutchens’ Blog

The China Daily reports here that a CSRC staff member has been arrested in connection with his work with the Stock Issuance Examination Committee (SIEC).

The SIEC reviews applications to publicly issue stock on the mainland’s exchanges and recommends action to the CSRC. Ostensibly SIEC members are independent of the CSRC.

The first rules on the SIEC proclaimed they were intended to “increase transparency” (zengiia toumingdu), but ironically they required that the membership of the SIEC be kept secret. Last year new rules on the SIEC changed this, requiring that the roster of SIEC members be made public and that specific meeting times, participants and agendas be disclosed in advance. Since then, the CSRC has dutifully posted such announcements on its website.

Apparently prior to the rule change the arrested CSRC official disclosed the identity of some SIEC members to applicant firms.

As elsewhere, firms in China conducting an IPO or subsequent public issuance can raise enormous sums. Moreover, in China raising capital through a public offing may involve fewer tradeoffs than it does in other places. PRC issuers rarely float enough shares to expose themselves to a market for takeovers. Plus, so far there’s no serious threat of civil litigation in China to enforce compliance with the disclosure obligations created in a public listing. Thus, given the vast amounts that can be raised and the modest trade-offs, conducting an IPO or secondary offering is a tantalizing possibility to many PRC firms.

However, accessing such a windfall requires government approval. Obviously, if there is a government or SIEC approval standing between an issuer and a capital windfall, a great risk–a moral hazard as the economists say–is created that the prospective issuer will use improper means to influence that approval decision. Or, to look at it from the other side, there is a great risk that people exercising the approval authority will seek to extract for themselves a portion of the value the firm can raise through its public offering; there is, to again deploy the jargon of economists, danger that officials will engage in rent-seeking.

Given these structural incentives, it would hardly be surprising if something nefarious happened with the SIEC. Indeed, it would be surprising if corruption did not occur. Rather, what I find striking is how often PRC discourse fails to acknowledge that the best way to stamp out corruption could be to stamp out government approval requirements. If there is no government gatekeeper there is no moral hazard.

I’ve written on the SIEC previously, including snippets such as this blog entry. I gave the topic more sustained attention as a graduate student in law and Chinese studies when I wrote a paper that I presented at a conference in 2000 on the first version of the SIEC rules.

There have been many changes in China’s securities markets since the SIEC was created. Despite the changes, many fundamental issues in China’s markets have proven resilient. Government domination of the issuing process remains a core difference between China’s securities markets and those elsewhere. The creation of the SIEC, last year’s revamping of it and this CSRC staffer’s arrest are all in a sense efforts to cope with undesirable effects of the government’s determination to maintain that control.

Last week in Beijing beyond attending meetings, feasting and exploring bookstores, I also found a little time to investigate the Pocket PC scene in Beijing.

Arriving at the hotel, I was surprised to find a Chinese ad for a Chinese-made Pocket PC on the cover of a local “yellow pages.”

On the first floor of Bai Nao Hui ( 百脑汇) I came across a dealer specializing in handhleds. Bai Nao Hui is a collection of computer equipment dealers near the Lan Dao (蓝岛) shopping center. The name is a clever pun on “buy now.”

In the U.S. it is most common to purchase consumer electronics at large chain stores. This model exists in China, with stores like Guo Mei (国美) doing a substantial business. But in China the retail channel is often dominated by small “mom and pop” operators. Their “stores” may be just a counter or stall in a place like Bai Nao Hui where vendors of similar products congregate. For a U.S. consumer, the obligation to haggle and the dubious return policies can be sources of anxiety, but at least sometimes the yard-sale like atmosphere can be fun. Also, while negotiations to buy a sweater may start at a price double or triple the actual selling price (or even more if the purchaser looks affluent and doesn’t speak Chinese), margins seem less flexible in the electronics sector. Plus, with so many vendors you can always make a low-ball offer and walk away to test the vendor’s real bottom line.

The preponderance of small operators always makes me think about Hill Gates and her thesis about their being two modes of production in Chinese economic history: petty capitalist and state-tributary. The small operators at Bai Nao Hui are clearly petty capitalists; China Mobile strikes me as a contemporary incarnation of the state-tributary pattern.

In any event, the Bai Nao Hui dealer focused on PDAs and accessories had Pocket PCs by HP, Aigo, ASUS, Dopod, Panda and Levano (previously known as Legend) on offer. At the shop I bought a GPRS wireless modem in a CF card format for RMB 1,200. It’s made by Shanghai- and Hong Kong-listed Nanjing Panda.

I then went to the China Mobile office near the Third Ring Road at San Yuan Qiao. Perhaps because China Mobile is not a pure monopoly, I’ve actually had good experience with their customer service. Without any undue hassles (I let them copy a page of my passport, gave them a Beijing business address and filled out a simple form), I bought a China Mobile SIM card (a phone number) for RMB 80. That allowed me to subscribe to six months of unlimited data transfer for RMB 600. With he SIM card slipped into the Panda GPRS card, I had slow but useable wireless internet access all week. It worked with both my iPAQ and Tablet PC. I did not have voice functionality with my SIM card, but I did send and receive text messages (SMS or duan xin) with my PDA. I’m teaching in College Park next semester, so I’ll give the SIM card to a Beijing-based colleague.

Near the bookstores in Haidian a number of impressive new skyscrapers have been built. Some are still going up. A couple of them house technology markets. At one called Ding Hao (鼎好) I found several stalls specializing in PDAs. At one of them I bought a ”PDA Cam” on a CF card for RMB 650. Using my GPRS access I was able to confirm that was a fair price. Standing at the booth I did a search on Google for the model number and saw online prices of RMB 700-900.

I also bought a 1 Gig Sandisk Cf card and SD card. Each was about RMB 600.

Interestingly, I found that newer Pocket PC mobile phones (not Smartphones) cost more in China. Some of them are priced at RMB 9,000 to 17,000–about USD $1,000 to 2,OOO! In contrast the latest, most full-featured Pocket PCs retail in the U.S. for “only” USD 650. The difference is not apparently customs tariffs; these high prices included domestic brands.

One interesting promotion I saw offered a Unicom-branded Pocket PC if you sign up for enough English lessons with an outfit called Leadership for Life.

I spent last week in Beijing. The reason for my visit was to assist our Executive Education team. The Smith School has a relationship with a Chinese institution named the University of International Business and Economics (UIBE). Through this program it is possible to get a Smith School MBA by studying in Beijing.

The Executive Education people invited me to attend some meetings with UIBE and some other local organizations that may provide us with support services.

This was my first trip back to Beijing since January 2004. The pollution and traffic are no better–perhaps even a bit worse–but the food was just as good as I remember it. I ate at Xiao Wang Fu’s, the Noodle Loft (Mian Ku, 面酷), South Beauty (Qiao Jiang Nan, 俏江南 ) and Lu Lu’s 鹭鹭 for Shanghai cuisine. As I often say, China is a developing county in many respects, but with regard to cuisine clearly China is among the worlds most advanced places. Eating splendid food is a joy of being there.

I also went to several bookstores. Inevitably I visited the large Xinhua bookstore on Wang Fu Jing. There I ran into Albert Dien, a Stanford professor whose class on the Silk Road I sat in on during the year I lived in Cupertino, California before law school.

Not far from the Xinhua store I discovered a new, nicely designed bookstore named Scholars. I like their advertising slogan, ”I read, I think, I’m happy.” (Wo yuedu, Wo sikao, Wo kuaile, “我阅读,我思考,我快乐”).

I also went to the “Book City” (tushu cheng, 图书城) in Haidian near Peking University. Book City has a large Guo Lin Feng bookstore that used to be one of the nicest bookstores in Beijing. It now seems tired and poorly lit, but the selection isn’t bad.

Upstairs in one of Book City’s many small shops there’s a dealer who specializes in books about law. I found there a new series of translations of some of the major PRC laws. This series puts the Chinese text in the margin in small print next to an English translation. I find the layout quite appealing.

I also got an additional copy of one of the West business law textbooks translated into Chinese. I sometimes lend that book to Chinese students who take my undergraduate-level course. I use a different West book, but there is enough overlap so that a student often can use the Chinese text to learn concepts before struggling with unfamiliar English legal language.

I also found a Chinese edition of Law 101, a book by US law professor Jay Feinman. I am a great fan of this book. It is a lucid introduction to many of the topics covered in the first year curriculum of most U.S. law schools. I remember feeling as a 1L starved for context. The morass of legal rules ostensibly being taught through the case method was hard to retain without a general framework. Professor Feinman’s book provides that kind of helpful overview. It hasn’t been translated, but the edition I discovered has marginal annotations in Chinese that explain many of the legal terms used in the text. Perhaps I will use this book in supplement to a few carefully-selected cases if I teach in our Beijing-based MBA program next year.

In May 2005 I am scheduled to teach an MBA-level travel course on Doing Business in China. My draft course outline is here. Students with comments, suggestions or question are invited to contact me.