In August 1997 we wrote about the new regulations issued by the China Securities Regulatory Commission (CSRC) which extended its governance over companies controlled from the Mainland but listed in Hong Kong and other Chinese companies trying to access equity markets abroad. Since then, there has been significant, if piecemeal, reform of China's individual equity and debt markets.
The most striking gap in China's regulatory framework still remains, however. China does not have a national securities law. A draft law has been circulating between the relevant government authorities for a number of years, but rumours that it will be enacted have so far met with disappointment.
Investment management
In the absence of a national securities law, most attention has been focused on moves to consolidate fund and investment management. In November 1997, the CSRC promulgated the Administration of Securities Investment Funds Tentative Procedures, which have paved the way for the establishment of large domestically-subscribed and managed mutual funds.
Some of the policy considerations are obvious: to find a home for savings and to replace individual with institutional holders of securities who may take a less volatile view of the market. Foreign financial institutions hope that there will be a role for them in professional fund management in China.
The CSRC took over supervision of securities brokerages from the People's Bank of China last spring. It has been tackling the overgrown brokerage industry by forced mergers and the imposition of higher professional standards. So J&A Securities, China's largest securities firm, was merged with China Guotai Securities after a corruption investigation. Insider trading was officially banned and standards of conduct for brokers were established by the Administration of Securities and Futures Investment Consultancy Tentative Procedures.
CSRC implemented further reforms early in 1998, such as requiring firms to have at least Yn1m registered capital and five professional analysts, and prohibiting securities and futures consultancies from trading in the market. Consultants must pass examinations and be approved by the CSRC. Even under the revised PRC Criminal Law, market manipulation and providing false information or financial statements are now crimes which are punishable by imprisonment.
The equity markets
Companies incorporated in China have issued various classes of shares which nominally rank equally but can be held by different categories of person. These classes have consistently traded at different prices and the market meltdown has exacerbated this trend, emphasising in particular the small market capitalisation and lack of liquidity in the B-share market (shares held by foreigners and listed on Shanghai or Shenzhen). The ultimate hope is that the domestic and foreign held share markets will merge. Meanwhile, a government policy announced in March last year, bars companies from listing more than one class of shares.
Though the larger domestically held share market has held up better, its volatility has given cause for concern. Under recent procedures, listed companies must disclose events that might affect their share price, and brokerage firms dealing in A-shares must retain five percent of profits as reserves. Further, they may not hold more than 80 percent of assets as shares or buy more than 20 percent of a company's shares in one day. From March this year, Shanghai investors were barred from acting through more than a single broker; in Shenzhen, investors may use any number of brokers, but may only sell shares using the broker that purchased them.
In an effort to increase transparency, the Shanghai Listing Rules mandated greater information in companies' annual reports from the beginning of 1998: detailing profit origins, restructurings and other significant transactions. Both Shanghai and Shenzhen have started labelling loss-making companies. No more than 10 listed companies now may publish annual reports on the same day.
In the past year, CSRC has also issued regulations setting out approval procedures for primary and secondary issues of B-shares.
The bulk of the bonds issued in China are government bonds, administered by the Ministry of Finance. ‘Internal' bonds are denominated and traded in yuan. As a mat-ter of course foreigners do not purchase or hold internal bonds. The central government has raised `external' bonds in the international capital markets since 1985. The credibility of the government's '10 Windows' which it used as a conduit is under strain: Guangdong International Trust and Investment Corporation has collapsed and Tianjin International Trust and Investment Corporation was reported to have been suffering from a cash shortage. However, a recent 10-year global bond from the sovereign government has been well received.
The domestic corporate bond market has remained relatively undeveloped. The government's primary interest in national debt, quota restrictions and unrealistic terms (higher rated enterprises may pay more for their debt than those rated lower, for example) have disadvantaged corporate bonds. The uncertainty surrounding corporate bonds was exemplified in April 1998, when a new PBOC regulation for enterprise bonds was suspended two months later because of excessively strict rules and lack of coordination with the State Development and Planning Commission and CSRC.
Convertible bonds
Corporate bonds denominated in foreign currency have also not been popular, mainly because of tight control over foreign debt. The Administration of Issue of Foreign Currency Bonds by Domestic Organisations Procedures came into effect in January 1998. These new { procedures, however, did not change the basic requirement for State Administration of Foreign Exchange approval and specifically included foreign invested enterprises within their scope, which are normally subject to a less stringent regime.
The PRC Company Law also provides that companies may issue convertible bonds; that is, bonds that can convert into shares. In March 1997 the CSRC Provisional Measures for the Administration of Convertible Corporate Bonds were introduced. These measures apply only to domestic listings, but convertible bonds have been issued abroad – Zhenhai Refining & Chemical Company Limited, a Chinese company, issued bonds listed on the Hong Kong and London stock exchanges which are convertible into H-shares.
Freshfields 1999. Freshfields is an international law firm. Most of its offices throughout Asia, Europe and North America include China specialists. For further details, contact Matthew Cosans at Fresh-fields, 65 Fleet Street, London EC4Y 1 HS tel: +44 171 936 4000 or by e-mail (mcosans@freshfields.com).
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