China"s securities market is still underdeveloped, and it will take time to allow foreign investors to participate freely
　　
　　Sorry, foreign investors. For those of you who want to trade freely in Chinese securities, you’ll have to wait because the market has not been fully opened to foreign capital.
　　Compared with the insurance and banking sectors, China’s securities market is much more limited to foreign investment.
　　
　　Restricted market
　　
　　“As part of its WTO commitments, China has promised to open its securities service sector,” said Zhong Wei, economic professor with Beijing Normal University.
　　Under China’s WTO commitments, foreign securities institutions and brokerage firms are allowed to engage directly in the trading of foreign-currency-denominated B shares without having to go through a Chinese intermediary. Their representative offices in China may become “special members” of China’s stock exchanges. They also may establish joint venture (JV) securities companies. Foreign partners’ shares were limited to 33 percent upon China’s accession to the WTO and reached a maximum of 49 percent in 2004. JV securities companies can underwrite A shares, B shares, H shares, government and corporate bonds.
　　China fulfilled the abovementioned commitments by November 2003, ahead of schedule.
　　“However, China’s WTO commitments do not involve the opening of the A share market, or establishing wholly foreign-funded securities operatives and management companies,” Zhong pointed out.
　　China’s securities market has only 15 years of experience and was grown in a relatively closed environment. Therefore, it is still an immature emerging market now, and it will take time for the securities market to be fully opened.
　　The opening of the securities market means that foreign investors can buy and sell domestic securities freely, which leads to cross-border capital flow. It involves the opening of China’s capital account, i.e. convertibility of renminbi, and is not part of its WTO commitments.
　　However, China has, to some extent, opened its securities market, more than what it had committed to do for the WTO.
　　One main effort China has made is access to the IPO market. The Chinese Government issued two regulations allowing foreign-funded companies in China to be listed and issue stocks in and outside of China.
　　Second, although China didn’t commit to opening its A share market, foreign capital can access the A share market through being qualified foreign institutional investors (QFIIs) or foreign strategic investors.
　　Zhong believes that China has done a lot in the areas of securities. Compared with foreign securities companies, Chinese securities companies are numerous, but small in scale and limited in strength. According to the Securities Association of China, the total aggregate asset value of all securities companies in China is only around 600 billion yuan. If the securities market were fully opened like the insurance and banking markets, surging international capital would have weakened the fragile Chinese securities market. Worse still, the speculative nature of foreign securities companies would harm the whole national economy and bring instability to the whole economic system.
　　
　　Emerging problems
　　
　　Even though China has been cautious in this sector, some problems still occurred in the securities industry.
　　Currently, China does not allow foreign capital to establish wholly foreign-owned securities institutions. Therefore, foreign companies have to set up JVs with Chinese companies to enter the securities industry. Currently, seven China-foreign securities JVs have been set up, including China International Capital Corp., Bank of China International (China) Ltd., China Euro Securities Ltd., Changjiang BNP Paribas Peregrine Securities Co. Ltd., Daiwa SMBC-SSC Securities Co. Ltd., Goldman Sachs Gao Hua Securities Co. Ltd. and UBS Beijing Securities.
　　According to China’s WTO commitments, foreign companies are allowed to set up JVs to engage in the Chinese securities investment fund management business. Foreign partners’ shares were limited to 33 percent upon China’s accession to the WTO and reached a maximum of 49 percent in 2004. Further, Chinese and foreign stockholders are entitled to management rights in line with their stock proportions.
　　But according to Beijing-based Financial News, in such JVs, the management rights of foreign shareholders far outpace their stock proportions, surpassing that of Chinese shareholders.
　　Meanwhile, the securities JVs do not bring much innovation to the Chinese securities market. Chinese shareholders hope JVs can introduce advanced management experience and technology so as to strengthen their investment banking operations. However, their mission differs from foreign shareholders, who see JVs only as a springboard to enter the Chinese market. As soon as policies allow, they hope to form exclusively foreign-owned companies, taking personnel and technology accumulated in JVs. With different objectives within the same company, the foreign and Chinese sides have failed to find a way to converge their interests.
　　There are also many existing problems in the Chinese securities market. For instance, the over-the-counter market has not been established, the venture capital system is also immature and market supervision is insufficient. But securities supervisory departments at all levels, meanwhile, are strengthening their efforts to prevent poorly managed and high-risk foreign securities companies from setting up JVs.
　　For instance, after UBS Beijing Securities was approved, the China Securities Regulatory Commission (CSRC) did not give approval to any new securities JV.
　　China Securities Journal reported that after the comprehensive rectification of all securities companies by October 2007, China will resume the approval procedure for securities JVs.
　　Market opening inevitable
　　“The complete opening up of the securities market is an irreversible trend,” said Professor Zhou Zhanzhong at Zhongnan University of Economics and Law.
　　Zhou believes China’s securities market should go through two phases before it is fully opened to foreign capital. The first phase is from the present to 2015, which will focus on capital introduction and solving existing problems. The second phase is from 2015 to 2020, when the domestic securities market is gradually opened to full competition.
　　“After 2020, when the securities market is matured, it will be able to prevent possible risks in the market,” said Zhou.
　　As a matter of fact, the Chinese Government has already taken on the project of opening the securities market. The split share structure reform starting in 2004 provided foreign strategic investors with an opportunity to participate in the domestic stock market.
　　Shang Fulin, CSRC Chairman, noted that pushing forward the opening to the outside world is a key part of reform and development in China’s capital market. Shang revealed that in the future, China will pursue opening according to the following principles.
　　First, the market reform should be actively carried out in an orderly fashion. The opening of the securities market and capital market should be in line with the opening progress of the whole economy. It should also be coordinated with the foreign exchange reform and the opening of the whole financial market.
　　Second, the securities market should learn from the successful experience of developed markets by introducing foreign talent, technology and foreign capital to restore the imbalanced capital structure in the Chinese capital market.
　　Third, China promotes fair play and mutual benefit. Both Chinese and foreign securities operators should be entitled to the same treatment and policies. They should compete and cooperate so as to maximize their profitability.
　　“Foreign capital should enter the Chinese securities market step by step at an appropriate time,” Shang said.
　　

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