CHINA'S SECURITIES EXPERIMENT: THE CHALLENGE OF GLOBALIZATION
(Jiangyu Wang)

I. HISTORICAL DEVELOPMENT AND CURRENT SCALE

Before early 1950s China had once the Asia's largest stock market. During 1940s Shanghai Securities Exchange was the largest stock exchange in Asia and more influential and internationally supported than that of Hong Kong. In 1949 when the Communist Party took over the country and established PRC, it began to institute a centrally planned economy in mainland China and finally eliminated securities activities together with any other private ownership in 1959.

With the end of the Culture Revolution, since 1978 under the leadership of Deng Xiaoping, China has gradually implemented market-oriented economic reform. Restructuring the economy generated more and more capital needs, which could not be met by the traditional source - collecting funds and taxes from State-owned enterprises. By 1980 some collective enterprises were allowed to issue corporate stocks to their own employees. In 1981, coming under a lot of debate, debt securities appeared when the State Council (the central government of China) issued national treasure bonds (Guo Ku Quan) trying to make use of this "capitalist instrument" to raise money to finance its budge deficit, which signalized the official endorsement of the re-emergence of the securities markets. The historical first issuance was largely successful because its subscriptions were mandatory. Following the first issuance were several other kinds of national bonds, including bonds issued by the Ministry of Finance (bonds for key construction projects and finance bonds starting in 1987 and 1988 respectively) and bonds issued by several other national bureaus and organizations. In 1984, China began experimenting with the idea of establishing Joint Stock companies.
At first the government did not allow the bonds and stocks issued to be tradable. However, secondary market developed underground despite government's approval. Finally the government acknowledged this practice and endorsed it with formal sanctions. In 1986, People's Bank of China (PBOC), the central bank in China, authorized the first over-the-counter market in Shenyang, which had the capacity to deal with bond transfers, mortgages, and negotiable securities appraisals. In the same year, Shanghai was also allowed to set up a small market for stock trading. Soon after this, over-the-counter markets rapidly developed in other five cities. These practices eventually led to the establishment of two national stock exchanges: the Shanghai Stock Exchange (SHSE) opened on December 19, 1990 and soon thereafter the Shenzhen Stock Exchange (SZSE) opened on December 1, 1990. Both exchanges are defined by local rules as "non-profit membership institution and legal person." Transaction process was computerized in the two exchanges at the very beginning and both use "book-entry" trading system. Moreover, each exchange has a wholly-owned settlement company, responsible for the registration, custody and settlement of trading of shares listed in that exchange. The Shanghai Stock Exchange launched the National Securities Trading Automated Quotation System (the "STAQ") and the National Electronic Trading System ("NET") on December 5, 1990. The introduction of the STAQ meant the start of concentrated over-the-counter securities trading through computer networks, linking up securities firms or agencies all over China, and offered trading via computer terminals. The two national exchanges and the automated quotation system formed the framework of China's securities markets, technically enabling China to establish an open, fair, efficient market. Soonly after the established of stock exchange, some corporations were allowed to issue foreign investment shares (so called "B shares" as we shall discuss below) to raise capital from foreigners.

The year 1992 saw a big booming of China's securities market. In that year, to stimulate the economical atmosphere stifled by the June 4th event in 1989, China's then paramount leader Deng Xiaoping toured the southern part of China, calling for substituting market economy for central planned economy in this country and encouraging people to boldly conducting economic experiment everywhere, no matter the nature of the experiment is socialistic or capitalistic. Deng's speech proved to be a powerful push toward securities markets immediately. By the end of 1992, the number of listed enterprises in Shanghai and Shenzhen increased to seventy (up from less than twenty in 1991), eighteen of which issued B shares targeted at overseas investors.

By the end of 1998, China's listed companies had issued a total of 74.61 billion shares to over 40 million investors in the markets and had raised a total of RMB 355.31 billion. The total market capitalization at the end of 1998 was equivalent to 24.46 of GDP of the country. As of August 1999, 920 companies listed in Shanghai and Shenzhen stock exchanges with a total market capitalization of RMB2965.5 billion and a daily trading volume of RMB1.5 billion.

At the very beginning of the development of markets, overlapping authorities regulating securities surprisingly co-existed for several years. Authorities such as People's Bank of China, Ministry of Finance, the State Planning Commission, the State Commission for Restructuring the Economic System (SCRES), the State Administration for Industry and Commerce (SAIC), and many local governments, etc., all had issued norms impacting upon securities markets. Confusion and conflict thus created finally led to the creation of a centralized market regulatory body. The establishment of the State Council Securities Committee (the "SCSC") and China Securities Regulatory Commission (the "CSRC") in 1992 marked the formation of this body. The SCSC is the State authority responsible for excising market regulation. The CSRC is the SCSC's executive organ, responsible for conducting supervision and regulation of the market in accordance with powers delegated by the SCSC. China has also established a regulatory framework for securities market. Since 1987, more than 250 norms and regulations governing the issuance and transaction of securities have been released by the relevant authorities. Among those laws the most important ones are the 1993 enacted The Corporation Law of the People's Republic of China ("Corporation Law"), effective on January 1, 1994, and The Securities Law of the People's Republic of China("Securities Law"), effective on July 1, 1999.

(Footnote Omitted)