The Shenzhen Stock Market:

Background, Problems and Prospects

by

Yeung Lai Yee

Submitted to

School of Economics
University of Hong Kong

in Partial Fulfillment of
the Requirements for

the Degree of M. Soc. Sci,

June 1992
UNIVERSITY OF HONG KONG
LIBRARY

Thesis Collection
Deposited by the Author
 Table of Content

Page

Introduction 1

Chapter 1:
Background

Chapter 2:
The Shenzhen Stock
Market 26

Chapter 3:
Problems 66

Chapter 4:
Prospects 85

.References 94
 THE SHENZHEN STOCK MARKET :

Background, Problems and Prospects

Introduction

The formal institution of stock exchanges in Shanghai

and Shenzhen respectively in 1990 and 1991 marked a new

era in China's financial development. China's financial

system was one of extreme repression before 1978 :

characterized by a monobank system, the absence of

financial markets, artificially fixed interest rates,

government set exchange rates and isolation from the

international financial community.1/ The series of

reforms carried out in agriculture, industry and finance

since 1978 have brought about rapid economic progress. It

has, at the same time, disclosed many problems that

existing institutions have failed to solve.2/ As it is too

costly to restructure all institutional set-ups

simultaneously, economists and reformers have tried to

probe for some order of economic transformation and a

V For a comprehensive account of China's financial

repression and reform, see Y.C. Jao ( 1990 )
2
/ see, for example, Steven N.S. Cheung, ( 1989 ) , James
V. Feinerman (1991)
proper sequence of financial liberalization.

Before the 1978 reforms, the entire Chinese economy

was practically under the control of state plans

administratively and financially. Agricultural production

was carried out to meet state production targets and most

agricultural products were procured by the state at

government determined procurement prices. Inputs including

land (sown acreage) , labour, capital, seeds and fertilizer

were fixed under a heirachy of allocation plans or

rationing at different levels. Enterprises relied on

state budgetary allocations or bank loans for their

production funds and investments. In return, they had to

hand over their operating profits to the State Treasury.

Wages were kept at little higher than subsistence level

and restricted to a narrow range in terms of monetary

income. Savings grew at only RMB 2 to 3 billion per year.

3
/ Chinese banks operated under the guidance of the

Ministry of Finance and acted merely as channels for

distributing government funds to end-user units. Neither

credit analyses nor feasibility studies were carried in

most of the fund allocations. Neither supply and demand

nor risks associated with loans to borrowers had much

bearing on interest rates which were determined by the

Ministry of Finance.

V Yang Pixin ( 1985 ) .

 The decentralization of the economy and the

introduction of market mechanism into different sectors of

the economy since 1978 have reduced the share of state

sectors in agriculture and industries to a much lower

level. A system of various forms of responsibility

contracts has been introduced into agricultural production

since 1978. Starting then, peasant households have

assumed the task of production and payment to the

Government. Production quotas have been lowered and

procurement prices raised. Peasants are allowed a

significant share in residual claims leading to greater

work incentives and increased production. Enterprises,

after the industry reforms, are allowed to retain a

portion of the profit. Wages are revised and bonus

systems are instituted to relate remuneration to output.

The per-capita income of both the farm and non-farm

sectors rose remarkably in the last decade.

At the same time, enterprises could not rely as

before on state fiscal expenditures or bank loan

allocation as the prime sources of funds. The

consolidated revenue of the central, provincial, and local

governments fell from 34 percent of GNP in 1978 to only 19

4
percent by 1989. / The Government, on the other hand,

V Ronald I McKinnon, " Financial Control in the

Transition from Classical Socialism to a Market Economy ( 1991
) quoting Blejer and Szapaary, " The Evolving Role of Fiscal
Policy in Centrally planned Economies Under Reform : The Case
of China" IMF Working Paper 0407, March 31, 1989.
had to look for new revenue sources or funds to finance
5
state financial outlays. / On the supply side, the

Chinese people's saving and financial assets have been

rising at a remarkably fast rate during the past decade,

contributing to unprecedentedly large amounts of personal

saving deposits which rose 16 times during the period

1978-1988.6/ Ordinary people have few options, except to

choose between saving at interest rates below the

inflation rate or consumption. These developments have

only added to the Chinese plannersf s worry about inflation

and caution in financial policies.

To channel idle capital into productive capital for

the fund-hungry sectors and to cover budgetary deficit,

treasury bonds, stocks and various instruments for direct

financing have been essential instruments. The emergence

of capital markets, including Shenzhenfs Stock Exchange,

is the logical response to some of the problems created or

aggravated by China's rapid development in the past

decade. And the expansion of these markets is destined to

be the dominant feature of China's reform in the 1990fs.

5
/ see, for example, Zhong Pengrong, !f Ten Years of
Economic Reforms " published by Henan Provincial People's
Press, June, 1990; and Han Zhiguo & Liu Jipeng, " The
Emergence and Development of Shareholding System " ( 1990 ) ,
Guanli Shijie No. 6, 1990.

V NCNA, Beijing, Feb. 18,1992.

4
 This paper attempts to study the Shenzhen Stock

Market in light of the on-going economic transformation

and financial liberalization of the Chinese economy.

Chapter 1 examines the inadequacy of the existing

financial system, the evolution of the share-holding

system and other events which form the backdrop to the

establishment of the Shenzhen Stock market. Chapter 2

gives an account of the formation of the Shenzhen Stock

Exchange, its operation and development, its role in the

mobilization of domestic resources. The issuance of "B

Shares" is also discussed to evaluate the Shenzhen Stock

Market's capability to tap foreign funds. Chapter 3

scrutinizes the problems, in terms of technical and

regulatory handicaps, inadequate infrastructures and non-

economic stumbling blocks, faced by the Exchange.

Recognizing the unpredictability of the future course of

events in China and political elements involved in such

sensitive areas as investment and speculation, Chapter 4

ventures to look into the prospects of future development

of this financial innovation and the role it may play in

Chinaf s economic development.

 Chapter 1

The Background

A.Financial Repression 1950-78

It is evident that Chinafs financial system during

the period 1950 to 1978 was one of extreme repression.

Government and private banks and financial intermediaries

that existed before 1949 were either confiscated or

nationalized with nominal compensation, and merged with

the People's Bank of China which monopolized all banking

business. In the early fifties, financial markets were

closed, and negotiable financial instruments were

7
prohibited. / The rudimentary securities and stock

exchange, which had merely survived wars and political

turmoils but still failed to become a permanent

establishment in the thirty years before 1949, found no

place in the newly founded People's Republic.8/ To crack

down on the speculative activities in the Shanghai

financial markets ( which were largely caused by

hyperinflation ) , the Military Committee of the Communist

Party closed down the Shanghai Stock Exchange Building in

1
1 see Y.C.Jao (1990) and James V. Feinerman (1991)
8
/ See e.g. Feng Zhiming, " The Shanghai Stock Exchange
11
and Yu Huanqing , " Securities Markets in China since the
Establishment of the Republic of China " ( 1946 ).
June 1949 .9/ The centralization of banking and financial

control under the Ministry of Finance had met with little

opposition as the nation strived to balance the budget and

fight hyperinflation. Moreover, the relatively small

amount of idle capital and private savings did not help to

retain the old financial markets and institutions.

B. Economic Reforms 1978-89

Following the death of Mao Zedong in 1976 and the

fall of the " Gang of Four " in 1977, the Chinese

leadership apparently woke to the spectacular economic

achievements of many of its neighbours which chose to

adopt a market-oriented system. Since 1978, a series of

economic reforms which led to far reaching changes in the

Chinese economy have been carried out. The emergence of

Shenzhen stock market is in fact the latest product of

these reforms, particularly that of the liberalization of

the financial system, the fast spreading joint-stock

system adopted by Chinese enterprises and the

establishment of Special Economic Zones.

In the late 1970fs, faced with the shortage of funds,

brigade-run enterprises in the rural areas started to

raise funds among their peasant members to expand the

production facilities. Various forms of investment by

V Zhen Bijun & Lin Muxi ( 1990 )

7
peasant members flourished. By putting in an amount of

money as investment capital, a peasant member or household

became a shareholder of the brigade or township enterprise

and was entitled to receive bonuses and dividends. This

pioneering practice of giving a place to private capital

in the collective brigade enterprise met no objection and

soon gained approval from the Central planners. According

to a Directive of the State Council on " Regulations

Governing Certain Problems in Developing Commune and

Brigade Enterprises " issued on July 3, 1979, order was

given that an appropriate amount could be withdrawn from

provident funds of the production brigades and teams as a

source of new investment capital in developing brigade

enterprises in case of capital shortage.

Soon in 1982, when more and more specialized peasant

households were found to be supplying funds for the

expansion of rural enterprise activities, Wan Li, Vice

Premier of the State Council then, announced that measures

should be relaxed to facilitate this kind of activities.

The idea of allowing peasants to own a share in the equity

of rural enterprises and the distribution of income in

return not only to labour input but also to capital was

formally approved by a Chinese Communist Party Central

Directive on " Certain Problems Concerning Current

Agricultural Policies " in 1983. Given this official

sanctidft to proceed, it did not take long for the joint

stock system in rural enterprises to spill over from rural

8
to urban enterprises.10/ In 1984 and 1985, faced with a

shortage of funds coupled with the tightening of bank

credit, Chinese urban enterprises began to issue shares to

raise funds both from their own staff and workers within

the enterprise and the public. At a meeting of the State

Commission for Restructuring the Economy on trial reforms

in the urban economy in Changzhou in April, 1984, it was

acknowledged that permitting staff workers to invest in

the enterprises they work for and enterprises to sell

shares, entitling staff members to year-end bonuses, is an

effective way to solve the fund shortage problem and to

give staff workers greater incentive to work* The joint-

stock company system soon become an important constituent

of urban economic reforms.

C.Joint-Stock Company System11/

In July of the same year (1984) , what is believed to

be the first stock issuing company — the Beijing Tianqiao

Department Store Company Ltd. — was formed and RMB 300

million worth of shares were issued. The assets of the

enterprise were divided into three parts: state-owned

stocks 50*97% ( based on Tianqiao Arcade and the Qianmen

store assets) , bank-owned stocks 25.89%, other enterprise

stocks 19.69% and staff private-owned stocks 3.46%. It

10/ See e.g. Zhong Pengrong ( 1990 )

\
11
f For detailed account of the joint stock system ,
see Zhong Pengrong (1990) , Han Zhiguo & Liu Jipeng (1990).
was followed by numerous similar enterprises in Shanghai,

Guangzhou, Shenyang and other major Chinese cities. This

fund raising method was widely used in Guangdong, Jiangsu,

shanghai, Beijing, Henan, Anhui Hubei, Liaoning and Inner

Mongolia. By the end of 1985, approximately RMB 10

billion had been raised within the country by means of

stocks and bonds.12/ Most of this early issuance of

stocks/shares were carried out by collectively owned

enterprises. In December, 1986, the State Council issued

the " Regulations on Deepening Enterprise Reforms and

Making Enterprises More Active " which gave the first

official signal to select a small number of large and

medium size state enterprises to try out for the joint-

stock system. During the period 1984 to 1989, several

thousands of Chinese enterprises introduced this system of

joint-stock holding all over the country. It can be seen

years later, that the first handful of companies listed in

the Shanghai and Shenzhen stock exchanges were a chosen

few of the successful joint-stock companies with proven

profit track records.

The joint-stock system took many different forms

under different circumstances. The major variants are :

1) By transforming existing enterprises to joint-

stock companies. An estimated 85 percent of the

12
/ See Xu Jingan ( 1987 ) .

10
enterprises under the joint-stock system were transformed

in this way.13/ Stocks were issued through the conversion

of the assessed assets of an existing enterprises into

shares which were then allocated to related companies, or

internally to employees of the enterprises concerned, or

by public offering to investors in general. Shares issued

internally to employees were called employee shares14/

while those issued based on state assets or enterprise

accumulations are known as state or enterprise shares.

Most issues promised interest rates at higher than bank

deposit rates with fixed dividend payment. Some shares

were bought back by companies after certain periods. In

fl
these cases, the stocks were more like corporate bonds
11
in nature.

2) By establishing new joint-stock companies through

merger or division. This may take the form of vertical

integration of enterprises in different stages of

production in an industry, or the lateral integration of

enterprises in related and complementary industries so

that supplies of raw or intermediate materials are secured

and the market for products could be lined up. It may

also come about through the merger of enterprises in very

different lines of activity. They may still remain as

separate legal and accounting entities. State and

13
/ Han Zhiguo & Liu Jipeng (1990) .
14
/ See for example Tarn On-Kit (1991) .

11
collective enterprises were sometimes merged in this way.

As the economic reform progressed, enterprises saw new

opportunities for takeovers and mergers. Capital,

production plants, production techniques, patents, trade

marks were all reckoned to be assets as enterprises

combined to form new joint-stock companies. Enterprise

shares first came about with the granting of more

financial and operational autonomy to state enterprises.

These shares are created when enterprises were allowed to

reinvest part of the after-tax profits that they could

retain . These shares are held by the issuing enterprise

itself as an entity.

3) By establishing brand new companies. This usually

involves the setting up of a brand new operation through

public issuance of shares or the formation of a new

company by the merger of existing enterprises. The new

operation consttutes a legal and accounting entity. An

estimated 13 percent of all joint-stock companies belong

to this category.15/

The joint-stock system has been spreading faster

among smaller enterprises than large enterprises; among

collectively owned than state-owned enterprises. Share

issuance is mainly targeted at employees and related

institutions or enterprises rather than at the public.

15 y see footnote 13/.

12
Nonpublic offerings account for a far larger share than

public offerings. It is estimated that the total number of

joint-stock companies well exceeded 6,000 by late 1980!s,

with the total value of shares issued to the public

amounting to RMB 1.3 billion.16/

A number of problems have soon surfaced. There are

fundamental problems associated with the appraisal of

state-owned assets, given the lack of established

standards or methods for such assessment. Export analysis

has shown that there was often a tendency for state-owned

assets to be consistently undervalued. To protect the

value of state-owned assets and to manage them more

efficiently, the National Administration of State Property

was established by the State Council in 1988. Another

problem was the absence of an appropriate legal framework.

There was no company law nor limited liability articles in

China. The dividend rates were arbitrarily fixed. Nor

was the joint-stock system introduced on an orderly or

well planned basis. Non-public offering was the

prevailing practice. As this joint-stock system proceeds,

and is gradually recognized as the right path for

enterprise reforms, there arose an urge to overcome the

legal and institutional stumbling-blocks to its further

development.

16
/ Shanghai Asia Research, Centre (1992), p.58,

13
 17
D. Financial Reforms 1979-90 /

Parallel to reforms in agriculture and industry,

reforms had been taking place in the Chinese financial

system. In February, 1979 the Agricultural Bank was re-

instituted, to finance rural and farm sector activities.

This was followed in March by the restoration of the Bank

of China as a specialized bank for handling foreign

exchange and international trade; the Peoplefs

Construction Bank and the establishment of the China

International Trust and Investment Corporation (CITIC) the

latter of which became in due course an important player

in China's financial and securities markets. Government

bonds were issued in 1981 to cover budgetary deficits and

to finance major infrastructure construction. Most

importantly, in September 1983, the State Council

instructed the People's Bank of China to restrict itself

to the functions of a central bank, setting up the

Industrial and Commercial Bank of China was set up in

January 1984 to handle the non-central banking activities

previously handled by PBC, such as deposit-taking from and

lending to Chinese enterprises, institutions and

individual businesses. These were followed by the

creation or re-opening of financial markets and the

uj see Y.C. Jao ( 1990 ), James V. Feinerman

(1990),Xie Ming Gan (1990) chapter 14 and Zhong Pengrong
(1990) Chapter 9.

14
establishment of various regional and specialized bank

such as the Guangdong Development Bank, the Xiamen

International Bank, the Fujian Industrial Bank and the

Shenzhen Development Bank which subsequently became the

first publicly listed company on the Shenzhen stock

market.

The credit crunch in 1986 forced banks to borrow

from each other. Inter-bank markets which were approved in

principle by the PBC in 1984 spread fast and wide, and

were found within years in Wuhan, Shanghai, Shenyang and

nine other cities. Inter-bank transactions totalled 30

billion yuan in 1986 and surged to 240 billion yuan in

1987.18/ The credit squeeze also gave an impetus to the

issue of corporate shares by enterprises and debentures by

banks which failed to obtain sufficient funds. By this

means an enterprise was able to raise capital directly

from its own employees and the public. Corporate stocks

took many forms and were a misnomer in many cases. While

in conventional usage bonds fall under liability and

shares under capital or equity, the Chinese corporate

stock is a mixture of bond and equity in varying degrees.

19
7 Typically, the corporate stock has denominations of

RMB 50 or RMB 100 for individuals and RMB 100,000 for

18 / Zhong Pengrong (1990).

19
/ For a conceptual analysis of corporate shares vis-
a-vis bonds issued by Chinese enterprises, see Han Zhiguo
& Liu Jipeng (1990).

15
institutional investors. The maturity is normally short7

ranging from one to five years. The return usually

consists of two parts: a fixed interest pegged to the

posted rate of the PBC, and a dividend related to net

20
profit. / As Y.C. Jao puts it, the corporate stock

under the joint-stock system in the latter half of the

1980s was a kind of " non-voting, redeemable,

participating preferred stock " in developed economies.

The development of the joint-stock system without a stock

market is in a way a sort of disintermediation in Chinese

finance.

In order to regulate the issuance of stocks and

securities, the Chinese State Council announced in March

1987 " The State Council Directive on the Management of

fl
Stocks and Securities . The issuance of shares to the

public subsequent to the Directive brought Chinese "

fl
Shares closer to the connotation of the term in

developed economies. These stocks were non-redeemable,

transferable with dividends determined by profit

levels.21/ The major issuing entities of shares since the

mid 1980!s have been i) state enterprises, ii)

collectively owned enterprises and iii) China-foreign

joint-ventures, in that order. It can be seen from the

20/. Y.C. Jao (1989).

21 Han Zhiguo (1990) pointed out that some

enterprises issued shares as a form of employee welfare
with dividends as high as 40% a year, which were grossly
out of line with enterprise profit levels.

16
Company Profiles of Selected Companies Listed on the

Shenzhen Stock Exchange the the end of this chapter that

the companies fall under these three categories.

Share issues under the Chinese joint-stock system

that have evolved in the past five year roughly fall into

two major categories :

i) Internal Issues

These include a variety of share issues either

within the enterprise or within industry or region.

Only designated entities or persons are eligible to

purchase the shares. These may be enterprises

within the same industrial network, the same region

or employees of the enterprises concerned. The

enterprise must obtain prior approval from the local

branches of the People's Bank of China. Other

procedures vary and are largely unregulated.

Public Issues

These are shares issued to the general public

and are better regulated. The enterprise is

required to apply for prior approval by a bank with

a copy of the enterprise's business licence , company

articles, prospectus for the application of shares,

financial statements for the past three years and

proof of the capability of the issuer to underwrite

30% of the shares. The enterprise should also submit

17
 an auditor's report on asset reassessment.

With the bank's approval, the enterprise can

then authorize an approved financial institution to

carry out the public offer. A shareholders meeting

is to follow to elect the board of directors after

which share certificates are issued.

E. The Growing Domestic Savings & Inflation

Based on the experiences of many developing

countries, household savings constitute the major sources

of internally generated investment capital. It is

important that households be encouraged to hold a

significant portion of their savings in the form of

monetary assets, and to replace direct, personal and

informal credit transactions by indirect, formal credit

arrangements. As a result of agricultural and enterprise

reforms, the per-capita income of both the farm and non-

farm sector has registered remarkable increases since

1978, giving rise to a generation of peasant or urban new

lf
rich — the Wanyuanhu ". Accumulation of financial

assets by the Chinese people rose at a spectacular rate.

According to the statistics disclosed by a New China News

22
Agency report by 1988, / nominal savings rose 16 times

over the 1978 level of RMB 21.6 billion to RMB 380.1

n
l NCNA, Beijing, February 18, 1992 carried in
Jinrong Shibao, February 20, 1992.

18
billion. The corresponding figure for 1991 surged by an

additional RMB 500 billion. The same report pointed out

that the total ( nominal ) saving balance, viz. cash on

hand and financial assets held by the population or non-

government bodies, added up to more than RMB 1,300 billion

by early 1992. Of this amount, savings deposits account

for over RMB 900 million; cash on hand more than RMB 200

million and the remaining RMB 200 million plus are made up

of various forms of financial assets.

Faced with double digit inflation, Chinese consumers

have not found the 4 to 6 percent saving and deposit

rates offered by banks very attractive. In fact the real

interest rate has been generally negative. It is believed

that the possibility of free perfect substitution between

consumption and saving, Chinese people would probably

choose to consume more than the existing level. However,

for many years, good quality consumer goods and consumer

durables have always been in short supply. Domestic

production of these goods has found it increasingly

difficult to meet increasing demand and imports were

restricted and subject to heavy duties. Short supply of

colour television sets, washing machines and the like has

been constantly reported. Owning a car or a home is not

common either for the average Chinese. All these factors

contribute to a high rate of saving.

A closer look at the distribution of income would

19
reveal an even more interesting picture. Economic reforms

has no doubt resulted in a higher per capita income on the

average. It has also caused a greater disparity of income

distribution among the Chinese people. According to

surveys done in the early years of reforms, the Gini

coefficient for China in 1979 was 0.33, the coefficient

was 0.237 for rural China in 1978, and 0.185 for urban

China in 1977.™/

The co-existence of new and old institutions,

government run and non government run enterprises, market

and non-market elements led to a widening gap between

earnings of workers in different sectors. Easily noted is

the wage differences between state enterprises and joint

venture enterprises and non-wage earnings of employees of

profitable and loss incurring enterprises. The gap is

even wider between wage earners and Ge-ti-hu ( people

engaged in private business ) . As conventional economic

and growth theories hypothesize, the propensity to save or

to invest is higher among the richer than the poorer and

the accumulation of wealth in the hands of the minority is

likely to be more conducive to investment and growth than

a equal distribution for all.

23
/ Zhao Renwai, Some Observations of Income
Distribution in the Economic Transforation of China,
Jingji Yanjiu No. 1 , 1992.

20
 Table I

Saving Deposits 1952-1990 ( in RMB billion)

Urban Areas Rural Households

Year Total Fixed Current Fixed
Subtotal Subtotal Deposits
Deposits Deposits

1952 0-86 0.86 0.48 0.38

1953 1.23 1.22 0.68 0.54 0.01

1954 1.59 1.43 0.98 0.45 0.16
1955 1.99 1.69 1.33 0.36 0.30
1956 2.67 2.24 1.56 0.68 0.43
1957 3.52 2.79 1.96 0.83 0.73

1958 5.52 3.51 2.39 1.12 2.01

1959 6.83 4.73 3.16 1.57 2.10
1960 6.63 5.11 3.73 1.38 1.52
1961 5.54 3.92 2.97 0.95 1.62 .
1962 4.11 3.14 2.56 0.58 . 0.97

1963 4.57 3.56 2.94 0.62 1.01

1964 5.55 4.48 3.70 0.78 1.07
1965 6.52 5.23 4.34 0.89 1.29

1966 7.23 5.77 4.69 1.08 1.46

1967 7.39 5.98 4.89 1.09 1.41
f968 7.83 6.23 5.03 1.20 1.60
1969 7.59 6.10 4.94 1.16 1.49
1970 7.95 6.45 5.38 1.07 1.50

1971 9.03 7.33 6.14 1.19 1.70

1972 10.52 8.51 6.96 1.55 2.01
1973 12.12 9.41 7.77 1.64 2.71
1974 13.65 10.58 8.67 1.91 3.07
1975 14.96 11.46 9.45 2.01 3.50

1976 15.91 12.22 10.06 2.16 3.69

1977 18.16 1351 11.17 2.34 4.65
1978 21.06 •15.49 12.89 2.60 5.57
1979 28.10 20.26 16.64 3.62 7.84
39.95 28.25 22.86 5.39 11.70 7.63
1980

52.37 35.41 28.94 6.47 16.96 10.70

1981
67.54 44.73 36.52 8.21 22.81 15.41
1982
57.26 46.39 10.87 31.99 21.84
1983 89.25
121.47 77.66 61.53 16.13 43.81 28.55
1984
105.78 84.12 21.66 56.48 38.40
1985 162.26

147.15 118.93 28.22 76.61 53.99

1986 223.76
206.76 164.79 41.97 100.57 70.84
1987 307.33
265.92 204.52 61.40 1 14.23 78.83
1988 380.15
373,48 310.25 63.23 141.21 107.96
1989 514.69
519.26 439.62 79.64 184.16 145.51
1990 X - 703.42

Source : China Statistical Yearbook 1991

21
 According to findings of a sample survey on income

distribution among rural and urban population in 1988, the

distribution of income in China has shown interesting

characteristr ics.24/

Table II compares the monetary income of employees in

state and private sectors by ten percentile brackets in

1988:

Decile State Sector Private Sector

Groups in
ascending Lowest Highest Average Lowest Highest Average
order of
income
1 - 1064 .4 791. 9 -1180. 0 0 -93.7

2 1064 .4 1321 .2 1204. 2 0 331.0 157. 8

3 1321 .2 1496 .8 1414. 0 365. 0 704.4 546.4

4 1497 .6 1644 .0 1572. 2 708. 0 1080.0 913. 3

5 1622 .0 1790 .4 1716. 0 1080. 0 1404.0 1215. 8

6 1790 .4 1935 .6 1861. 7 1412. 0 1884.0 1542. 2

7 1935 .6 2106 .0 2016. 7 1885. 2 2487.6 2167. 8

8 2106 .0 2336 .4 2213.8 2532. 0 3360.0 2979. 0

9 2336 .4 2722 .8 2503.9 3385. 2 4460.4 3818 .6

10 2724 .0 30092 .4 3682. 0 4557. 6 29231.2 7394 .9

Note: State Sector refers to state enterprises,
government departments and agencies; Private Sector refers
to individual businessmen, private enterprises, joint
ventures and foreign investment ventures.

It is derived from findings shown in Table I that the

earnings of the lowest 20% of income earners in the

74
/ Zhao Renwai (1992).

22
private sector account for only 3.4% of the total

income.25/ The highest two groups (20%) account for 54.1%

of the total, being 15.9 times the share of the lowest two

groups. The Gini coefficient for this sector is 0.4929.

In the state sector, the lowest two income earner groups

(20%) account for 10.52% of the total income while the

highest 20% account for 32.6%. The Gini coefficient in

this group is 0.2321 ( see Table II ).

Table III

share of share of
earnings of earnings of Gini
lowest 20% of highest 20% of Coefficient
income earners income earners
State Sector 10.52 32.60 0.2321
Private Sector 3.40 54.10 0.4929

More importantly, what is not shown in the table —

viz., the geographical distribution of income between more

developed and less developed areas is of great

significance. There is appreciable income difference

between coastal and inland areas and between Special

Economic Zones and the rest of the country. Shenzhen

Special Economic Zone has evidently climbed to the top of

the population with average per capita income in 1991 at

25
/* Since the lowest figures show negative numbers,
they are discarded and only figures from groups 2 to 10
are considered.

23
RMB 5,340.26/

The growing difference between these fast and slow

growth areas has already caused concern. Any facilities

that help fund deficient areas enterprises to raise funds

in cash abundant regions is one way to solve this problem.

A stock market open to both categories of areas is a

feasible solution.

F. Availability of foreign funds

It is generally recognized that as developing

economies move towards self-sustaining growth, investment

required for development will have to be financed more

through internally generated savings, particularly when

foreign assistance or loans are not readily forthcoming.

According to a special report on securities markets

27
carried in the People's Daily on December 30, 1991 /, it

was pointed out that China found it improbable that

massive foreign loans could be raised in the 1990!s.

Firstly, the international capital market is not as well-

26
/ Shenzhen Municipal Statistical Bureau Communique,
March 9,1992.
27
/ The report is an excerpt of the Speech made by
Yuan Mux at the lf Symposium on the development policies for
China's securities market lf cosponsored by the State
Council Research Office, People's Bank of China, and China
Securities Association.

24
off as it has been in the past decade and new changes were

recognized by China to have appeared in the international

capital movements. The Middle East, which used to be a

capital exporter, must import capital as a result of the

Gulf War in the next few years. Dramatic changes in

Eastern Europe and the disintegration of the Soviet Union

had made China less optimistic about the prospects of

exploiting a generous capital environment. As pointed out

by Fry ( 1991 ) , saving and investment ratios have fallen

in all geographical regions of the world since 1982.

Interest rates have be on the climb from 2 percent in the

1970!s to 5 percent in the 1980fs, the cost of borrowing

is expected to rise further in the 1990fs.

Moreover, China has entered a peak debt repayment

period in the 1990fs. Converting domestic consumption

funds into productive capital as well as new ways to tap

foreign capital is therefore essential. The establishment

and successful operation of stock exchanges open to

foreign investors is considered a feasible venue to

capture foreign investment funds.

25
CHAPTER 2

The Shenzhen Stock Market

A. The Foreground: Shenzhen — The Special Economic Zone

Shenzhen was designated a Special Economic Zone in

1980. The idea of Special Economic Zones was conceived to

attract the capital, technology and entrepreneurial

expertise of foreign investors by offering the comparative

advantages in land and labour, and by providing investment

incentives such as tax concessions and flexibilities in

Government policies. Foreign-Chinese joint ventures are

given the freedom to hire and fire employees, to import

raw material and intermediate products for the production

of goods for export. Much more flexible policies are in

force than in the rest of the country. Prices and wages

are largely set by market forces.

In ten years1 time, Shenzhen has grown from an

agricultural community of less than 100,000 people to a

manufacturing and commercial city with a population of

2.38 million.28/ The Gross Industrial Output Value (GVIO)

rose at an average annual rate of 66 percent to reach EMB

28
/ Shenzhen Municipality Statistical Bureau
Communique, March 9, 1992.

26
 29
16.4 billion ( at 1980 constant prices ) in 1990. /

GVIO rose further to RMB 27.2 billion ( at current prices)

in 1991, of which output of enterprises with foreign

investment account for RMB 18.67 billion ( 68.6%), state

enterprises accounted for RMB 6.77 billion ( 24.9 %) and

collective and state-collective joint enterprises for 1.52

billion ( 5.6% ) .30/ Exports totalled US$ 3.45 billion

and imports US$ 2.54 billion in 1991, both registering

31
double digit average growth rates since 1979. / Total

cumulative foreign investment is estimated to exceed US$

32
6.6 billion. / Per-capita income in 1991 was RMB 5,340,
33
most probably the highest among all Chinese cities. /

The SEZ was graced by the visit of Deng Xiao Peng in 1984

and 1992 and spearheaded as the laboratory ground for

economic reforms.

The SEZ is indeed a leader in many aspects of

economic transformation : freeing prices, freedom of

29
/ Hong Kong Government Industry Department Report on
Official Visit to Shenzhen and Shekou in March 1991.
30
/ Shenzhen Municipal Statistical Bureau figures.

31
/ see footnotes I/ and 2/.
32
/ Lawrence C. Reardon estimated in an article
carried in the China Business Review, Nov-Dec 1991, that
total foreign investment in Shenzhen during 1979-89
exceeded US$ 5.5 billion and put 1990 foreign investment
at US$0.55 billion. Shenzhen Municipal Statistical Bureau
reported 1991 foreign investment as US$ 0.58 billion.
33
/ Derived from the Shenzhen Municipal Statistical
Bureau figures : Total Income RMB 12.75 billion divided by
a population of 2.38 million.

27
enterprises and workers to enter employment contracts,

cooperation with foreign investors, land auctioning,

commercialization of the housing market, commercial

property development and foreign exchange centres. Its

proximity to Hong Kong facilitates the inflow of

knowledge, information and skills into the SEZ. The Hong

Kong dollar is widely accepted in Shenzhen. The constant

physical movement of Hong Kong residents in and out of the

SEZ fosters positive exchanges and understanding between

Shenzhen and capitalist Hong Kong. The whole economic

environment and people are no doubt more receptive to the

idea and the working of free markets than in other parts

of China. These developments provide the essentials for

the emergence of a stock market.

The participation of Hong Kong businessmen in

economic activities in Shenzhen has become more and more

active during the past decade. A considerable number of

Hong Kong manufacturers had moved their manufacturing

plants across the border to Shenzhen as a result of

spiralling costs- in Hong Kong in the 1980fs. Hong Kong

based hotel and restaurant groups set up hotels and

restaurants in the SEZ. Visitors from Hong Kong constitute

a large proportion of tourists to Shenzhen. There is

evidently an intense and growing interest of Hong Kong

people ,xin the SEZ. It is little wonder that when the

Shenzhen Stock Market is opened to foreign investors

later, Hong Kong plays important roles in terms of

28
providing professional expertise as well as investors

interest in the » B » share market.

Table IV

The Economy of Shenzhen in 1991 at a Glance

RMB million % share in

unless Total
otherwise
stated
Gross Industrial Output 27,197 100.0%
of which output of foreign 18,675 68.7%
invested enterprises

state owned enter. 6,769 24.9%

collective/ state- 1,527 5.6%
coll, joint enter.
Others 226 0.8%

Gross Agricultural Output 1,430 n.a.

Total Trade* (in US$ million) 5,967* 100.0%

of which imports* 2,521* 42.2%

exports * 3,446* 57.8%

domestic exports* 2,360* 39.6%
re-exports* 976* 16.3%

Population 2,385,300 100.0%

permanent residents 1,198,100 50.2%
temporary residents 766,000 32.1%
other 432,100 18.1%

Saving Deposits 8,871

B. The Joint Stock System in Shenzhen

The joint stock system was introduced in Shenzhen in

1986. It was a time when the SEZ, like other parts of

29
China, felt the pressure of a nation wide credit crunch.

Borrowing from banks got very difficult and enterprises in

need of funds for expanding their production facilities

had to turn to sources outside banks. A number of

Shenzhen enterprises were selected for trial

transformation into joint- stock companies. The SEZ had

the advantage of being the pioneer in having an

established State Assets Management Operation* Valuation

and management of state-owned assets was taken care of by

professional investment management units. Within years,

83 enterprises were turned into joint- stock companies, of

which 13 were state-owned enterprises. **/ By 1990, over

100 joint-stock companies had been set up. Nineteen had

the experience of issuing some sort of securities.

Shenzhen was also recognized to be capable of providing

new testing ground for the joint-stock system as there was

a much greater variety of types of ownership than other

parts of the country. State enterprises had to face very

keen competition form the multitude of existing foreign

owned ventures, and Chinese foreign joint ventures. It is

known that at the first year of the introduction of the

joint-stock system in Shenzhen, employees were pursued to

purchase employee shares or even required to purchase such

shares involuntarily.35/

34
f. Annual Report on Shenzhen Securities Market 1990.
35
/ According to indirect personal reports made by
Shenzhen residents.

30
 In the mean time, the financial sector in Shenzhen

was taking shape gradually in line with the development of

commerce and industry. The trading of bonds, securities

and stock were carried out quite freely. These included

Treasury Bonds, Construction Bonds issued by the Ministry

of Finance; official securities such as debentures issued

by national banks and unofficial securities issued by

state owned enterprises, cooperative enterprises, district

and village farmers1 cooperatives. Issuers could proceed

with public issues at their own discretion without

employing agents. They were not obliged to disclose

specific information as required by company law in

developed economies; the share certificate issued to

investors were not standardized* There were no uniform

methods or procedures of issue.

Apart from the Shenzhen Branch of the People's Bank

of China which acts as a regional central bank, a number

of state-owned banks, foreign banks and non-banking

financial institutions have emerged. As early as 1985,

the Shenzhen Branch of the People's Bank of China had the

intention to set up a professional securities company and

the proposal was approved by its Beijing Headquarters in

the same year. Nevertheless the plan was not implemented

until 1987. The proposal included the implementation of

securities control, requiring that all enterprises which

\
plan to raise capital through stocks and bonds must obtain

prior approval by the Shenzhen Branch of the People's Bank

31
of China. These measures have put all capital raising

activities through securities and share offering under the

control of the People's Bank of China. The Bank

eventually decided to set up a specialized operation in

the latter part of 1987. This operation, named Shenzhen

Special Economic Zone Securities Company limited, is a

joint-stock enterprise and its 55,000 shares of RMB 100

each have been fully subscribed by ten financial

institutions organized and headed by the People's Bank of

China.

C. The Shenzhen Stock Market & Early Trading

Even before the formal establishment of the Shenzhen

SEZ Securities Company, the Shenzhen Development Bank made

the first public issue of shares in May , 1987, followed

by subsequent share issues in 1989 and 1990. The Bank

itself is the outcome of the joint stock system

experimentation in the Shenzhen SEZ. The Bank was

formerly a group of six farmers1 cooperatives in Shenzhen.

It was owned jointly by farmers in a Shenzhen village. It

underwent the joint-stock system reform more smoothly than

other state-owned enterprises because of its extensive

shareholders basis. In May, 1987, the Bank issued RMB 10

million ordinary shares for public subscription. The

general public in Shenzhen then was not familiar with

stocks and shares and the response was unenthusiastic. It

was reported that calls were made to enterprises and

32
individuals to give the first public offering a push.

Only 79 percent of the target was met. The company was

officially registered as the Shenzhen Development Bank on

December 28, 1987.

Soon after its formation in early 1988, the Shenzhen

SEZ Securities Company gave Shenzhen Development Bank a

hand in subsequent share offerings. Arrangements were

also made for the listing and dealing of the Development

Bank's stocks with the company. In two public issues in

1987 and 1988 with the shares at par value, response was

better as more people became familiarized with stocks and

shares and confidence grew with time and experience.

Unlike returnable shares with fixed devidend rates floated

by other issuers, these shares did not offer fixed

dividend rates and could not be returned. These shares

were closer to 'share1 in the conventional sense of the

term than the more corporate bond like shares that some

Chinese companies had issued in the past.. Only a small

number of stocks were traded among investors in the early

36
stage. /

The Shenzhen Branch of the People's Bank of China ,

which is the top regulatory body for the development of

the local stock market , realized that more diversified

36s/ Report on Shenzhen Development Bank in 1990 Annual

Report on Shenzhen Securities Market, pp. 68-81. Also see
various issues of The Securities.

33
stocks had to be made available to investors to create an

active secondary market. It started to concentrate on a

campaign to bring enterprises with good performance into

the market. As a result, the state-owned Vanke

Enterprises Company Ltd. was chosen to float its shares on

December 28, 1988 and became the second publicly listed

company in Shenzhen after the Shenzhen Development Bank.

The way the shares were offered for sale, the prospectus

and the auditing procedures were patterned on Hong Kong

practices with the assistance of a major Hong Kong

securities company, Sun Hung Kai Co. Ltd. which was

officially appointed by the Shenzhen Government as advisor

to Shenzhen's capital market development. Sun Hung Kai

was to provide professional advice on the development of

the stock market and assist Shenzhen to set up a stock

exchange.

To encourage market competition, the Shenzhen Branch

of the People's Bank of China authorised the Securities

Section of the Shenzhen Development Bank to conduct

similar securities operations and encouraged other

financial institutions to participate. A third company

indicating interest in securities activities was the

Shenzhen International Trust and Investment Company.

Assets listed with the Shenzhen SEZ Securities included

Treasury Bonds, financial debentures and company stocks.

Treasury Bonds were issued by the Ministry of Finance, and

were of five-year term carrying different yields ranging

34
from 8 to 10 percent. Financial debentures are issued by

various specialized banks with different terms between one

and three years. They were divided into accumulative and

discount debentures : the former carrying annually

escalated interest rates and may be redeemed at any time;

the latter may only be redeemed at a predetermined date

and paid no interest. However, the discount rate for sale

is much higher than for redemption.

In terms of trading volume, Treasury bonds were the

most active in 1988, registering a total of RMB 40 million

during the period April to December , 1988. Trading of

financial debentures added up to RMB 1.5 million, and

Shenzhen Development Bank's stocks recorded only RMB 1

million during the same period. The thin trading in

shares, according to Liao Xiwen , Managing Director of the

Shenzhen SEZ Securities Company, was due to the limited

availability of stocks listed, and investors preference of

dividends to selling at appreciated prices. It was

generally recognized that Shenzhen investors in 1988 did

not appreciate capital appreciation and paid more

attention to dividend instead. These had frustrated the

development of a secondary market but it was believed by

some optimists that the concept of investment would take

shape after some time and an active stock market would

35
 37
soon emerge. / Anyway, the public issuance of stocks

with estimated value of RMB 270 million by the first five

listed companies upto mid 1990 was estimated to have saved

about RMB 30 million in terms of cost of capital raising

compared to bond issuance and bank loans.38/

Stocks were traded over the counters. There were a

number of counters in the Securities Companyfs offices*

One who wished to buy or sell the stocks may quote a

price, which would then be listed by the company. Should

a matching buyer be found, the company would make the

transfer on behalf of both buyer and seller. The company

charged both seller and buyer 5 percent commission for

every successful deal. The rate was not based on any

regulations but determined solely by the company. There

were no explicit stipulations in prohibiting private

transfer of securities. All the buyer and seller had to

do was to register with the company after the deal and pay

a 5 to 8 percent transfer fee to the company while no

transfer fee was charged for transactions arranged by the

company.

D. Advances in 1989

37
/ See Securities Market Reporter, July, 1991 First
Issue, ^1990 Annual Report on Shenzhen Securities Market
and Hong Kong Securities Bulletin, various issues.
38
/ 1990 Annual Report of the Shenzhen Securities
Market.

36
 1989 marked a turning point for the development of

the Shenzhen stock market. Stock trading picked up

gradually in early 1989. Gintian Enterprise, formerly a

state-owned subsidiary enterprise under the Shenzhen

Municipal Textile Company obtained approval from the

Shenzhen Municipal Government in February 1989 to issue

shares to the public after a year's successful experience

in issuing internal shares under the joint stock system.

27,800 million shares of RMB 100 each were issued in

February 1988 : 22,000 shares were issued based on

existing assets of the company valued at RMB 2.2 million,

of which 11,000 shares were state shares handled by the

Municipal Textile Company, the other 11000 shares were

collectively owned by the company as enterprise shares;

the 5400 shares based on newly raised capital were shared

by the Shenzhen Development Bank which was allotted 1000

shares and employees of the company who together raised

capital for 4400 shares. At the end of 1988, each share

was awarded one bonus share and share capital was

39
increased to RMB 548,000. /

The performance of Gintian in 1988 had important

bearing on the offering of shares by the company in

February 1989. The 452,000 shares of RMB 10 were

oversubscribed. An additional 70,000 shares were approved

for issue to the public. Good results reported by the

39V Company report of Gintian Enterprise Co. Ltd. and

1990 Annual Report of the Shenzhen Securities Market.

37
Shenzhen Development Bank also stimulated market interest.

The market was unfortunately dampened by political events

in mid 1989. Share prices plunged and trade volume

dropped drastically. The market remained in doldrums for

months until late in the year. In December 1989, Shekoufs

Anda Transport Company went public. Anda was formerly a

state enterprise and was transformed into a state owned

joint-stock company in December 1989. The shares were

fully subscribed ahead of schedule. The market was

warming up again. Trading of the three types of stocks

totalled RMB 23 million in 1989.

In March 1990, a fifth company, Champaign Industrial,

went public with great success. Champaign was the first

Chinese-foreign joint venture to go public and was the

40
largest publicly listed company in Shenzhen. / By

early 1990, stocks of five companies ( Shenzhen

Development Bank, Wanke, Gintian, Anda and Champaign )

were trading actively on the market. The reports of

outstanding performance of the Shenzhen Development Bank,

Vanke and Gintian excited the market. By May, 1990,

monthly trade volume surge 30 times over January to RMB

150 million. The trading volume for the month of May

alone was 5 times the total year trading volume for 1989.

The total trading volume in 1990 amounted to RMB 7

40°/' Champaign was first set up as a Hong Kong-China

joint venture in 1987. See company report of Champaign
Industrial.

38
billion. The number of securities agents rose from three

in 1989 to 11 by the end of 1990 and the trading points

41
were increased to fifteen. / stock instead of bonds

trading was the mainstay in the Shenzhen market as

contrasted to the Shanghai Stock Exchange. The

establishment of a stock exchange in Shenzhen was then in

order«,

At a national conference in Shenzhen in early 1990,

at which Premier Li Peng reaffirmed Shenzhen's

spearheading role in China's reform and 'open-door '

policy,stock prices and volume began to surge shortly

thereafter, increasing many times during the following six

months. The following table shows the price changes in

42
this period: /

Table V Stock Prices (RMB)

1990 % change
1991
Early May 30 Jun 3 Nov May to Nov
30 Jan

Stock

Shenzhen 11.0 24.0 64.2 +484 60.09

Develop
Bank

Vanke 1.3 7.5 17.7 +1262 14.51

Gintian 24.3 81.0 208.9 +760 17.38*

Anda 1.5 8.0 21.5 +1333 14.87

41
/ see footnote 14/.
42
/ Hong Kong Bank China Briefing , October,, 1991.

39
 Champa ig 13.0 52.0 147.7 4-1036 16.15*
Indust .

* The shares of Gintian and Champaign Industrial were

split by a ratio of 1:10

E. Formal Opening of the Stock Exchange

The Shenzhen Stock Exchange was originally scheduled

to open in mid 1990. It was delayed by the Central

Government, as there was grave concern about the

possibility of stocking up an already highly overheated

market.43/ The Shenzhen Government subsequently

intervened with a series of administrative measures to

cool off the market. These measures included the

following:44/

1. Starting May 28, 1990, all buyers and sellers

must register with their identity cards and any trading

without going through the proper channels was banned.

2. Doubling of stamp duty from 0.3% to 0.6%, and

imposing dividend withholding tax to discourage

43 / Trade sources in securities trading in Hong Kong

that had experience dealing with Chinese securities
officials pointed out that the collapse of the Shanghai
stock market 43 years ago had made some fearful of social
disturbance resulting from stock market fluctuations.
44
/ See 1990 Annual Report of the Shenzhen Securities
Market and Baring Securities Shenzhen Economic and Stock
Market Review.

40
speculative activities.

3. The introduction of daily limits on price

fluctuations, again to reduce speculation.

4. Releasing market information through radio and

television broadcast as well as telephone enquiries to

improve market transparency.

5. A new set of regulations governing stock trading

were passed to protect investors and to penalize heavily

illegal deals.

These measures took several months to show effects in

the market. The announcement of the State Council in June

1990 that there would be a temporary halt in new issues

more than offset the impact of these restricting measures

in the following few months. Contrary to the intention of

dampening the market, the announcement drove prices up

instead. Investors interpreted this announcement as an

expected limited supply of available stocks while demand

is believed to be on the upclimb. The Shenzhen market

stayed buulish till the end of 1990.

Monthly trading volume rose from less than RMB 10

million, in early 1990 to RMB 454 million in mid 1990. By

the end of 1990 Shenzhen's total transaction volume of

RMB 17.5 billion accounted for 97% of the country's total

41
volume.45/ The Shenzhen public's craze for the city's

limited supply of shares led to skyrocketing of stock

prices with price-earning (P/E) ratios averaging over 70

by the end of 1990. While the demand for shares soared,

the supply of stock was held constant as a result of

Beijing's policy for gradual development of the market.

The city's inefficient over-the-counter trading system

also failed to cope with the market's rapid expansion.

Starting December 1, 1990, the Shenzhen Exchange

began de facto operation. Shenzhen authorities gradually

transferred listed stocks from over-the-counter trading to

centralized trading at the exchange located in the

International Trade Building. By April, 1991, the

exchange was operating fully in practice, if not in name,

with all of the city's listed stocks being traded.

Unfortunately, previous measures to dampen the market (

such as increasing stamp duty and imposing tax and daily

price limits ) , and the delay in both the official opening

of the stock exchange and listing of new shares reflected

changeable Government policy and damaged investors'

confidence. Shenzhen's stock price plunged again and

trading volume shrank, bringing the average P/E ratio down

to about 20.

Finally, the Shenzhen Stock Exchange got official

45
/. The other was the Shanghai Stock Exchange where
trading was much slower than Shenzhen.

42
sanction from Beijing and was officially opened on July 3,

1991. Trade was conducted by two methods : the white

board and hand signals. By the first method, buy or sell

orders are posted on a white board hung on the wall at the

front of the trading hall. Shares can also be traded on

the floor among brokers with hand signals. The hand

signal method is used when market volume exceeds RMB 6

million per day. In order to minimize malpractice, a

computerized trading system was to be installed.46/

Shenzhen securities officials apparently realized that

administrative intervention had not helped the market in

1990. Short-term fluctuations in share prices were

accepted as natural and self-correcting. The Shenzhen

Branch of the People's Bank of China (PBOC), the market's

chief regulator, began to lift previous restrictive

measures. By the end of August, 1991, five of the six

listed stocks had been exempted from the daily price

47
limits / and were on a free float. The stamp duty was

lowered from 0.6% to the previous level of 0.3 %.

Moreover, PBOC authorized enterprises and Government

departments to invest in the market through the Stock

48
Exchange. /

46
/. The computerized trading system was installed
later in February, 1992.
47
/. The one not exempted was Wuye.
48
/ See Hong Kong Bank China Briefing October 1991 and
reports in Hong Kong Wen Wei Pao and Takung Po.

43
 The outstanding performance of the six listed

companies in Shenzhen soon attracted investors from other

parts of China. With news spreading that Shenzhen

authorities were lobbying institutions to inject capital

into the Shenzhen stock market, stock prices rose from the

lows. It was also reported that some capital had moved

from the less active Shanghai Exchange to Shenzhen in the

latter half of 1991. Amount of hot money flowing into

Shenzhen exceeded RMB 1 million per day at some point.

4
v

F. Role of the Shenzhen Stock Market in Raising Domestic

Capital

In the brief history of the stock market since the

first public listing of Shenzhen Development Bank in 1987,

over RMB 20 billion was estimated to have been raised

through the public issues of shares. It has not only been

able to mobilize resources in Shenzhen but also has

attracted capital from outside the Special Economic Zone.

In November of 1991, the Shenzhen stock exchange

launched a large scale plan to list eleven more companies

to cut some of the massive speculation seen on the bourse

in 1990. This attracted an estimated 400,000 people

49
/ Hong Kong Economic Reporter No.2246,, Nov. 18,
1991.

44
lining up for subscription forms, indicating the popular

demand for stocks and attracting much attention in other

parts of China and Hong Kong. On November 10, 1991,

application forms for subscription were made available at

291 banks, securities agents and insurance companies.

About three million application forms were handed out in

two days and 2.4 million forms were returned with

indicating the level of interest. The chance of success

was only 3.6 percent.

Although the actual allocation was to come gradually

over some months, the situation was no doubt an indicator

of dramatic over-subscrption and the availability of

funds. It was reported that the amount of hot money

flowing into Shenzhen from Shanghai, Wenzhou, Hangzhou,

Wuhan, Gaungzhou, Hainan and Beijing exceeded RMB 1

50
million per day. /

Again in April 1992, seeing the spectacular rise in

stock prices in March, people came from the neigbouring

Pearl River Delta, Jiangsu, Zhejiang and even as far north

as the North East to jump on the bandwagon. Private

savings deposited in The Shenzhen Branch of the Industrial

and Commerce Bank alone per day was more than BMB 10
51
million. / It is uncertain how long this money is

50'/ Economic Reporter, No. 2246, Nov. 28, 1991,

51
/ Hong Kong Economic Times , April 15, 1992.

45
going to stay in the Shenzhen stock market nor is it

possible to estimate the amount which will end up in the

purchase of new shares that will be issued in the coming

year. This phenomenon is nonetheless demonstrative of the

potential of the Shenzhen Stock Market in mobilizing

domestic savings.

As of April 15, eleven companies were listed in the

Shenzhen bourse available to the Chinese public. These

are referred to as " A " shares. Starting February 28,

1992, a speical type of " B " shares were made available

to foreign investors. In other words, the Shenzhen

Exchange is segmented into two sectors, one for Chinese

citizens and one for non-Chinese citizen investors. The

latter will be discussed in the following section. It was

planned that at least fifty companies will be listed on

52
the Shenzhen and Shanghai bourse by the end of 1990. /

Although it is not clear at this point whether this target

could be met, it is probable that a dozen or more new

companies will be listed in the Shenzhen Stock Exchange by

the end of 1992. The amount of money raised by the issue

of new shares will be substantial.

G. " B " Share Market

The successful experiences in the the first few

52
/ Economic Reporter No. 2264, April 13, 1992 and
various newspaper reports.

46
months since the formal opening of the Shenzhen Stock

exchange paved the road for the issue of "B" shares. This

is a very recent development. The trading of « B " shares

began on February 28, 1992, about one month behind the

first issuance of " B" shares in Shanghai in Janaury and

three days behind the commencement of trading through a

scripless central computer clearing system in the Shenzhen

53
Stock Exchange on February 25, 1992. / The Shenzhen

Exchange earmarked this as a new phase of the Shenzhen

stock market.

The issue of " B " opens a new avenue to tap funds

outside of China in addition to the domestic capital

mobilized by the Shenzhen Exchange. Although the market

is still very limited and the number of " B " stocks

listed is only six by June, 1992, there is immense

potential for expansion. Enthusiasm has been shown by all

parties : Hong Kong and oversea investment companies, fund

managers, Shenzhen authorities and Shenzhen enterprises

and individual oversea investors who up to now are not

given direct assess to the market at this point.

The " B " stocks are registered stocks of RMB par

!l
value to be bought and sold by oversea investors. All

53
/ The computer system, however, is not yet in full
operation up to April 1992, according to a report in
Shenzhen SEZ Daily April 15, 1992.

47
B " stocks are quoted at the Shenzhen Stock Exchange and

all overseas securities agents must, through institutions

with special permission in securities business, make deals

in " B " stocks at the Shenzhen Stock Exchange. Deals

made outside the Exchange are strictly forbidden. No

matching outside the Exchange is allowed. The governing

body of the Shenzhen " B " stocks is the Peoplef s Bank of

China ( POBC) and in practice the Shenzhen Branch of the

POBC is entrusted to exercise the authority. It is

responsible for the examination and approval of the issue,

listing, registration of transfer of ownership and

lf
distribution of dividends of B " stocks. It has the

power to designate institutions to deal in " B " stocks

and to approve oversea agents.

Although the new shares are quoted in Renminbi,

foreign investors are allowed to buy and sell them with

foreign currency. The trading of " B" shares is handled

through oversea agents and Shenzhen brokers , similar to

the arrangement in the Philippines and Thailand. In

collaboration with the Shenzhen Branch of the State

Administration of Exchange Control, the Shenzhen Branch of

the People's Bank of China controls the remmittance and

exit of foreign exchange in the issue and trading of

Shenzhen " B " stocks.

The primary target of " B " shares are institutions,

48
securities companies, investment companies and investment

funds. The first stock offered was China Southern Glass,

followed soon by Konka, Wuye and China Bicycles Company,

Huafa and Petro Chem. The International Finance

Corporation ( IFC ) , an aff liate of the World Bank that

invests in the private sector was the first international

institution to make a major purchase of 3.5 million shares

of the China Bicycles,a joint venture of Hong Kong (Link)

and Schwinn Bicycles of the United States, that was set up

in 1983. Nine international brokerage houses have been

fl
approved to deal in B " shares. **/ The three clearing

Banks are Standard Chartered, Citibank and Hong Kong Bank.

The trading board lot for " B " is 2,000 shares for

all listed stocks. Shares purchased cannot be sold until

T + 4 ( the fourth day after trading ) . Short selling is

prohibited. The transaction costs include i) a 0.7 %

commission with a minimum charge of HK$ 400 ; ii) a 0.05

% exchange llevy ; iii) 0.3 % stamp duty and iv) a 0.3 %

clearing fee limited to a minimum of HK$185 and maximum of

HK$ 625 . The settlement period is T + 3. Stock is held

55
by the designated clearing and depository bank(s). /

54
/ The nine brokerage houses are JArdine Fleming,
W.I. Carr, Wardley, Standard Chartered, Credit Lyonnaise,
Chin Tung, Hoare Govett, Crosby and Baring.
55
/ Hoare Govett Asia Limited Dealings and Settlement
for " B " shares & Sun Hung Kai "B11 shares dealing
information.

49
 The " B " share market is still in an infant stage

but it is evident that it has aroused great interest. It

is still being debated, as to whether the opening of the

Shenzhen " B " share market at this stage is premature.

50
 Table VI

"A " Stocks listed on the Shenzhen Exchange June 2,1992

Stocks Closing Volume P/E Ratios

Price Traded
Shenzhen Dev Bank (A) 44.90 797,600 48.02
Gintian (A) 36.70 747,500 41.70
Vanke (A) 24.80 1,213,500 75.15
Anda (A) 24.60 252, OOO 62.00
Champaign Ind (A) 9.90 20,500
—
Baoan Investment (A) 30.20 2,650,400 55.41
China Southern Glass 23.20 244, 000 89.23
(A)
Konka (A) 25.70 456,000 51.81
Shenzhen Wuye 26.60 417, OOO 100.76
Property Dev. (A)

China Bicycle (A) 24.75 439,500 53.46

Dasheng (A) 36.00 141,000 60.00

Chunye (A) 53.00 134, 000 54.08

Huafa (A) 19.00 329,500 105.56

Petro Chem (A) 24.60 205,500 79.35

Kamhing (A) 25.45 54,500 71.39

Huayuan (A) 25.00 95,000 70.86

51
 Table VII
11
B " Stocks Listed on the Shenzhen Exchange June 2,1992

Stocks Closing Volume P/E

Price Traded Ratios

Shenzhen Wuye Property 19.00 152,000 71.97

Dev. (B)

China Southern Glass (B) 15.40 166,000 59.23

Konka (B) 18.75 86,000 37.80
China Bicycle (B) 17.80 136,000 38.44
Huafa (B) 12.90 210,000 71.67
Petro Chem (B) 17.30 108,000 55.61

Table VIII

Listing Dates of Shenzhen " B " Shares

Stocks Listing Dates

Shenzhen Wuye Property February 28 , 1992

Dev. (B)
China Southern Glass (B) March 27 , 1992

Konka (B) March 30 , 1992

China Bicycle (B) March 31 , 1992

Huafa (B) April 17 , 1992

Petro Chem (B) May 6 , 1992

52
 Table IX

Company Profiles of Selected Companies

Listed on the Shenzhen Stock Exchange
(m = RMB million)

SHENZHEN DEVELOPMENT SHENZHEN GINT1AN CHINA SOUTHERN GLASS

BANK INDUSTRY CO LTD

OWNERSHIP TYPE BEFORE Collectively-owned State-enterprise, a A joint venture of

LISTING & BRIEF enterprise, forxnaly 6 subsidiary --of the three state-owned
HISTORY Rural credit unions. Shenzhen Municipal enterprises {Shenzhen
Formerly registered Textile Industry M u n i c i p a l
as a Bank on 28 Corp. Transformed C o n s t r u c t i o n
Nov.1987 after first into a joint-stock Materials Co. ( 2 4 % ) ,
en share issue to public company in Feb.1988. China Northern
Co in May 1987. First issue of shares Industries ( 2 4 % ) and
to public in G u a n g d o n g
Feb.1989. International Trust
and Investment
Co. ( 2 4 % ) } and China
M e r c h a n t
Holdings(28%)
SCOPE OF BUSINESS Banking services. Cotton textiles, Glass and glassware,
textile machinery, e a r t h e n w a r e ,
dyes, silk, garments, furnitures, arts &
household electric crafts, glass
a p p l i a n c e s , p r o c e s s i n g
chemicals, car equipments, hardware,
repair, jewellery and c o n s t r u c t i o n
property development. materials, retailing.
 Table IX (Continued)

SHENZHEN DEVELOPMENT SNEHZHEN GINTIAN CHINA SOUTHERN GLASS

BANK fCont'd) INDUSTRY CO LTD fCont'd)
(Cont'd)

TOTAL ASSETS 2,919m 285m 138.8m

(as of date (Dec.31,1990) (Dec.31,1990) (Jul.1991)
specified)

TOTAL LIABILITIES 1,681m n. a* 61.06m

(as of date (Dec.31,1990) (Jul.1991)
specified)

NET ASSETS 1,238m n. a. 77.75m

en
(Jul.1991)

SALES REVENUE / n. a. 194m (1989) 20.97m and US$827,300

TOTAL INCOME 271m (1990) (1988)
5 7 . 0 8 m and U S $ 4 4 9 , 7 7 0
(1989)
7 5 . 3 7 m a n d
US$6,201,600 (1990)
PROFIT AFTER TAX
1988 25.58m n.a. 6. 38m
1989 43.02m n.a. 9.12m
1990 70.88m 5.86m 17.13m
Jan-Jul 1991 n. a. n.a. over 20m (1991)

REGISTERED CAPITAL 48.5m plus US$ 0.5 10.7m 107.53m

(number of shares) million (21,040,200 ordinary (107,532,550 ordinary
(48,500,000 ordinary shares) s h a r e s p l u s
shares, 171,385 16,000,000 »B»
premium shares) shares)
 Table IX (Continued)

SHENZHEN DEVELOPMENT SHENZHEN GINTIAN CHINA SOUTHERN GLASS

BANK fCont'd) INDUSTRY CO LTD fCont'dl
fcont'd)

INITIAL CAPITAL n. a. n. a. 71,232,550

SHARES

ISSUED CAPITAL SHARES n. a. n. a. 36,000,000

SHARE DISTRIBUTION

a. Institutions* n. a. 29.83% 66.24%

b. Public n. a. 62.11% 15.81%
en
Ui c Employees n. a. 8.0% 3.07%
d "B" shares or non- n. a. 0.047% 14.88%
Chinese residents

REMARKS Shenzhen company that First public issue of According to Hong

made the first public shares in Feb.1989. Kong Economic Times,
issue of shares- in One of the first five May 21, 1992,
May 1987. One of the companies listed on Southern Glass signed
first five companies the Shenzhen an acquisition
with shares traded in Exchange. agreement with
the Shenzhen Standard Glass Corp
Exchange. of California, US, by
which Southern Glass
will hold a 60% share
of the American Glass
Company. This is the
first Chinese
publicly listed
company to be
 Table IX (Continued)

SHENZHEN DEVELOPMENT SHENZHEN GINTIAN CHINA SOUTHERN GLASS

BANK fCont'd) INDUSTRY CO LTD fCont'd)
fCont f d)

involved in the
acquisition of an
oversea enterprise.

State Institutions include state enterprises, government departments and

organizations, collectively-owned and other types of enterprises,
n. a. not available or not applicable.

en
cr»
 Table IX (Continued)

Company Profiles of Selected Companies

Listed on the Shenzhen Stock Exchange
(m = RMB million)

SHENZHEN WUYE KONKA CHINA BICYCLES

PROPERTY DEVELOPMENT ELECTRONICS

OWNERSHIP TYPE BEFORE Formerly Shenzhen A China- Hong Kong A China-Hong Kong-US
LISTING & BRIEF Wuye Development joint venture. Equity joint venture set up
HISTORY Company, a state- shares between in 1983. The US
owned enterprise Shenzhen's SEZ partner is Schwin
established in Oversea Chinese City Bicycles and HK
Nov.1982 to undertake Economic Development partner Hong Kong
01 the contract for the Company and the Hong (Link).
construction of the Kong Electronics
S h e n z h e n Manufacture is :- 51
I n t e r n a t i o n a l : 49.
Commercial Building.
Tranformed into a
j oint-stock company
in 1988. Changed to
present name in
Apr.1990.

SCOPE OF BUSINESS Diversified from Manufacturer of Manufacturer of

construction to television sets & various models of
import and export video recorders, FAX bicycles, tyres and
business, catering machines, air accessories. Also
and property c o n d i t i o n e r s , manufactures exercise
development. packageing materials bikes.
a n d a u d i o
c o m m u n i c a t i o n
systems.
 Table IX (Continued)

SHENZHEN WUYE KONKA CHINA BICYCLES

PROPERTY DEVELOPMENT ELECTRONICS rcont'd)
rcont'd) fCont'd)

TOTAL ASSETS 65.52m (Jul.1991) 344.1m (Jul.1991) 658.7m (Jul.1991)

(as of date
specified)

TOTAL LIABILITIES 44.17m (Jul.1991) 238.1m (Jul.1991) 493.6m (Jul.1991)

(as of date
specified)

NET ASSETS 21.35m 106.0m 165.1m

en
CO
SALES REVENUE / 26.82m (1988) 437.6m (1988) 162.0m (1988)
TOTAL INCOME 31.28m (1989) 331.5m (1989) 254.3m (1989)
197.96m (1990) 838.4m (1990) 510.8m (1990)
169.82m(Jan-Jul 1991) 554.9m (Jan-Jul 1991) 485.1m (Jan-Jul 1991)

PROFIT AFTER TAX

1988 22.35m 17.15m 9.04m
1989 14.09m ' . 11.88m 18.15m
1990 24.95m 29.10m 35,85m
Jan-Jul 1991 28.9m 55.44m 37.04m

REGISTERED CAPITAL 257,511,890 plus 128,869,000 plus 201,386,000 plus

(number of shares) 30,000,000 "B" shares 10,000,000 "B11 shares 25,500,000 fl B ft shares

INITIAL CAPITAL 186,011,890 98,719,000 143,086,000

SHARES

ISSUED CAPITAL SHARES 75,000,000 30,150,000 58,300,000

 Table IX (Continued)

SHENZHEN WUYE KQNKA CHINA BICYCLES

PROPERTY DEVELOPEMNT ELECTRONICS rcont'd)
fCont'd) (Cont'd)

SHARE DISTRIBUTION

a. Institutions* 72.23% 85.8% 71.05%

b. Public 13.59% 2.3% 13.66%
c. Employees 2.52%. 3 .2% 2.63%
d. I!BH shares of non- 11.65% 8.7% 12.66%
Chinese residents

REMARKS Shenzhen Wuye was one Konka is the first The International
01 of the second group Sino-foreign j oint Finance Corporation
UD
of state-enterprises venture approved for ( I F C ) , an a f f l i a t e of
designated for transformation into a the World Bank, and
transformation into j oint-stock company t h e f i r s t
joint-stock companies in China in December i n t e r n a t i o n a l
in 1988. 1979. institution to
purchase shares in
Shenzhen, holds a
1.7% share of the
company.

State Institutions include state enterprises, government departments and

organizations, collectively-owned and other types of enterprises,
n.a. not available or not applicable.
 Table IX (Continued)

Company Profiles of Selected Companies

Listed on the Shenzhen Stock Exchange
(m = RMB million)

SHENZHEN VANKE ANDA HUAFA ELECTRONICS

CO LTD

OWNERSHIP TYPE BEFORE Formerly Xiandai A state-owned A joint venture of

LISTING & BRIEF S c i e n t i f i c enterprise set up in China Zhenhua
HISTORY I n s t r u m e n t s 1981, named China Electronics Co. under
Exhibition Centre, a Merchant Holdings. the Ministry of
s t a t e - o w n e d Transformed into a Machinery (1/3),
enterprise. Turned j oint-stock company Shenzhen Electronics
cr> into a joint-stock on Oct.1989. Group (1/3) and Hong
o
company by issuing Kong Luk's Enterprise
13.25 million shares (1/3) .
of RBM 1 shares based
on the RMB 13.25
million worth net
assets in Nov.1988.
First issue of shares
to public in
Dec.1988.

SCOPE OF BUSINESS Trading, television Transport services Manufacturer of

sets, manufacturing, (passenger and television set, video
printing, garment goods). recorders, digital
making, electronics, watched, computers,
aquatic products, computer accessories
medical equipment, and precision
food, advertising and instruments.
publishing.
 Table IX (Continued)

SHENZHEN VANKE ANDA (Contfd) HUAFA ELECTRONICS

CO LTD rcont'd) rcont'd)

TOTAL ASSETS 220.08m 17.65m 488.89m

(as of date (Dec.31, 1990) (Dec.31, 1990) (Aug.31,1991)
specified)

TOTAL LIABILITIES 168.6m 14.56m 337.75m

(as of date (Dec.31, 1990) (Dec.31, 1990) (Aug.31, 1991)
specified)

NET ASSETS 51.98m 3.09in 151.14m

SALES REVENUE / 18.76m (1988) 4.7m (1988) 411.3m (1988)

TOTAL INCOME 23.48m (1989) 5.4m (1989) 205.4m (1989)
21.86m (1990) 9.5m (1990) 344.4m (1990)
238.4 (Jan-Jul 1991)
PROFIT AFTER TAX
1988 5.83m n. a. 47.75m
1989 12.48m 0.9m 25.60m
1990 21.47m 2.6m 32.87m
Jan-Jul 1991 n. a. n. a. 28.30m

REGISTERED CAPITAL 41.3m 12.5m 169.53m

(number of shares) (41,330,000 ordinary (12,500,000 ordinary (169,530,000 ordinary
shares) shares) shares plus "B11
shares)

INITIAL CAPITAL n. a. n.a. 139,900,000

SHARES

ISSUED CAPITAL SHARES 41,330,000 25,000,000 after 29,630,000

additional issues.
 Table IX (Continued)

SHENZHEN VANKE ANDA fCont'oO HUAFA ELECTRONICS

CO LTD (Cont'd) fCont'd)

SHARE DISTRIBUTION

a. Institutions* 32% 60% 82.52%

b. Public 43,8% 39% 14.63%
c. Employees n. a. 1% 2.85%
d. "B" shares or non- 24.2% n. a. n. a.
Chinese residents

REMARKS One of the first five One of the first five The company claims to
00 companies listed on companies listed on be among the top
the Shenzhen Stock the Shenzhen Stock enterpris e s in
Exchange. The company Exchange. Shenzhen in terms of
has a remarkably foreign exchange
young staff with creation through
average age at 30. export.
58% of the staff had
a tertiary education.

State Institutions include state enterprises, government departments and

organizations, collectively-owned and other types of enterprises,
n* a. not available or not applicable.
 Table IX (Continued)

Company Profiles of Selected Companies

Listed on the Shenzhen Stock Exchange
(m = RMB million)

HUAYUAN BAOAN ENTERPRISE DASHENG

OWNERSHIP TYPE BEFORE A Shenzhen-Hong Kong Set up in 1983 as a A Shenzhen registered

LISTING & BRIEF joint venture joint-stock company enterprise. Ownership
HISTORY established in July named Baoan County not specified. Turned
1987. The joint Investment Co. into a joint-stock
venture applied for Changed to present company in Nov.1988.
approval for name in 1991.
transformation into a
j oint-stock company
in 1990.

SCOPE OF BUSINESS Electronics, computer Investment. Manufacturer of vedio

software. recorders, hi-fi,
household electric
a p p l i a n c e s ,
amplifiers, musical
instruments.

TOTAL ASSETS 59.89m 180m 49.07m

(as of date (Jul.1990) (Dec.1990) (Dec.1990)
specified)

TOTAL LIABILITIES 43.83m 120m 37.38m

(as of date (Jul.1990) (Dec.1990) (Dec.1990)
specified)

NET ASSETS 14.03m 50m 11.69m

 Table IX (Continued)

HUAYUAN (Cont'd) BAOAN ENTERPRISE DASHENG fCont'd)

(Cont'd)

SALES REVENUE /
TOTAL INCOME
1988 12.09m 166m 37.15m
1989 24,32m 254m 32.25m
1990 41.96m 556m 54.70m
Jan-Jul 1991 39.96m n.a. n. a.

PROFIT AFTER TAX (Only profit before

tax available)
1988 2 . 02m 9.29m 1.67m
1989 2.99m 18.20m 2. 02m
1990 3.16m 40.30m 6.12m
Jan-Jul 1991 2.66m n. a. n. a.

REGISTERED CAPITAL 26.56m 165m 13.9m

(number of shares) (26,562,000 ordinary
shares)

INITIAL CAPITAL 15,562,000 n.a. n.a.

SHARES

ISSUED CAPITAL SHARES 11,000,000 n.a. 10,500,000

SHARE DISTRIBUTION

a. Institutions* 58.59% 44.7% n. a*

b. Public 37.65% 51.15% n.a.
c. Employees 3.76% 4.15% 13%
d. "B11 shares or non- n. a. n.a. n.a.
Chinese residents
 Table IX (Continued)

HUAYUAN CCont'd) BAQAN ENTERPRISE DASHENG fCont'd)

TCont'd)

REMARKS 90% of Huayuan!s The first Shenzhen Dasheng exports 50%

products are for enterprise that was of its profucts to
export. set up as a joint- Hong Kong, S.E. Asia,
stock company* Japan, US and Europe.

* State Institutions include state enterprises, government departments and

organizations, collectively-owned and other types of enterprises*
n.a. not available or not applicable.

en
en
Chapter 3

Problems

The official opening of the Shenzhen Exchange is

without doubt a milestone in the development of capital

markets in China. Problems have nonetheless remained.

Moreover, some concealed problems have eventually surfaced

as trading volume grows and activities expand. These

problems are manifold and are not expected to be solved

within a short period of time. This chapter tries to

discuss these problem under five major categories : A) .

The Lack of An Appropriate Legal Framework; B)

Insufficient Professional Practitioners ; C) The

Inadequacy of Supporting Infrastructures; D) Foreign

Exchange Problems; and E) Non-economic Interferences.

A. The Lack of An Appropriate Legal Framework

56
An American scholar / engaged in the study of

Chinese Reforms in the past decade points out that the

structural relationship between law and the economy is one

of the most crucial determinants of China's prospects for

modernization. Property rights, ownership regulations,

employment and labour laws, etc., that have been developed

6
56,
/ see Feinerman ( 1991 ) . Feinerman is Associate
Professor, George Town University Law Center and Fulbright
Lecturer on Law at Beijing University 1982-83.

66
in the past two centuries in the western countries are

prerequisites for the market to function properly.

Feinerman (1991) provides an interesting framework for

discussing the situation of the legal framework

development lagging behind progress made by the Shenzhen

Stock Exchange. To quote Feinerman 57/ ,

11
It is almost universal experience of
western market economies that law evolves
following , and in response to , changes in
other realms that create conditions for
economic development. 58/ For instance,
economic conditions must be ripe for
development to occur, the political climate
must be conducive to change, and there must be
the requisite cultural or societal belief that
change is desirable and possible. For law to
be a part of this process, there must be a
widespread belief that law matters and that
legal changes can and will be enforced at all
levels of society. Thus, law is a necessary
but not a sufficient condition for meaningful
economic change or development. fl

11
These considerations accord with the
general notion in the West that markets
functions best when free from intrusive
government regulation. There are some obvious
exceptions of course, such as natural
monopolies and those sectors of the economy
that have proven more effective when
regulated, such as banks. In addition, both
the emergence of regulated markets, such as
securities exchanges, and the proliferation of
consumer protection laws demonstrate ways in
which political decisions cast in law have an
effect on the economy.... so there is a
continuing synergy between law and economic
development ..."

57
/. Feinerman (1991) op cit.
58
/ Feinerman quoting Harrison White (1981), " Where
do Markets Come From ?' American Journal of Sociology,
Vol. 87, 1981, p.517.

67
 The history of China in the past forty two years has

been a very different experience. There was, and still is,

a very different perception of the rule of law and the role

of law. Chinese cadres and the population at large, have

been used to following policy of and instructions from the

government rather than in accordance with law for several

decades. Law is often viewed as a means of bringing about

a certain economic and legal order rather than what comes

about through economic, political and social changes. The

disregard for the rule of law and the abuse of privilege

enjoyed by some high ranking cadres bred corruption. The

progress of reform and resulting economic development has

evidently warranted the creation or the re-creation of

economic laws. It is clear from preceding chapters that

the accumulation of wealth by the Chinese population, the

extent to which economic reforms in the past decade have

changed the economy and the designation of Shenzhen as an

economic Zone provide essential economic conditions for

the emergence of the Shenzhen Stock Exchange. It is to the

amazement of many observers outside China that stocks and

shares have been traded, ( very actively at times ) for

some years, before the formal opening of the Shenshen Stock

Exchange without an explict legal framework.

There were no basic laws regarding the joint stock-

company system, no limited liability company articles nor

formal articles of association. The " Interim Measures on

the Management of Internal Joint Stock Share Certificates

68
for Shenzhen Municipality » came in late February, 1992,

six years after the implementation of the joint-stock

system in Shenzhen in 1986. The shareholder had little

protection by law of his rights and he was content to see

that the issues appeared to have had some form of nominal

endorsement by various levels of local government, although

the validity and strength of such endorsement were never

explicit. As individual investors were somewhat used to

this kind of implicit order, the Shenzhen securities

authorities were unimpressed with the importance of law and

regulations in orderly trading if the market was to operate

efficiently. The authorities were naturally overwhelmed to

see tens of thousands of people lining up for application

forms when eleven new companies were announced to be listed

on the Shenzhen Exchange and authorized to issue shares to

the Chinese public in 1991. Even months after some lucky

applicants were informed to have been allotted shares, the

unit share prices they were supposed to pay was not yet

known. Nor were details of offers published. In fact,

there were no rules nor regulations stipulating explicitly

the disclosure of company information to prospective

shareholders and when these information should be

disclosed. Apparently, these people in the queues, as

economic agents, were not well informed prospective

investors. Their behaviour or decision to buy was not

guided by analyses of company information, P/E ratios,

etc., but their accustomed reliance on the government to

screen the good from the bad. After all, government

69
approval had been crucial to success or failure in the

economic and business world of China. The fact that these

companies were approved for listing was good enough

information for prospects of profit making. In fact,

59
recent press reports / disclosed that subscription forms,

each of which entitling the registered holder to purchase

2,000 shares, were selling at RMB 3,000 or more in the

black market. The highest price reported was as much as

RMB 10,000.

As long as the subscription forms in these legal

transfers were genuine ( which can be viewed as a sort of

black market activities ) , they were less disturbing than

the cases of forged share certificates sold by some

Shenzhen enterprises to employees and the public, ***/

Claims about malpractice of brokers and brokerage agents

61
were also reported. / In a seemingly lawless environment,

unruly activities are common at all levels of the trade.

59
/ See for example, Hong Kong Wen Wei Po, March 20,
1992.
60
/ For example, China Daily reported on April 10 that
the Shenzhen SEZ Foreign Trade Group Guangzhou Feng Hua
Company was ordered to close down as the People's Bank of
China conducted an investigation for alleged illegal
activities. The firm, a subsidiary of Shenzhen SEZ
Foreign Trade Holdings, allegedly illegally printed 1,000
sets of share rights transfer certificates and sold them
to employees. According to Shenzhen SEZ Daily, April 8,
1992, Fenghua bought 400,00 shares of Zhuhai Junxing
Enterprise at RMB 1 each in early March and started
printing transfer certificates illegally to sell to
employees and other people at Rmb 1 or RMB 2 per share.
61
/ See for example, Wen Wei Po, February 14, 1992.

70
There have been reports of organized queue jumping at stock

transaction counters, daily rows betweem gangs, mainly

jobless people from other provinces who make profits by

taking positions in the long queues and selling them at

high prices.62/ During the active trading months in the

first half of 1992, the prices went as high as RMB 200.

It would be unfair to accuse Shenzhen securities

authorities and the central securities authorities of

obtuseness regarding the importance of the rule of law.

Changing the legal framework would be a long and

painstaking process and apparently it has been lagging far

behind economic progress. The experience of the Chinese

government and the Chinese population in the past forty

years has probably blunted their sensitivity and implanted

a concept of law that is not very conducive to the

establishment of the rule of law in economis activity. On

the other hand, securities legislation has been a concern,

though perhaps not be a major concern of Shenzhen

securities officials. Towards the end of 1988, the

Government showed an intention to transplant Hong Kong laws

pertaining to securities market. A closer look reveals

that the securities market in Hong Kong is embraced by the

62
/ See for example Hong Kong South China Morning Post
May 13, 1992, Shenzhen authorities have arrested 105
people for disrupting public order at stock transaction
counters. An unemployed man from Anhui province was
stabbed to death during a fight between rival gangs over
places in a share transaction queue. According to the
Hong Kong China News Service, of the 105 people arrested,
12 were unemployed residents of the SEZ.

71
common law. its operation is regulated partly by

regulatory bodies like the Securities and Futures

Commission and partly by the rules of the stock exchange.

Some of latter may not have the force of law. However,

malpractice or improper decisions are all subject to

judicial review. Comparing Shenzhen to Hong Kong, one can

see the following are present in Hong Kong but not Shenzhen

i) a government which aims to provide a minimum

administrative role of maintaining law and order while

leaving the market to function without undue intervention;

ii) an established system of law borrowed from Britain

with both judges and lawyers who are independent of the

administration and can be relied on to protect rights of

investors;

iii) a public well educated in the concept of law and

which is generally well informed.

Problems are doomed to surface as the Shenzhen Stock

Exchange develops with the lack of a comprehensive legal

lf
framework. The availability of B " shares to overseas

investors necessitate interaction and cooperation with

foreign brokerages and international securities

professionals and eventually the integration of the

Shenzhen market with the global market. Shenzhen has so

72
far been more adaptive than Shanghai. The issue of

Shanghai's first only » B » share,63/ Vacuum Electronic in

late 1991 had not been very smooth. Some merchant bankers

who originally were interested in underwriting the issue

even opted to withdraw because of Shanghai's intractable

stance and reluctance to follow internationally accepted

practices. Merchant bankers were requested to sign

underwriting agreements without appropriate financial

statements and audit reporting. One bank actually withdrew

from underwriting the issue.64/ One of the underwriters is

still handicapped when advising investors as there is no

tax law governing capital gains.65/ Shenzhen had moved

faster and drafts of " B " shares regulations were

completed in late 1991. In April 1992, it is considering

the establishment of an arbitration body for " B " share

trading.

B. Insufficient Professional Practitioners

Trading in stocks and shares is a very recent

development for Shenzhen. Even for China, the comeback of

stock exchanges after the hiatus of more than forty years,

63
/ as of April 15, 1992.
64
/. It was Standard Chartered Asia. See Lai (1992)
under market reports.
65
/ Sun Hung Kai Securities advises investors that up
to April , 1992, there is no tax on capital gain reaped in
Shanghai " B " stocks.

73
is very close to starting from scratch. According to the

Shenzhen Stock Exchange «/, there were only thirty people

employed by Shenzhen securities companies in the beginning

of 1990. The number rose to 300 by the end of 1990 and

increased further to 600 by the end of 1991.67/ Most of

them are far from experienced due to the short history of

the trade. The rapid expansion of the market in 1991 and

1992 requires efficient floor brokers, share registration

personnel, qualified accountants, auditors and managers.

Professional practitioners with appropriate training and

qualification, dedication and adherence to professional

standards of conduct are important elements for a healthy

market*

As pointed out earlier, the issue of Shanghai Vacuum

11
B " shares had problems with foreign underwriters because

the Shanghainess company failed to produce financial

statements prepared according to international standards

timely.68/ As Shenzhen has more experience in dealing with

foreign investors, accounting is less a problem,

66
/ See 1990 Annual Report on Shenzhen Securities
Market, p. 57.
67
/ The numbers were provided by Mr Xie Lin of the
Securities Section of the People's Bank of China, Shenzhen
Branch to the author during an interview in May 1992.
68
/ See Lai (1992) . It was reported that the
financial report of Shanghai Vacuum Electronics prepared
by domestic accountants was not accepted by international
merchant bankers. It was finally agreed that Arthur
Anderson, an international accounting firm, was appointed
to prepare an audit report.

74
particularly in joint venture companies. However,

professional Chinese accountants that are conversant with

the international accounting practices and are able to

prepare statements in accordance with acceptable

accounting systems are essential for the Shenzhen shares to

expand into the area of tapping foreign funds. At the

present stage, Shenzhen can solve this problem by

soliciting assistance from neighbouring Hong Kong. Even at

the national or local level, accounting and auditing

professionals and good accounting systems are crucial to

the development of the Shenzhen stock market. A competent

team of accountants and auditors and relevant regulations

stipulating the disclosure of financial information of

public listed companies are the key to enhancing the

confidence of Chinese investors in the stock market and

carrying the Shenzhen Stock Market past the primitive stage

to a more sophisticated operation.

Other practitioners including brokers, securities

traders, agents involved in stock and securities trading

with good training and respect for professional standards

of conduct are also essential to minimize mistakes and

malpractice. There is obviously a very heavy demand on

labour, particularly on heavy trading days. Brokers and

other personnel are reported to be working overtime and

still fail to clear backlogs. This problem is aggravated

by the insufficient telephone, communication and banking

services. It is very difficult to get through telephones

75
of the exchange and the full operation of the computer
69
system is not yet in sight. / The still developing

banking services are another handicap particularly for

individual cross-border ( of the SEZ ) traders. As

telegraph transfer for individual customers is not common

in China, and buyers have to open an account in one of the

Shenzhen banks in order to trade in Shenzhen stocks,

individual investors outside Shenzhen are known to carry

70
cash all the way from outside Gunagdong to the SEZ. /

There have also been reports of illegal activities and

malpractice by securities agents and brokerages now and

71
then. / If these kind of activities are found to happen

too frequently, investors confidence would be severely

shaken.

Shenzhen authorties, however, are generally optimistic

69 / Shenzhen SEZ Daily, 4/15/92.

70
/ Hong Kong Economic Times, in a series of reports
on the Shenzhen Stock Market reported on April 15, 1992
that investors from Guangzhou, Jiangsu, Zhejiang and as
far off places as the North East were found carrying brief
cases full of RMB to deposit in Shenzhen banks and
registered to purchase Shenzhen stocks. A picture showing
people lining outside on the banks was also carried in the
newspaper. It was reported it took one whole morning for
one to open an account and deposit money because the
cashiers had to spent hours counting cash RMB.
71
/ See , for example report of China New Service on
February 13, 1992 . The Securities Department of the
Shenzhen Branch of the People's Bank of China were
reported by investors many times to have behaved contrary
to trading regulations causing losses to investors. The
Securities Department was ordered to compensate investors.

76
about overcoming this problem. The simple logic is that

demand will be met by supply if the wage rate is free to

move to the market clearing level. And it is evident that

Shenzhen stock market is well supplied with skillful

personnel from all over China and has been able to attract

the best talents in the country. The fast growing stock

and securities market has no doubt generated immense

employment opportunities. The demand has been met by a

continuous influx of young and well-educated migrants.72/

It is claimed that about half of the number of graduates

with a doctorate degree in China are working in Shenzhen

and the trade employs an above average number of university

graduates and graduates with a master or doctorate

degree*73/ The average monthly wage for a university

graduate employed by Shenzhen securities companies is more

than RMB 1,000 which is extremely attractive to an average

graduate in China, particularly to one living in other

parts of China where wages rarely exceed RMB 500. Although

once employed by a securities office, an individual is not

permitted to engage in stock -trading, the higher standard

72
/ During her visit to the Shenzhen Stock Exchange,
the Peoplefs Bank of China, Securities Section and broking
houses, the author has the impression of a very young work
force in the stock and securities trade and the SEZ as a
whole. Accompanying officials pointed out that temporary
residence was usually granted to migrants under the age of
45 and with a good general education background.
73
/ Information obtained during meetings with Mr. Xie
Lin of the Securities Section of the People's Bank of
China, Shenzhen SEZ Branch and Mr. Zhen Qinan, Assistant
Chief Executive of the Shenzhen Stock Exchange on May 28,
1992.

77
of living, the glamour of the SEZ and the immense

opportunities emerging in South China are considered

additional benefits on top of wages by more ambitious job

seekers.74/

New employees of the. stock exchange, government

securities offices and securities companies are usually

given on-the-job training. More established securities

offices and companies are obliged to take some of these

trainees although there is no explicit training

arrangement.75/ Personnel mth potential to assume more

responsible positions are sent: across the border to study

stock trading in Hong Kong-. Hong Kong professional

practitioners are also invited to Shenzhen to share their

experiences with Shenzhen professionals. It is therefore

believed that given time, theire will be a sufficient number

of professional practitioners to met the demand of the

stock market.

C. The Inadequacy of Supporting Infrastructures

14
/ It is estimated there are about 1.3 milllion
temporary resident workers in the Shenzhen SEZ, according
to a report in the Shenzhen SEZ Daily,, Jan. 23, 1992.
These workers lf come when tliere are jobs and leave when
there is no job ". This unlimited supply of labour has
prevented wage hikes.
75
/ Information obtained from Mr. Xie Lin during
meeting in Shenzhen.

78
 Supporting infrastructures include specific

regulations pertaining to the trading of stocks and shares,

and to the operation of the stock exchange; the

implementing mechanism; banking services, accessibility to

information by investors; facilities available to investors

outside the Shenzhen SEZ as well as telecommunication and

telephone services.

The earliest four sets of regulations concerning the

securities market were drafted in late 1989* These are "

Provisional Regulations of Shenzhen SEZ for Bond Issues ",

"Provisional Regulations of Shenzhen SEZ for Share Issues

11 H
9 Constitutional Memorandum of the Securities Trading

Committee under the People's Government of Shenzhen

Municipality ", and " Provisional Rules of Shenzhen SEZ

for Securities Market Management ".7<7 The Shenzhen Stock

Exchange has been trying to catch up in developing a set of

securities legislations lately. " Interim Measures on the

Issue and Trading of Stocks" was published in mid 1991 and

has remained as interim measures thereafter.77/ After

much delay, " Interim Regulations on Joint-Stock Limited

M
Companies were announced in February , 1992 .78/ It was

followed by the " Interim Measures on Regulating Shenzhen

76V "The Securities Market of Shenzhen under Four

Regulations " in The Securities Journal, March 1990.

17
/ Hong Kong Ta Rung Po, July 3,1992.
78
/ Announced by the Shenzhen Municipal Government on
February 19, 1992 and carried in Shenzhen Commercial News,
March 18, 1992.

79
Internal Joint- stock Share Certificates " later in the

79
month / and " Interim Measures on Regulating Public
80
Listed Companies « in April , 1992. / Prior to the

announcement of these regulations, there were only

circulars outlining proper procedures in listing or trading

issued by the Municipal Government or the Shenzhen SEZ

Branch of the People's Bank of China providing guidelines

81
to traders. /

Regulations pertaining to " B " shares were announced

ahead of the listing of " B " shares in the Shenzhen Stock

Exchange. The " Interim Procedures on Control of Shenzhen

ff
Special ( B-Type) RMB Stocks was promulgated for

enforcement by the People's Bank of China and the Shenzhen

82
People's Government / and " Rules for the Implementation

of the Interim Procedures for the Administration of Special

Stocks in RMB ( B-type Stocks) in Shenzhen City " were

issued by the Shenzhen SEZ Branch of the People's Bank of

83
China / in December 1991. " Regulations on the Trading,

79
/ Announced by unspecified authority on February 26,
1992 carried in Shenzhen SEZ Daily on April 10, 1992.
80
/ Announced by the Shenzhen Municipal Government on
April 4, 1992 and carried in Shenzhen SEZ Daily, April 15,
1992.
81
/ Over 70 such circulars were listed in the 1990
Annual Report on Shenzhen Securities Market.
82
/ An English translation of the Procedure was
carried in China Economic News, January 27, 1992.
83
/ An English translation was carried by China
Economic News , February 3, 1992.

80
and Clearance Procedures of B-type stocks in the Shenzhen

Stock Exchange » and " Interim Regulations on the

u
Registration of Special ( B-type ) stocks « f soon

followed. All are, however, provisional regulations and

not permanent national regulations.

The lack of regulatory legislation had probably been

spotted by Hong Kong securities companies interested in "

B " shares well before their public listing. The Shenzhen

SEZ securities officials are reported to be quite receptive

to professional advice and apparently chose to develop

regulations for " B " shares in order to successfully

launch the listings. However, foreign securities

practitioners, especially trustees, are still concerned

about the problems associated with " B " shares in terms

of settlement, liquidity, and credibility of information

released on individual issues.

D) Foreign Exchange Problems

This problem was not apparent at the " A " shares only

stage. Since the Shenzhen Stock Exchange offered « B "

shares for investors outside China, the situation has been

more complicated. Although the " B " shares are

denominated in RMB, foreign buyers must convert foreign

M
/ Both announced by unspecified authority and
carried in Shenzhen SEZ Daily on February 1, 1992.

81
currencies into RMB in order to trade in Shenzhen stocks.

The exchange rate is set at the level quoted at Shenzhen

Foreign Exchange market on the day prior to the transaction

date. As RMB is not convertible in the international

foreign exchange market, this is a major concern of foreign

investors. It is an important factor when investors

evaluate the liquidity and foreign exchange risks involved.

It is also a concern of China. As trading in " B " shares

grows, the amount of foreign currencies flowing in and out

of the Shenzhen stock market will affect the demand and

supply for RMB. On the other hand the exchange rate of RMB

will also have effects on Shenzhen stock prices.

This problem has been overshadowed during the first

lf
few months since the first B " shares was listed in late

February, 1992 by rising prices. The price of Shenzhen

Wuye Property Development, for example rose by 200 percent

from RMB. 6.30 on March 31, 1992 to RMB 19.00 on June 2,

1992. The price of China Bicycle rose from RMB 7.35 on

March 31 to RMB 17.80 on June 2, 1992. The gain in share

prices in these months had made foreign exchange risks

considerations insignificant. However, RMB is constantly

under the pressure of devaluation considering China's

foreign trade situation. The " B " share market will no

doubt be affected by exchange rate changes of RMB and vice

versa.

E. Kon-economic Interferences

82
 Government administrative interventions in stock

markets are generally not considered desirable. The

Shenzhen Municipal Government had on several occasions been

driven to step in the market to dampen black market and

speculative activities. in mid 1990, when share prices

skyrocketed, daily limits of + or - 10% on share prices

were imposed on May 28. The limits were further reduced to

+ or - 5% on June 18 and again to a upper limit of to 1%

and lower limit of 5% on June 26. Other measures included

the increase in stamp duty from 0.3 % to 0.6% and the

imposition of a tax on interest earned by dividend above

the bank interest rate for 12 month time deposit. The

daily limits were later lifted and stamp duty reduced.

That the government takes liberty in imposing and revoking

administrative measures on market activities could be very

damaging on investor confidence.

Worse still will be changeable policies. The

establishment of the Shenzhen Stock Market has been a topic

of hot debate in terms of political ideology in China. The

Exchange had been held up on several occasions because of

unsettled differences among policy decision makers. It is

not within the scope of this paper to examine the political

elements and ideological debate on the capitalist or

socialist nature of a stock market. It must nonetheless be

admitted that the political environment of China has a

heavier weight on the development of stock markets in China

than in other Asian developing countries. Political

83
instability will no doubt be a paramount problem.

84
chapter 4

Prospects

South China is anticipated to be one of the fastest

growing economy in the Asia and probably in the world in

the next decade. The Shenzhen SEZ, being the most

prosperous city of South China and in close proximity to

Hong Kong, has all the essential conditions for the

development of tertiary industry, particularly capital

markets. It has the advantages of an open environment,

experiences in dealing with the outside world and a proven

record of economic success. It is, on the other hand,

disadvantaged by a relatively small area, and a

comparatively short history as a manufacturing or

commercial centre compared to other big Chinese cities like

Shanghai and Shenyang. The total number of industrial or

non-industrial enterprises is much less than those in old

Chinese industrial centres. Most of enterprises in

Shenzhen are small to medium size operations. There are

other factors such as remoteness from the Central

Government, greater foreign interests, which may be

positive or negative elements depending on the political

climate.

Recent developments, however, have shown that

Shenzhen may well overcome some of the disadvantages.

There is a possibility that Baoan County where the SEZ is

85
situated will be incorporated in Shenzhen in the near

future. An airport is being built. There is an immense

interest of businessmen in Hong Kong, which itself will

become part of China in 1997. With investment and

expertise from Hong Kong, there are good possibilities to

develop both manufacturing and service industry in

Shenzhen, given the room to expand physically. According to

the Second Ten Year Economic Development Plan ( 1991-2000

) of Shenzhen, RMB 100 billion will be raised and invested

in Shenzhen in this period to improve the infrastructures

of Shenzhen, including roads, electricity supply, telephone

and communication networks.85/

A. Domestic " A '• Share Market

It is estimated that more than 350,000 mainland

Chinese residents have the experience in investing in

Chinese " A " shares.86/ Shenzhen residents are

particularly enthusastic investors. One out of three SEZ

residents has the experience of buying stocks.87/ The

85
/ According to a report in Guangzhou's Yangcheng
Wanbao, May 29, 1992, Li Quanfang, Deputy Major of the
Shenzhen Municipality outlined the Second Ten Year
Economic Development Plan of Shenzhen during a press
conference. He disclosed that the boundaries of Shenzhen
will be expanded and the SEZ is designated to be turned
into a major Chinese commercial and financial centre.
86
/ Hong Kong South China Morning Post, June 2, 1992
quoting Zhen Qinan, Deputy Chief Executive of the Shenzhen
Stock Exchange.
87
/ Information obtined during the author's visit to
the Shenzhen Stock Exchange.

86
domestic " A " shares will probably grow considerably in

1992 both in terms of number of stocks listed and trade

volume. A number of joint-stock companies are in the

process of getting ready for public listings. Some Hong

Kong - Shenzhen joint ventures have indicated interest in

offering shares to the Chinese public, recognizing the huge

reservoir of private savings available. Chinese

enterprises in Guangdong or other parts of South China have

also been eyeing the Shenzhen Exchange as a source of

capital. Recently announced regulations on public

companies stipulate that an enterprise must have at least

three years' good performance and profit record; at least

RMB 15 million net asset value and at least 800

shareholders before the enterprise can apply for listing on

the Shenzhen Exchange. There are more companies which meet

these requirements that the Exchange ( constrained by

existing resources ) can presently accommodate. The

Exchange has been constantly approached by companies

outside Shenzhen on listing procedures. And the President

of the People's Bank of China, Li Guixian stated explicitly

in early June, 1992 that companies outside the SEZ should

also be allowed to be listed on the Shenzhen Exchange so

that the Exchange which eventually become the major

financial centre in South China.88/

In order to expedite new listings, the Shenzhen Stock

88
/ Hong Kong Ta Kung Pao, June 2, 1992,

87
Exchange gave approval to thirty-two non-Shenzhen

securities companies for their application to become member

brokers of the Exchange. These companies are based in

seventeen different provinces and municipalites including

eight from Guangdong province; four from Hainan and Xiamen;

and twenty from Beijing, Shanghai, Tianjian, Shanghai,

Jiangsu, Zhejiang and other areas.89/

With more new listings, the market will become broader

and deeper. Mutual funds will also be launched in the

near future. This will be a landmark in the development of

the Shenzhen stock market.90/

There is , however, going to be some competition, not

only from the other stock exchange in Shanghai but possible

new exchanges. Nine provinces and municipalities have

indicated interest in establishing stock exchanges.91/

These include proposed set up in Beijing, Tianjin,

Shenyang, Guangzhou, Wuhan, Hainan, Xiamen and Shandong.

Hainan, actually has set up an internal stock exchange

without prior approval. nf

89
/ Hong Kong Wen Wei Bao, May 24, 1992.
90
/ Hong Kong South China Morning Post, June 2.
91
/ Hong Kong Economic Times, April 15, 1992.
92
/ Hong Kong Economic Times, April 15, 1992 reported
that the People's Bank of China had reported to the State
Council to order for the closure of the Hainan internal
stock exchange. Only five stocks are listed.

88
 The Shenzhen Stock Market does have one advantage over

other existing or potential competitors. Having the

experience of going through bulls and bears in the past few

years, the market and investors have matured. And the huge

amount of private savings by the Chinese population

accumulated over the past decade will be able to sustain

more than two stock exchanges in the country.

B. " B " Share Market

The " B " share market is very a recent development.

It is not surprising that many obstacles remain to be

overcome in the near future. Imperfections regarding the

trading procedures are left to the market to look for

improvement. The indirect dealing procedures, including

the inaccessibility of individuals investors; the higher

costs incurred through intermediaries and the limited

availability of stocks listed are the main barriers to the

development a thicker market. Investors and fund managers

need time to familiarize themselves with the " B " share

investment and to compare the costs, profit potential,

lf
liquidity in B " share investment against other
fl
investment opportunities. In short, the B " share are

lf
competing with markets outside China. The Shenzhen B "

shares are open to further development as well competition.

The general environment — the booming economy of

South China — is the most important factor promising good

89
prospects for the » B » share market in Shenzhen- This is

the sole reason for all the interest shown by overseas

institutions, brokerage houses and investors despite the

many uncertainties. Investment companies in Hong Kong have

been most responsive to exploit this South China boom.

Individual investors are offered different channels to

n
invest. These include placing their purchase of B "

shares with authorized traders; investing through

investment funds and more indirectly through investing in

China-play companies listed on the Hong Kong Stock

Exchange.

The Hong Kong Securities and Futures Commission has

recently decided to authorize the first mainland China " B

11
fund for retail promotion in Hong Kong in April, 1992.
93
/ The first fund approved is the GT Management ( Asia )

Shenzhen and China Fund which aims for long-term capital

growth by investing in quoted mainland securities. There

is the usual five percent entry fee, along with an annual

fee which runs at 0.75 % until the fund reaches 50 percent

in investment, when the usual 1.5 % annual loading comes.

The GT fund reserves the right to invest in companies which

derive the majority of their earnings or have the majority

of their assets in China. More funds are in line for

93
/ South China Morning Post, April, 14, 1992,

90
approval. **/ This represents an important break through

for Hong Kong and overseas individual investors as well as

for the Shenzhen " B " share market. It helps to overcome

some of the obstacles barring individual investors from

particpating in Shenzhen " B " shares, although the costs

incurred through fund investment is higher .than direct

trading on the floor. Fund investment may be a feasible

solution to overcoming the paucity of information on " B "

shares available to investors.

Another vehicle created to invest in Shenzhen " B "

shares is displayed notably by the China Assets ( Holdings

), a company recently listed on the Hong Kong stock

95
exchange through private placement. / China Assets

announced plans to use up to five percent of its net assets

to buy China " B " shares for short-term trading. The

majority of the company's portfolio will be unlisted

lf
securities taken up at the take-off " stage with a view

to the shares being listed on the Hong Kong and China

exchanges.

94
/ ibid. The two funds named are Barclays de Zoete
Wedd and CEF Management. Trade sources estimate about a
dozen more funds are expected to be approved by the end of
1992, including Mprgan Grenfell Asia ( HK ) China Fund,
SHK China fund and Wardley Chinese Fund.
95
/ South China Morning Post, April 15,1992. China
Assets shareholders include China Venture-tech, the Asian
Development Bank, PIHNA Nominees ( Hong Kong ) , China
Assets Management, Standard Chartered Bank, James Capel
Fair East and Sun Hung Kai & Co.

91
 Chinese companies are no less imaginative. Baoan, for
M
example has the idea of listing its B " shares on the

Hong Kong exchange, or setting up a Hong Kong company as

its subsidiary. Plans are already underway in the first

half of 1992 to list " B « shares in foreign markets such

as Hong Kong and Singapore where the shares will be able to

traded more freeely.96/ Although it will probably have to

go through a lot of redtape before it can be materialized,

it is believed that there are many opportunities and

channel for " B " trading to grow.

As the legal and accounting systems of Hong Kong and

Shenzhen are quite different, a team of legal and

accounting professionals has been appointed by the Hong

Kong government to study matters related the listing of

Chinese " B " shares on the Hong Kong Stock Exchange in

April , 1992. * I A number of Hong Kong based accounting

firms had also entered into joint ventures with Chinese

accounting firms or set up offices to fill the niche in

assisting Chinese companies to meet overseas accounting

standards and listing requirements.98/

%
/ These plans were disclosed by Zhen Qinan in Hong
Kong, the first stop of a Shenzhen-China-Global
Presentation to London, Paris, New York and Washington to
introduce the Shenzhen Stock Exchange to oversea
investors. See footnote 90/.

* I Hong Kong Oriental Daily,, May 4, 1992.

98
/ These firms include Arthur Anderson, Deloitte
Touche Tohmatsu and local Hong Kong accounting firms. See
for example Hong Kong Ta Kung Pao, April 30, 1992 and Ming
Pao Daily, June 2, 1992.

92
 The interest in investing in South China related

stocks had already shown itself in many of the companies

listed in the Hong Kong stock exchange with assets in

Shenzhen and other parts of China or with major businesses

in China. These shares have registered 40 to 70 percent

rises in their share prices in the first three months of

1992. "/ All these options are both complements to as

well as competitors to the Shenzhen " B " market, depending

on the future path of these funds and companies. The

fl
attractiveness of Shenzhen " B is still to be tested by

the market.

D. Conclusion

Most of the problems discussed in the previous

chapter, such as the lack of supporting infrastructure and

shortage of professional practitioners will probably be

solved over time. As long as the Shenzhen Exchange holds

an open policy, the author is very optimistic about

Shenzhen's ability to solve its technical problems. The

foreign exchange problem is more complicated and

fundamental changes of legal framework is unlikely to be

realized in the near future. The Shenzhen Stock Exchange

has to content itself with such an environment and make the

best effort to improve regulations, smooth trading

99
/ These include about a dozen companies with Chinese
interests or assets in China, e.g. Guangdong Enterprise.

93
procedures, revise its accounting and auditing system,

provide better information for investors through different

media including newspapers, radio and television broadcast

and keep administrative intervention to the minimum. With

more orderly trading and greater transparency of the

market, both " A " and " B " shares will have immense room

for growth, and will become important venues to raise funds

for China.

94
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Abbreviations:

NCNA New China News Agency

FBIS Foreign Broadcasting Information Service

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