CHINA’S STOCKMARKET OTHER ECONOMIST BOOKS
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Pocket Asia Pocket Europe in Figures Pocket World in Figures CHINA’S STOCKMARKET A Guide to its Progress, Players and Prospects
Stephen Green To my family and friends
THE ECONOMIST IN ASSOCIATION WITH PROFILE BOOKS LTD
Published by Profile Books Ltd 3a Exmouth House, Pine Street, London ec1r 0jh
Copyright © The Economist Newspaper Ltd 2003 Text copyright © Stephen Green 2003
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ISBN 1 86197 665 8 Contents
List of figures vii List of tables viii Acknowledgements x Preface xiii
1 Introduction 1 Economic reform in China 2 Why is a stockmarket important? 3 China’s stockmarket 4 Opening up to the world 6 2 A brief history of China’s stockmarket 9 The shareholding reforms, 1984–89 9 Setting up the stock exchanges, 1989–90 11 Stockmarket fever, 1992–93 12 Two dull years and a scandal, 1994–95 18 A promising but false start, 1996–97 21 Growth with the csrc in charge, 1998–2002 23 China’s stockmarket today 26 China’s stockmarket and the world 32 China’s bond market 36 3 Foreign investors and Chinese equity: the B- and H-share markets 46 China’s path to financial globalisation 47 The B-share market 50 Overseas share issuance 56 P-chip fever 64 4 The investors 70 Individual share investors 71 Securities companies 78 Trust and investment companies 98 Investment funds 100 Insurance and pension funds 109 Asset management companies 113 The development of financial conglomerates 114 5 The listed companies 118 The ownership problem 118
v Performance of listed companies 125 False disclosures and the problem with accountants 135 Improving listed companies 141 Listing of private companies 151 6 The regulatory framework 154 Local government regulation, 1990–97 154 The csrc in charge, 1998– 160 Regulation of the primary market 160 Regulation of the secondary market 164 Why is regulation so poor? 168 7 Re-regulation and the future of China’s stockmarket 170 Why China’s stockmarket will improve 171 Improvements in regulation, 2001–02 182 Improving listed companies 184 Allowing the courts to play a role in regulation 189 Improving oversight of the regulator 192 Making non-tradable shares tradable 193 8 Foreign investors’ entry: the prospects and the dangers 199 The implications for foreign investors of WTO membership 199 Listing of foreign companies and acquisition of Mainland companies 206 The qualified foreign institutional investor framework 209 A link with Hong Kong: the qualified domestic institutional investor framework 211 The future 212
Appendices 215 1 Abbreviations 217 2 Chinese terms 219 3 Glossary 224 4 Chronology of events 239 5 Recommended reading 251 6 Useful website addresses 255 7 References 257
vi List of figures
2.1 Tradable shares as a proportion of total shares, year-end 1998 17 2.2 Floating shares, 2000 18 2.3 Domestic listed companies (A- and B-shares), 1990–2002 27 2.4 Total raised capital from domestic and overseas share issuance, 1991–2002 27 2.5 Stockmarket and bank financing compared, 1993–2002 29 2.6 Stamp tax collected by the government, 1993–2002 30 2.7 The world’s largest stockmarkets, year-end 2001 33 2.8 Emerging markets’ listed companies, year-end 2001 33 2.9 Largest emerging countries’ stockmarkets, year-end 2001 34 2.10 The largest stockmarkets in Asia, year-end 2001 34 2.11 China’s stockmarkets compared with other transitional states’ stockmarkets, year-end 2001 35 2.12 Average size of a listed company, year-end 2001 36 2.13 Domestic Treasury-bond issuance, 1981–2002 38 2.14 Corporate bond issuance, 1992–2002 41 3.1 China’s different share categories, March 2002 48 3.2 Capital raised from initial public offerings in the A- and B- share markets, 1991–2002 51 3.3 Number of companies making B-share ipos, 1992–2002 51 4.1 The growth of share accounts, 1993–2002 71 4.2 The 15 largest companies, year-end 2001 79 4.3 Types of securities companies, year-end 1998 81 4.4 Income of an average large securities company, 2000 84 4.5 Top ten underwriting securities companies, 2001 91 4.6 Trading volume of investment funds, 1994–2002 104 5.1 The capital structure of listed companies, 2002 119 5.2 Companies controlled by internal lps or state shareholder, 1992–99 120 5.3 Listed companies’ financial results, 1991–2001 128 5.4 Preferential tax treatment at listed companies, year-end 2000 131 5.5 Companies not distributing any form of dividend, 1995–99 132 5.6 Acquisitions of listed companies, 1996–2002 144 6.1 Returns on investment in the ipo lottery, 1997–2002 163 7.1 Estimates of the government’s total liabilities, 2002 178
vii List of tables
2.1 China’s share categories 16 2.2 Stockmarket collapse, 2001–02 25 2.3 Stockmarket capitalisation, 1992–2002 28 2.4 Selected p/es from around the world, October 2001 30 2.5 Variations in the one-year household deposit savings rate, May 1996–March 2002 31 2.6 Enterprise bond issuance, 1990–97 42 2.7 China’s corporate bond market, end-2002 43 2.8 China’s convertible bond market, end-2002 45 3.1 Capital raised from equity issuance abroad and fdi, 1991–2002 49 3.2 B-share mid-year results, 2000–01 53 3.3 Distribution of China’s foreign-listed shares, March 2002 56 3.4 Non-United States companies listed on the nyse, June 2002 61 3.5 Mainland China adrs, June 2002 62 3.6 Red-chip adrs, June 2002 63 3.7 UBS Warburg’s p-chip index in 2002 65 3.8 P/Es of select firms listed at home and abroad, year-end 2001 68 4.1 Regional distribution of investors at the Shanghai Stock Exchange, year-end 2001 74 4.2 The location of China’s securities companies, year-end 1999 77 4.3 Securities companies brokerages in the ten largest provinces, year-end 1999 78 4.4 Profits of 89 securities companies, 1999–2001 80 4.5 Top three securities companies in each sector, 2001 85 4.6 Securities companies with the largest brokerage outlet network, year-end 2000 86 4.7 Top ten securities companies in the brokerage business, 2001 87 4.8 Brokerage commissions across Asia, 2000 88 4.9 Top ten securities companies with funds under management from listed companies, year-end 2001 92 4.10 Assets of China securities companies and international investment banks, year-end 1999 95 4.11 Breakdown of the income of three international investment banks, 1999 95 4.12 Breakdown of the income of three large Mainland securities firms, 1999 96
viii LIST OF TABLES
4.13 China’s fund management companies and their shareholders, year-end 2001 102 4.14 Investment management companies, year-end 2001 103 4.15 Market capitalisation of formal funds and simu jijin, year-end 2000 108 5.1 Ownership of listed companies, year-end 2000 118 5.2 How directors were appointed at listed companies, 1996–99 122 5.3 Salaries of senior management, year-end 1999 122 5.4 Where do the most important and most frequent disputes take place? 124 5.5 Listed companies’ results, 2001 127 5.6 Losses of listed companies, 1994–2001 128 5.7 Capital raised in initial and rights A-share offerings, 1993–2002 130 5.8 Cash dividends, 1994–99 132 5.9 Loans to major shareholders, year-end 2001 134 5.10 How believable are listed companies’ reports? 136 5.11 Asset restructuring of listed companies, 1997–2001 142 5.12 Income per share of companies undergoing a change in the controlling shareholder, 2001 145 5.13 How control at listed companies changed, 2001 146 5.14 Average annual growth of total factor productivity 153 6.1 Industry breakdown of issuance to firms, 2001 162 6.2 What hurts you most? 165 7.1 NPLs and the fiscal cost of restructuring the financial sector in financial crisis 179 7.2 The capacity of the market: IPOs as a proportion of GDP, 1997–2002 180 7.3 Estimates of demand for stockmarket funds, 2002 180 7.4 Estimates of funds becoming available in 2002 181 8.1 Prospective joint-venture fund management partners, year-end 2001 205
ix Acknowledgements
o build a stockmarket worth over $200bn in the space of some 12 Tyears is a remarkable achievement. It has been a privilege during the course of my research to meet some of the people involved. Their expe- rience and expertise has shaped my understanding of the development of the market’s institutions and problems. My hope is that this book reflects both the good and bad aspects of development so far. This book relies heavily on research done during my extended stays in Shanghai, Beijing, Shenzhen and Hong Kong during 1999–2001 for my phd thesis. Subsequent trips to Shenzhen in July 2001 and to Shanghai and Beijing in July and August 2002 were crucial in bringing the story up-to-date. I am particularly grateful to the management of the Shen- zhen Stock Exchange for their generous welcome and help in collecting materials, as well as to staff at the Shanghai exchange and China Secu- rities Regulatory Commission for their help. The Economic and Social Research Council generously supported my phd research (Award no. R00429824432). Other sections grew out of work I have done over the past couple of years for Business China, a magazine published by the Economist Intelli- gence Unit. I am indebted to its former and current editors, Laura Burt and Margaret Dooley, for allowing me the freedom to report on most of the things that sparked my interest, and for allowing me to use parts of that research in this book. A paper I wrote as a background briefing for the Organisation of Economic Co-operation and Development and which was subsequently largely absorbed into their China in the World Economy report, as well as pieces I have written for CFO China, China Online and Oxford Analytica were useful in developing ideas and fund- ing the research. Among the many English and Chinese sources from which I have benefited Caijing (Finance and Economics) magazine deserves special mention. Many of the stories of corruption related here could not have been told without the investigations of its journalists; they, like many of the young professionals I met at the stock exchanges and China Securities Regulatory Commission, are the market’s brightest hope. Writing about any aspect of China’s rapidly evolving economy is a huge challenge: statistical sources, if they exist, rarely agree; much that is true is reported via rumour and over dinner; and much that is untrue
x ACKNOWLEDGEMENTS
finds its way into official media sources. That said, the researcher faces far fewer problems than he or she would have done, say, ten years ago, and if there is one thing that people in China generally do love talking about, it is the stock market. I have interviewed over sixty Chinese offi- cials and those working in the industry, read widely, in both Chinese and English (and a few of the sources are listed in the selected bibliog- raphy) and tried as far as possible to cross-check information. Despite all this, there will inevitably be some inaccuracies, for which I apologise. I am enormously grateful to all those who chatted with me, allowed me into their libraries and pointed out where I was being, by turns, too cyn- ical and hopelessly naïve. Some of them did so on the basis of anonymity. Among those I can name, I would like to express my thanks for benefit of the experience, expertise, and help of Pieter Bottelier, Nick Bridge, Tom Canalakiss, Chen Jian, Chen Yixin, Charles Cheung, Tim Clissold, Dai Wenhua, Kenneth DeWoskin, Jane Duckett, Peter Ferdi- nand, Dudley Fishburn, Gao Peiji, Ge Jun, Brian Goldstein, Guo Yan, Ken Ho, Christopher Howe, Hu Ruyin, Jiang Jiang, Jin Xiaobin, Tom Kass, Li Dapeng, Lin Chun, Andrew Lin, Min Yoo, Nathan Midler, Tom Mitchell, Anthony Neoh, Jaime Andreas Nino, Qu Qiang, Ren Jin, Andy Rothman, Stuart Schonberger, Sandy Sha, Situ Danian, Dan Slater, Hoi-yin Siu, Tu Guangshao, Xia Youli, Carl Walter, Anthony Wu, Wu Xiaoping, Steven Xiong, Yuan Guoliang, Zhang Jun, Zhang Xin, Zhao Xijun, Zhou Xiao, Zhou Xingguo, James Zhan and Dominic Ziegler. Thanks to David Wall for his long-standing interest in and support of my research; to Martin Liu and Stephen Brough at Profile Books for their faith in the project; and to Penny Williams for her sharp-eyed editing of the text. This book is dedicated to them, my family and those other friends without whose support it would not have been possible. Thanks. I alone am responsible for the views expressed here. I am now happily employed at the Royal Institute of International Affairs in London. E-mail me at [email protected] or visit the website, www.riia.org/asia, to find out how the research is going. Stephen Green March 2003
xi As for securities and the stockmarket, are they finally good or bad? Are they dangerous? Are they things that only capitalism has or can socialism also make use of them? To decide whether they can be used we must experiment first. Deng Xiaoping, 1992
The stock exchange serves the construction of a socialist economy. Li Peng, Shanghai, 1991
China’s stockmarket is worse than a casino. At least in a casino there are rules. Wu Jinglian, 2001
GENERAL NOTES
Exchange rate Since 1994: Remnibi (Rmb) 8.3 US$1
Data – means no data
Accounting year People’s Republic of China (PRC) January–December Hong Kong Special Administrative Region (HKSAR) No formal accounting year. Companies can choose their year-end. Most opt for either December (in line with the Mainland) or March (in line with their parent companies). Taiwan January–December
Abbreviations This book uses many abbreviations. A list is given on page 217. Preface
ew other aspects of reform in China fascinate more than the stock- Fmarket. Since the first haphazard trading in shares took place in Shanghai and Shenyang in 1986, when prices were marked up in chalk on blackboards, the market has grown unrecognisably. Its story has all the makings of a dynastic epic. The market has been at the centre of huge, era-defining policy battles between economic reformers pushing for capitalism and conservatives wanting to preserve socialist controls. As well as the ideological clashes, other disputes erupted in the 1990s as the stockmarket, with its tremendous capacity for generating funds, attracted the envious attention of officials from dozens of government departments. Bureaucrats from local government, the central bank, the industrial planning apparatus and the securities regulator fought contin- uous turf wars for the authority to regulate the market. In the market itself, hundreds of fortunes have been made, some legally, and many thousands of small investors have had their savings wiped out by ill- judged efforts at “stir-frying” shares (chao gupiao). Regular scandals, sev- eral of which have fundamentally shaken the market, have torn back the veil that normally hides the extensive corruption. For those with an eye on the future, the capital market is one of the most exciting ways in which China can reintegrate with the modern world. This is a world where international portfolio capital flows easily in and out of stocks from Australia to Zambia, where governments are withdrawing from ownership on a scale unprecedented in history and where banks are being disintermediated as firms find their investors directly through the capital market. Hong Kong, which returned to main- land control in 1997, provides an enviable example of how best to inte- grate into the global economy. For those with an eye on history, reform China’s stockmarket represents a return to Shanghai’s pre-revolutionary days when the city’s exchange was the largest in Asia. By all accounts, it was then a byword for speculative excess and foreign exploitation. So far, at least, only the former has returned. And herein lies, of course, the paradox that most puzzles observers of China’s experiment with equities. The old stockmarket was the apotheo- sis of the speculative capitalism that Mao Zedong vowed to destroy. Indeed, it was on his personal orders that the old Shanghai exchange was closed by the Red Army on June 10th 1949. But it was on the orders
xiii CHINA’S STOCKMARKET of his successor, Deng Xiaoping, that it opened again on December 19th 1990. A stockmarket seems, at least on the surface, to be completely at odds with market socialism, the present government’s template for an economy where the state remains the dominant owner of industrial assets, retains strategic control of the economy and attempts to enforce some semblance of socialist equality. It is this paradox – a stockmarket, that most capitalist of institutions – being nurtured in a country run by a communist party, that most fascinates observers. This guide to China’s stockmarket attempts to explain that paradox. It deals with all its institutions, players and policy issues, as well as its likely trajectory in the future. After an intoductory chapter, the book breaks down as follows: