The Australia-China Chamber of Commerce and Industry of New South Wales

Newsletter No. 21

13 June 2000





Chamber Announcements

State-Owned Enterprises (SOEs) Are Improving

Confidence in China's Share Market Regulation is Being Restored

Corporate Governance in China

Need for Improvement in Financial Skills





The focus for this issue is the China's Financial Sector. The Chamber issued a note on 10 December 1998 under the title: "Will China's Financial Sector Crash?" (available at We examined some of the dire predictions that emerged at the height of the East Asian crisis and concluded that many of them were overstated, especially with reference to China.

We now examine some of the support measures that were put into effect since July 1997. Not only has China moved in the right direction, but also the speed has been more rapid than most people thought possible. The institutional strengthening is not yet over, however.







An international seminar on the Environment of Law Enforcement Supervision in China will be held in Mianyang City (Sichuan Province) on 27-29 June. Co-hosts are the State Council Office for Restructuring the Economic Systems, Ministry of Finance and the World Bank. The Chamber was invited to participate and will present a paper at the seminar.

As is generally recognised, China's transition from a centrally planned economy to a socialist market-economy requires a more complete adherence to the "rule of law". In order to achieve that, substantial reform is necessary for both the judicial system and the administrative enforcement system. The issues associated with that reform are to be examined at the seminar, with particular reference to the Forestry Law and the Environmental Protection Law in China.

Further information or a copy of the Chamber's submission can be obtained from John Zerby [] or John Wang [].


ACCCI Dinner on Thursday 22 June 2000 from 6:30pm to 9:30pm at the Rugby Club in Rugby Place (off 31A Pitt Street) City.

The guest speaker is Mr David Sadleir A.O., former Australian Ambassador to China, who will speak on the topic China - The Search for Modernisation.

Invitations will be sent out to most people on our E-Letter mailing list. If you are interested in attending but did not receive an invitation, please let us know.







Data released by the State Statistical Bureau showed that SOEs earned 44 billion renminbi in profits in the first four months of the year, which is an increase of 350 per cent compared to the same period last year. It represents the first growth in SOE profits since 1995.

A number of factors are responsible for the upswing, some of which are mentioned below. The important point is that the drain on commercial bank funds to support loss-making SOEs is likely to be reduced. This will allow depositors' funds to be channelled into other uses, such as housing finance and consumer credit.

We noted previously that the term "non-performing loans" includes a mixed bag of debtors, ranging from enterprises that are late in their payments to those that are hopelessly positioned. No official distinctions were made in China, and without some knowledge of the percentage of almost-impossible-to-recover debts the overall effect they had on the banking system was difficult to assess. With the gloomy picture that emerged during the crisis, many observers focused on the worst assessment. Thus, the situation with SOEs was not as bad as it seemed then, and is getting better.

Some problems nevertheless remain. SOEs were granted accelerated depreciation allowance to encourage them to modernise their plant and equipment. This tends to overstate their profit figures, relative to normal accounting standards. The recent figures therefore show that they are doing better, partly as a result of new investment, but many may not yet be internationally competitive.

In addition, under China's present law, non-performing assets of commercial banks may not exceed 15 per cent of total assets. This was to encourage a transfer of those assets to the one of China's four asset management companies. Even with continued improvements in SOE profitability, however, the banks may have difficulty in keeping the ratio below 15 per cent. Continued use of the asset management companies may therefore be necessary, but no policy for that has yet emerged.


"They're Back: China State Companies on Upswing", ChinaOnline, 31 May 2000.

"China AMC To Handle Future Non-Performing Assets", ChinaOnline,1 June 2000.







China Securities Regulatory Commission (CSRC) was established in October 1992 after rioting in Shenzhen in August of that year. Thousands of people waited on the streets of the city to buy share application forms, but then discovered that officials had stolen more than half of them.

Scandal struck again in 1995. A brokerage, Shanghai Wanguo Securities, built a massive and legally dubious position on Treasury bond futures, only to find interest rates had moved against them. Facing losses of about 1 billion renminbi, Wanguo attempted to manipulate the market and sell off its position. The CSRC stepped in and cancelled trading.

The Shanghai Stock Exchange was criticised for lax supervision and undue influence from the municipal government. Its president was dismissed, and so was the CSRC's chairman. Scandal also plagued his successor.

The major problem was competing influences from participating regulatory institutions. This was changed with the Securities Law that was adopted on 29 December 1998. It gave major control to the CSRC and regulations issued since then have gone a long way toward restoring confidence.

In April 2000, for instance, the CSRC finally allowed brokers to borrow money from banks, using securities as collateral. Some insurers have been allowed to invest in managed funds.

Improved regulations resulted in a sharp increase in turnover. Total sales in A-shares and funds by the top 20 securities companies in 1999, ranked in terms of the turnover, was 2.8 trillion renminbi, 47 percent greater than the turnover in 1998. Total profit of the top 20, ranked by total profit, was 6.6 billion renminbi, an increase of 10 percent over the year before.

The mission of China's share markets was made clear in 1998. They are to be used to support industrial restructuring by offering an alternative to banking finance. The new chairman of the CSRC, Zhou Xiaochuan, has the highest level backing for developing the markets and increasing the speed at which state-owned enterprises (SOEs) can be listed.

The teething problems associated with China's share markets motivated a cautious approach, and the threshold level of capital for a listed enterprise was set at 30 million renminbi. This placed the securities market outside the reach of medium-sized firms and tended to favour the large SOEs.

Recently proposed changes will lower the requirement to 30 million renminbi for listing on China's "second trading system" which is expected to be in operation next year. The proportion of intangible assets held by newly listed companies can be as high as 70 percent, but they must disclose their corporate information on a quarterly basis.

Perhaps more importantly, stiffer rules will apply to a listed company's founders. They cannot sell their shares until three years after the company was formed. Managers holding more than 5 percent of a company's shares must wait two years to sell them, and strategic shareholders holding 5 per cent of a company's shares must wait six months. Restrictions also apply to departments that manage state assets.

Listing is also easier for stock issues if public offerings are combined with subscriptions by institutional investors. In addition, the listing companies and underwriters may now determine the proportion of subscriptions by institutional investors and of offerings to the general public. This is intended to give a boost to managed funds in China and to instil some discipline in board listings by those institutions.

Despite the tighter regulation for new listings, the quality of some listed firms is considered to be sub-standard and the CSRC has yet to delist any of them. This leads to the belief that local governments continue to exert a protective influence while the restructuring process continues.

Growth in the market for A-shares brought into further question the division China made in 1992 with B-shares. This was intended to attract foreign capital, but now contains small, illiquid and relatively poor-quality enterprises. During the first quarter of 2000, for the first time, not one of the foreign banks in China was among the top-10 players in the B-share market.


"China Shanghai, Shenzhen High-Tech Boards To Debut In June", ChinaOnline, 11 May 2000.

"1999 Rankings Of China's Top Brokerages", ChinaOnline, 15 May 2000.

"China Releases New Details on Planned Second Stock Board", ChinaOnline, 30 May 2000.

"Ya Hear the One About the Chinese Stock Market?" by Stephen Green, ChinaOnline, 1 June 2000.

"China Relaxes Restrictions On Stock Issues", ChinaOnline, 4 June 2000.







China's system of family ties and networks was considered to be potentially similar to the cronyism that plagued Southeast Asian nations at the time of the crisis (and to some extent continues). This led to much work by the World Bank and the International Monetary Fund in encouraging a procedure that would ensure greater protection for minority shareholders.

Similar changes occurred in China. New guidelines were recently issued with the view to standardising the conduct of listed company and to guide them in managing shareholder meetings. These "suggestions" have the effect of adopting what have become standard procedures elsewhere for the conduct of both annual and extraordinary meetings of shareholders.

Greater responsibility is to be placed on the members of the board in conducting the meetings and compliance with China's Corporate Law is emphasised through the attendance at the meetings of an attorney with qualifications in the securities industry.

When disputes occur concerning the assembling and convening of a meeting, its voting procedures, or the legitimacy and effectiveness of a resolution, and these disputes cannot be mediated, the parties concerned can take legal action in a people's court.

Interim guidelines for all listed financial institutions are more detailed. These include the following:

         Financial companies' asset quality must be fully disclosed, including the ways in which delinquent assets are handled and settled, as well as how effectively the companies' internal control mechanisms are established.

         Indicators related to the company's key business risks must be issued and changes in these must be reported in a timely manner, including the definition, application and changes in sensitive accounting terms.

         Intermediate agencies in the share market must conduct audits of these financial companies and provide them with public listing consultations. At the same time, the possibility of hiring experienced foreign intermediate agencies to assist in auditing will also be considered.

Finally, a suggestion was made late last month by the president of the Bank of China that the four major commercial banks (Bank of China, Agricultural Bank, China Construction Bank and Industrial and Commercial Bank of China) should go public as soon as possible to help them raise capital. At the moment, the banks can raise additional funds only by issuing bonds.


"China Sets Financial Institution Guidelines", ChinaOnline, 15 May 2000.

"China Banks Should Go Public Soon - Banker", ChinaOnline, 25 May 2000.

"China Tightens Procedures For Shareholders' Meetings", ChinaOnline, 1 June 2000.







A recent editorial in the People's Daily called for a restructuring of China's human relations systems in way that complements the restructuring of the manufacturing sector.

An optimum talent structure is "an organic combination of various types of talents arising from the capacity to learn from others' strong points", as well as the ability "to make up their deficiencies and to complement each other". In this way workplaces will have "an optimal talent structure of high co-ordination and low friction, so that various types of talents can give play to their advantages and special skills from different aspects."

"Therefore, to establish an optimal talent structure, it is necessary to proceed from the overall situation, establish a systematic concept and give full consideration to the specific features of each talent. In this way, we can make proper division of labour and form a rational echelon, each talent can give full play to his or her strong points, and their respective shortcomings can be effectively remedied and controlled".

Though the editorial was short on specific ways to achieve the desired restructuring, it recognised an important need in China. Restructuring of the economic system, and the financial sector in particular, is proceeding faster than China's capacity to upgrade the skills required for the rapidly approaching restructured outcome.

China's expected entry into the World Trade Organisation appears to be both a cause for greater skill-needs (in competing with a larger number of foreign enterprises) as well as a solution (achieving technical support from the foreign enterprises). It is not clear, however, how much the foreign enterprises will give and how much they will take.

The need to improve the skill level in China's financial sector is likely to increase in the next 18 to 24 months. It takes at least that long to complete a postgraduate degree. That period may also be a painful one for not having the necessary skill level.

Interest rates are rising in most OECD nations, but corporate borrowing continues to increase. Banks are reported to be taking more risk to increase their profits. This increases the potential volatility of global financial markets. China's restrictions on capital account transactions quarantined its financial sector against external pressures during the East Asian crisis, but the agreement to remove some of those restrictions as part of entry into the WTO will make the sector more exposed to contagion, if that were to re-occur in the near future.


Readjusting Talent Structure in Line With Economic Structural Readjustment", People's Daily, 8 June 2000.

"Danger Signs: The Swaps Market Is Behaving Very Oddly. Why?" The Economist, 10 - 16 June 2000.

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