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Monday, September 22, 2003

The Precarious State of China's Financial System

Just in case any of you were under the illusion that I thought everything in China was going to be just plain sailing, this article from finance Asia on a conference in Beijing last week about the problems with China's Securities Regulatry Commission should set things straight. The Chinese economy will never be able to enjoy stable sustained growth until it sorts this mess out. Of course the other side of the problem is: if and when it does how the hell will the US be able to continue to find the purchasers of dollar denominated assets which fund the deficit?

An extraordinary sense of gloom surrounding the securities market has emerged from a top level finance conference held last week in Beijing. The gathering of leading financial executives was notable also for being the venue for CSRC chairman Shang Fulin's first big speech. But other than promising that China's 130 securities companies were on track to be given permission to issue bonds publicly and by private placement, Shang didn't announce any new market boosting measures. That promise, long in the works, failed to spark the markets which saw thin trading of RMB4-5 billion in volume on both the two exchanges on the days of the summit, while the Shanghai Composite index dropped below the psychologically important 1500 mark. Despite economic growth averaging 8% over the last two years, the market's last high was 2200 in June 2001. In fact, the markets are in a very serious condition, say observers, who point out that they are not fulfilling any of their three functions of raising capital, pricing capital and acting as a barometer of the general state of the economy.

Figures show that China's stock market could, rather alarmingly, be slowly dwindling away. For example, the ratio of the funds directly raised in the capital markets to all funds raised has actually fallen to 5% compared to 8% in 2001, according to figures from the central bank. And last year, according to figures from the CSRC, 122 companies raised RMB78.8 billion ($9.39 billion), only 67% of what was raised in the previous year. In the first half of this year, only 58 companies have issued shares, raising just RMB32 billion, or around 80% of the amount raised last year for the same period.

The decline in direct financing is not of course, just a problem for the CSRC, it's also a problem for the whole economy since so much of the systemic risks fall on the banks - rather frail vessels, as has been widely reported, for such trust. The main victims of this situation are the securities companies, and sector reports estimate that the whole sector in the first half of this year saw a reduction of 5% on its stock trading, 44% and 47% respectively on fund and bond trading and that underwriting revenue was only 40% of the same time last year. In 2002, the sector made a loss as a whole of RMB 2.6 billion from 51 companies in the red. Of course, the CSRC is in an impossible position. On the one hand, its young technocrats want to introduce a first class capital markets system. But to do that it has to rout out many of the existing ills - potentially crippling market confidence in the process. Indeed, corporate governance was one of the focuses of the summit, with an emphasis on finding ways of preventing the brokerage houses misappropriating customer funds.
Source: Finance Asia

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