Walter Hutchens' Blog

Notes and comments on sundry things, generally related to China's developing markets for stocks and other securities, particularly the laws and regulations purporting to govern them. Maintained by Prof. Walter Hutchens of the Smith School of Business at the University of Maryland.

Wednesday, July 28, 2004

New Regs on Futures Brokerages


The CSRC has issued a series of notices relevant to the PRC futures industry. Specifically the notices concern the:

establishment, dissolution and merger of futures brokerage companies;

qualifications for shareholders of futures brokerage companies;

changes in the legal representative, registered capital, shareholders and structure of shareholding rights in futures brokerage companies; and

establishment, change or termination of branches of futures brokerages.

I don't see these on the CSRC website, but I found them at this PRC "Law Library dot com."

Guide to Regulatory Alphabet Soup: PRC's CBRC, CSRC & CIRC Issue MOU


The China Banking Regulatory Commission (CBRC), China Securities Regulatory Commission (CSRC) and China Insurance Regulatory Commission (CIRC) have issued a joint memorandum of understanding regarding their respective regulatory roles, available here.

Update: Since my discovery of this MOU on the CSRC website (with a blinking "NEW" icon beside it and dated July 27), others have taught me that this MOU was put on the CBRC website a month ago and was originally promulgated (though not apparently publicly disclosed) by the joint committee of these agencies on September 19, 2003. So it took the CSRC eight months to put it on their website. And that's the agency in charge of enforcing timely disclosure laws!

Tuesday, July 27, 2004

Wen Jiabao Speech on Private Economy


Xinhua News Service reports here that Wen Jiabao made "an important" speech about the PRC private economy at a a forum in Qingdao.

CSRC Approves More IPOs & Other Securities Listings


The South China Morning Post notes here that the CSRC has recently quickened its pace in approving IPOs and other types of public securities issuances. Forty-nine issuances have been approved so far in June and July, while 38 firms were approved in April and May.

While that shows an increase for the two most recent months compared to the prior two months, I'd like to know how it compares as a year-to-year pace and longer historical pace. The article didn't provide those numbers, nor did it note that CSRC listing approval is not the same as actual listing. Some of these newly approved companies may wait a long time before they actually issue and list the securities that have been approved.

Monday, July 26, 2004

Draft Revision of Company Law Moves Forward


People on Chinese Law Net have brought to my attention reports that amendments to the PRC Company Law have been completed and will be submitted to the National People's Congress this year.

A description of the changes is here and a very brief news article about the revision is here.

Beijing Capital Land


Markets still don't decide who gets to issue shares on mainland China's stock "markets." Government planners do. Beijing Capital Land (首創置業股份有限公司) is an example.

Beijing Capital Land wants to raise money through a public offering of shares on the mainland (it is already listed in Hong Kong), but the central government wants to slow down the economy and seeks to do so partly by constricting finance in the property sector.

This apparently explains why the listing application of Beijing Capital Land has been informally rejected, as reported here by the South China Morning Post.

Absent the current approach to cooling the economy, Beijing Land should have been a strong candidate for a mainland listing. It is mostly owned by the Beijing government.

State Council Decision on Reform of the Investment System


China's State Council has issued a Decision on Reform of the Investment System, signaling intent to make further reductions in administrative approvals that exert or potentially exert control over the economy.

Here is a Q&A; on the Decision from the National Development and Reform Commission (formerly the State Development & Planning Commission (SDPC).

Here the South China Morning Post has an article on the decision. The mainland-controlled China Daily covers it here.

The SME Board's First Scandal: Qionghua


Jiangsu Qionghua, one of the first companies to list on the new Shenzhen SME Board, is the first to be implicated in a scandal, with major disclosure problems discovered only ten days after its listing, according to this story in English.

The written characters are different, but Qiong hua is a homonym for "poor China."

Shenzhen Govt. Issues "7 Articles" on Stock Market Development


The Shenzhen municipal government has issued a document being dubbed the "7 Articles" (to mirror the State Council's "9 Articles") on capital market development.

The title is 关于加强发展资本市场工作的意见 or Guanyu jiaqiang fazhan ziben shichang gongzuo de yijian which one might translate as Opinions on Strengthening Capital Market Development Work.

The document was published in the Gazette of the Shenzhen Municipality People's Government (Shenzhen shi renmin zhengfu gongbao) (2004 no. 27); which is currently available online in Chinese here on the Shenzhen government website.

Shenzhen even provides English translations of the Gazette's table of contents. The one including the 7 Articles is here. They translate "yijian" as "proposal" but that's not right. The document is an enactment of the Shenzhen government, not a proposal. (On the other hand, it is vague generalizations, so perhaps one could understand it as the Shenzhen government's proposed coruse of action for itself). However translated, it is designated "document no. 106 2004."


A PRC press report on the Seven Articles is here. A skeptical account is here.

Shenzhen Stock Exchange Issues Guide to Listing Process for SMEs


The Shenzhen Stock Exchange has issued this quite cogent guide (in Chinese) about how to list a company.

The guide is titled "A Guide to Stock Issuance & Listing for Small and Medium Enterprises" ( 中小企业股票发行上市指南; or Zhongxiao qiye gupiao faxing shangshi zhinan). However, the information is not only relevant to companies wishing to list on the Small and Medium Enterprise Board (SMEB) but to companies interested in a PRC listing in general. This is because the listing requirements for SMEB are the same as the requirements for listing a company on the PRC's "main board" in Shenzhen or Shanghai.

Page 86 of the guide includes a helpful graphic depiction of the PRC listing process.

One reason this free guide is helpful is because a lot of changes have recently been made to the PRC listing process. For example, now there's a mandatory "coaching" period for prospective issuers, a requirement for independent directors, a requirement that an issuer be backed by a "sponsor" (baojian jigou) and changes to the Stock Issuance Examination Committee which ostensibly approves listing applications. This guide, dated May 18, 2004, reflects those changes.

Interestingly, there is a section in the guide titled "What Matters Should Foreign-invested Enterprise Converting into a Joint Stock Company Especially Consider?" ( 外商投资企业改制为股份有限公司应特别注意哪些事项?; or Waishang touzi qiye gaizhi wei gufen youxian gongsi ying tebie zhuyi na xie shixiang?). Discussion of SMEB has so far focused on its purported ability to help capital-starved native PRC firms, but this section indicates the SZSE at least contemplates the possibility of FIEs listing on SMEB. I imagine the SZSE might be more enthusiastic about that idea than the CSRC or some other parts of the PRC government, but it is at least interesting that they included the section.

The SZSE has published a series of "guides." A catalog of them is here.

Wednesday, July 21, 2004

Gates Foundation Gets QFII Status, Merrill Lynch Gets QFII Quota


The Bill and Melinda Gates Foundation has been approved by the China Securities Regulatory Commission (CSRC) for qualified foreign institutional investor (QFII) status, which will allow the foundation to invest directly in China's A-share stock market. The CSRC announcement is here.

Bei Hu of the South China Morning Post reports this development here.

The Chinese no doubt love the idea that the world's richest man has directed his foundation to invest in China. The implication is that if Bill Gates thinks it is smart to invest in China's stock market he must be right.

Gates on the other hand must be currying favor with China. If the foundation simply wanted to invest in China for economic reasons, it could do so through one of the existing QFIIs. Maybe Gates' people think this will help them fight Linux in China or accomplish some other corporate goal.

China's State Administration of Foreign Exchange (SAFE) will now have to issue an investment quota to the foundation, telling it how much money it will be permitted to bring into China. SAFE announced yesterday the investment quota for Merrill Lynch, another QFII. They are approved to bring in USD 75 million.

When investments by some QFIIs have been disclosed, the PRC press has widely reported on them. I suspect the Gates Foundation's stock picks will be of interest to many Chinese, too.

While the QFII program allows some foreign capital to flow into (and to a lesser extent out of) China's stock markets, the news I am waiting on is that foundations in China can be set up without government approval, or that PRC citizens can use their RMB to buy shares in Microsoft. One day . . .

Monday, July 19, 2004

Blogs, Scholarship and Tenure


Today's Wall Street Journal has this story, Law Professor's Web Log Is Jurists' Must-Read about how the blog of Prof. Douglas A. Berman has become important in the aftermath of the recent Supreme Court decision on sentencing.

The article notes, "Mr. Berman has established himself as the go-to guy for all things Blakely for federal and state judges, defense lawyers, prosecutors and prisoners' relatives. Although the 5-4 Supreme Court ruling technically affects only one state's court system, its greatest impact so far has been on federal sentencing guidelines, whose constitutionality has been called into question in dozens of court rulings nationwide, almost all of them posted on Mr. Berman's blog."

I have only a moderate level of interest in federal criminal sentencing guidelines, but this article does prompt me to reflect on the role of blogs in academic life.

Blogs do not yet fit into the conventional academic legal publishing model (the ALP model). Dominant conventions of legal scholarship and the standards for academic tenure and promotion at most universities generally require that legal academics write and find a law review to publish lengthy, heavily footnoted articles. The more "prestigious" the particular law review the better. Unique to law is that most of these law reviews are edited by students.

These conventions contort scholarship in some ways, though they have some advantages, too. But whatever the problems and advantages of the ALP model standing alone, clearly in comparison to blogging it is slow. With a blog, a professor writes a squib, hits "publish" or some equivalent button and the information and analysis is available instantly to anyone with an internet connection. The process of writing, submitting, editing and publishing is radically truncated. Thus, discourse can move much faster than with the conventional ALP model.

In the traditional ALP model, the professor must not only write but also laboriously footnote his assertions (even, in the opinion of some editors, the patently obvious ones), conform the citation style to the Bluebook or some other arcane tome, send (often by snail mail) his or her manuscript to various law reviews which must review it with many others to decide if they'd like to publish it. If they do, the text is then combed over by student editors who verify the accuracy or each footnote. They also may wrestle with the prose and analysis. Once changes are finalized, the article is formatted for print, actually printed, distributed in hard copy and eventually included in searchable electronic databases. Literally months expire.

There are good things about the ALP model, but clearly consequential discussion of important, fast-moving changes like a new high court precedent with apparently sweeping implications are not ideally suited to the ALP model. Not only are blogs more nimble with instantaneous dissemination, but the discussion can be broader because participants don't have to have a paper subscription to the journal or electronic access through fee-based services like Lexis or Westlaw.

I have been keeping this blog about Chinese securities regulation for nearly a year now. For the average reader (or surfer) it is irrelevant, unconnected with his or her interests. But if you want to know something about PRC sec reg, finding this site is like hitting paydirt. I've written about each of the important regulatory developments over the last year and have links to related articles, laws and regulations.

Interestingly, though, when I filled out last semester the form our department uses for annual reviews, I didn't mention this blog. There was no space asking about web pages one maintains--just questions about the traditional ALP model, conference presentations and the like.

But looking at Prof. Berman's example, it is clear that a blog can be a significant contribution to legal discourse. When a blog is a significant contribution to legal scholarship, clearly it should be part of tenure and promotion decisions.

I can think of some objections to the ascendancy of blogs. First, the traditional ALP model allows one to have intermediaries suggest what's of value. The reputation of say the Harvard Law Review suggests that articles in it are worthy of attention. Tenure and promotion committees can rely on such reputational intermediaries when evaluating candidates. Blogs do not have such intermediaries, so it can be harder to know when one is meritorious. Also, the footnotes obsession of the traditional ALP model is good in that it allows people to find the sources of an author's assertions. Whether you agree or disagree with an author, the ALP model at least assures you can find the supporting evidence and evaluate it yourself. Blogs usually have links to other electronic sources, but the citation conventions are looser, and web pages can be effervescent. So blogs can be less rigorous in terms of citation. Third, the process of the traditional ALP model should through its rounds of editing also tend to improve prose and analysis in comparison to off-the-cuff remarks, which blogging is akin to.

But notice Prof. Berman is linking to case law and important sources. Notice also people are coalescing around his site as the epicenter of sentencing discourse, even though no reputational intermediaries are present in the publishing process. And while slow deliberation can be a valuable process, notice that the months of time the traditional ALP model would lard into the process (months for footnoting, submitting, editing and publishing) would be of little clear value here and could be of detriment.

All this means blogs have a place in legal scholarship. Tenure and promotion evaluations should take into account the good blogs can do and give individuals credit for creating and maintaining important and influential blogs. The hegemony of the traditional ALP model in tenure and promotion should be reexamined. Blogs can be important and should be recognized as markers in some cases of meaningful academic achievement.

Friday, July 09, 2004

SME Board IPOs


IPOs continue on the new Shenzhen SME Board. Three more firms were listed there Thursday, bringing the total to sixteen.

A list in Chinese of these 16 firms that have alredy listed on the SME Board is here, provided by the Shenzhen Stock Exchange which operates the SME Board. By clicking on the short form name of each company (3 or 4 characters), you are taken to additional information on each firm.

Another list, including apparently some firms approved to list but not yet listed, is here, also with links to details on each company.

I don't think I'll continue to update this list on my blog, but in English the firms listed (or approved to list) on the SME board now consists of:

listed on June 25:
1. Zhejiang NHU
2. Jiangsu Qionghua High-Tech Co.
3. Zhejiang Weixing Industrial Development
4. Chongqing Huapont Pharma
5. Elec-Tech International
6. Zhejiang Jinggong Science & Technology
7. Hualan Biological Engineering
8. Han's Laser Technology


listed on June 29:
9. Jiangsu Miracle Logistics System Engineering
10. Zhejiang Transfar

listed on July 5:
11. Zhejiang Dun'an Artificial Environment Equipment Co.
12. Zhejiang Kan Specialties Material Co.
13. Hubei Aviation Precision Machinery Technology Co.

listed on July 8:
14. Huangshang Novel Co.
15. Xiake Color Spinning Co.
16. Guangdong Well Medicine Science & Technology Co.

approved but not yet listed:
17. Zhuhai EastcomPeace Smart Card Co
18. Anhui Huaxing Chemical Industry Co.
19. Zhejiang Xinfu Biochemical Co.
20. ZhejianG Jingxin Pharmaceutical Co.



Some milestones in the development of the SME board are here.

Complaint about "Co., Ltd."


The official English names of PRC companies invariably end with "Co., Ltd."

This is moronic in English.

I guess it is a literalist translation of "you xian zeren gongsi," but corp., co., ltd. all convey an organization of limited liability, so "Co., Ltd." is just redundant.

Even in Chinese, I do not see how one can have a company (gongsi) of unlimited liability. That doesn't exist under the PRC Company Law, so I am not sure how this insipid convention arose. But I am doing my part to resist it.

I have noticed Dow Jones, which now publishes daily reports on PRC securities markets, also refuses to succumb to this "Co., Ltd." naming convention. Good for them.

Wednesday, July 07, 2004

Regulations of Funds: Round Up of New Regs


In addition to the PRC Investment Funds Law (证券投资基金法) coming into effect on June 1, a few new regulations concerning funds have recently been enacted, with others expected soon.

Mo Taishan, an official from the funds regulation department of the CSRC, has said six new regulations are expected.

Other articles specifically list those six expected regulations. According to this article, the set of six regs will consist of:

1. regs on marketing funds (基金销售管理办法);

2. regs on operating funds (基金运作管理办法);

3. regs on fund management companies (基金管理公司管理办法);

4. regs on information disclosure by funds (基金信息披露管理办法);

5. regs on custodianship of funds (基金托管管理办法) and

6. regs on executives for funds (基金公司高管人员管理办法).

A very similar list of six projected regs is here.

Of the six projected regulations, only three have been enacted so far.
These are:

1. regs on operating funds;

2. regs on marketing funds and

3. regs on info disclosure by funds.

In terms of the key points in these new regs, the elimination of a rule requiring that 20% of fund assets be put into bonds has been the main news, but some other changes are mentioned in the PRC stories below:

1. analysis of regs on operating funds;

2. analysis of regs on marketing funds and

3. analysis of regs on disclosure by funds.

Besides the general regulation on disclosure for funds (already released and part of the suite of 6 "major" regs on funds that have been forecast), the CSRC has enacted some minor regs concerning disclosure by funds, namely:

rules for fund offering annoucements,

rules on fund annual reports,

rules for semin-annual fund report and

rules for the notes to financial statemetns of funds.

Friday, July 02, 2004

Huaxia Securities Shake-up


Huaxia Securities has replaced its chairman after incurring big losses, according to stories such as this and this.

Interestingly, the PRC story cites the Financial Times as the source of the news, while the the Associated Press sites a PRC newspaper.

Thursday, July 01, 2004

New Rules for Investment Funds



New regulations are out today on PRC securities investment funds. As expected, the requirement that all funds put 20% of their assets into PRC govt. bonds or PRC corporate bonds has been eliminated.

This change is important to domestic actors in China including fund management companies and their investors such as PRC insurance companies which must invest in PRC securities through funds.

This change may affect bond and stock prices. With the market distortion imposed by the rule removed, some fund capital locked in bonds now because of the rule may flow to stocks.

Foreign investors will care, too. They can now participate in China's funds sector both as investors in fund management companies and potentially as buyers of fund products through QFII status.

While not a revolution, this change is an important incremental step. It means China's funds industry can now better differentiate its products. Fund investors can better tailor their strategies, too.

It is great to see a policy change that puts investment decisions more in the hands of investors rather than government regulators. More change in this direction would be wonderful. Funds will really start to have freedom when issuers become more diversified.

No longer is every listed company in China a moribund state-owned enterprise, but many still are, and the best or most promising companies in China often can't access China's stock markets. Who gets to list is still a matter of government approval rather than investor acceptance. When institutional investors start to allocate capital with less government mediation, that will be the real blast-off point for these markets.

A Chinese press article on the new rules is here.

The rules themselves are:


Administrative Measures for the Sale of Securities investment Funds, Zhengquan touzi jijin xiaoshou guanli banfa, 证券投资基金销售管理办法;
, and

Administrative Measures for the Operation of Securities Investment Funds, Zhengquan touzi jijing yunzuo guanli banfa, 证券投资基金销售管理办法.

The PRC Securities Investment Funds Law became effective June 1, 2004. A chinese copy of the law is here.

Tuesday, June 29, 2004

Two More SME Board IPOs


Two more firms listed on the Shenzhen SME board on Tuesday, the board's third day of operations.

The firms are:

Jiangsu Miracle Logistics System Engineering (天奇股份)
Zhejiang Transfar (传化股份)

This brings the total number of companies listed on the SME board to 10.

Interestingly, many of these 10 firms are from Zhejiang or Jiangsu. These provinces are next to Shanghai, home of the other PRC stock exchange. SMEs are abundant in that region, but the predominance of firms based there among these early SME board IPOs may also signal that they are making it a point to reach out and list firms located near Shanghai, suggesting this new SME board will not be a special vehicle for Shenzhen-based firms (or firms based in Guangdong province) to list, that the distinction between the SME board and the main boards is functional, not geographic. That would fit in with the idea of eventually consolidating the main boards in Shanghai, leaving Shenzhen only with this SME board and any PRC GEM (aka "second board") that may grow out of it.

Sunday, June 27, 2004

Boom & Bust: The SME Board's First Two Days


The Shenzhen SME Board was launched on Friday, and share prices of the eight companies debuting on it shot up by 133% on average (the range was from 37% to 335%). But today (Monday in China) all eight have already stopped trading because they decreased 10% almost immediately after opening.

The eight companies traded on the SME Board (with the Chinese names abbreviated) are:


Zhejiang NHU (新和成)
Jiangsu Qionghua High-tech (江苏琼花) (packing materials)
Zhejiang Weixing Industrial Development (伟星股份) (apparel)
Chongqing Huapont Pharma (华邦制药)
Elec-Tech International (德豪润达)
Zhejiang Jinggong Science & Technology (精工科技)
Hualan Biological Engineering (华兰生物)
Han's Laser Technology (大族激光)

A report on Friday's trading, with the statistics I mentioned above, is here.

A report on Monday's halted trading is here.

China Development Bank


Very intriguing story in the Wall Street Journal last week about China Development Bank, which has apparently managed to act like a real bank in China. The article is available here.

Saturday, June 26, 2004

Merrill Lynch Shopping for Partner for PRC JV Investment Bank


Merrill Lynch is looking for a partner for a joint-venture investment bank in China, Bloomberg reports.

Interestingly, a PRC banker quoted in the article states that big PRC investment banks (termed "comprehensive securities companies" in China's laws & regulations) don't want foreign investment because that would limit their ability to go public.

That's something I foresaw when I wrote an article on China's joint-venture investment banking regulations in 2002 in the China Business Review. PRC securities companies accepting foreign investment (which is capped at 33%) must be limited liability companies, according to article 4 of the PRC's rules on JV I-banks. Under China's Company Law only joint stock companies (not LLCs) may publicly issue shares.

Often foreign investors have made substantial investments PRC insurance companies and banks prior to or in anticipation of their international IPOs, but PRC rules prohibit securities companies from taking foreign investment and issuing shares publicly. Why this prohibition exists is not clear to me.

The Bloomberg story says Goldman Sachs are in talks with Fang Fenglei to create a JV investment bank. Fang may be a great partner, but under the same rules he cannot form a JV I-bank with Goldman by himself. The rules require that one of the Chinese investors holding at least 1/3 of the entity be a PRC securities company.

The article also says Deutsche Bank "is in talks to buy" a PRC securities company. Again, the foreign investment in a PRC securities company is capped at 33%, so Deutsche Bank cannot "buy" one under current regulations; it can only buy into one.