Over the past decade of development, China's stock market, which deals mainly with transactions of stocks and state treasury bonds, has evolved from a scattered and disorderly market into a concentrated, unified, open and highly efficient market.

Nationwide market

By the end of 1994, China had issued stocks, bonds and various negotiable securities valued at over 500 billion yuan, with the volume of market transactions rising to hundreds of billions of yuan. Today, the transaction market for stocks and bonds has become a nationwide focus of concern shown by the central government and various enterprises, as well as the common people.

China revived the issuance of state treasury bonds in 1981, a move which was followed by the issuance of many varieties of bonds.

In 1984, the Shanghai-based Feile Audio-Visual Co. offered its first stock issue to the public, thereby introducing China's first stock issued since 1949.

In 1986, Shanghai, Shenyang and Shenzhen introduced over the counter transactions for stocks and bonds. The Shanghai Stock Exchange, the first of its kind in New China, was founded on December 19, 1990. The Shenzhen Stock Exchange was established the following year. China's stock market has thus emerged in an embryonic form.

The two stock exchanges established nationwide specialized satellite stock data transmission networks in 1993 and 1994 respectively. The networks enabled securities dealers in other regions of China to engage in equal competition with their counterparts in Shanghai and Shenzhen, and effectively transformed the two stock exchanges from simply local to national exchanges. Securities dealers quickly surfaced in all large and medium-sized cities.

A recent investigation revealed that more than 20 million people in China currently engage in stock investments and transactions, with the number growing at a phenomenal rate of 10,000 people daily. For example, in 1992, Beijing had only six to seven securities companies and less than 10,000 shareholders. However, by early this year, the respective figures had jumped to 70 and 200,000. At present, the country has 37 national securities companies which deal mainly with negotiable securities, as well as 5,246 trust and investment companies and securities departments operated by comprehensive banks which also handle securities.

Over the past four-odd years, the number of broker's seats in Shanghai and Shenzhen stock exchanges has shot up from 46 to 3,214. The volume of capital stocks listed by the two exchanges has jumped dramatically from 363 million yuan to 60.96 billion yuan, with the total market value of stocks rising proportionately from 5.93 billion yuan to 485.33 billion yuan. At the same time, the variety of stocks listed by the two exchanges also climbed from 35 to more than 400.

March to standardization

The development of stock markets in various countries serves as ample proof that open, fair, unified and highly efficient stock markets must be subject to guarantees provided by a complete and strict legal system.

The Standing Committee of the National People's Congress is in the process of examining and approving the Securities Law. Nonetheless, China's securities market, which has proceeded in line with relevant laws and regulations formulated and promulgated in recent years, is moving rapidly from disorder to standardization. Liu Hongru, former chairman of the China Securities Supervision and Management Committee, noted that cultivating and developing stock markets are important aspects of China's economic structural reform. China's stock market, which is still in a primary stage, should be developed gradually through cautious experimentation. The country must explore all avenues which ensure that development of stock markets conforms with the socialist market economic structure. The effort will require the constant perfection of legislation, strict enforcement of law and the introduction of standardized operations.

A series of laws and regulations designed to standardize the market have been formulated and promulgated in recent years to keep track of the rapid development of China's stock market. A legal framework has initially been established to control the behavior of companies which list stocks, as well as behavior related to the distribution of securities and transactions. In terms of stock issues and transactions, relevant government departments have formulated and promulgated the Provisional Regulations on the Issuance and Transaction Management of Stocks, Provisional Measures on the Management of Stock Exchanges and Provisional Measures Prohibiting Illegal Stock Transactions, with said regulations taking effect in 1993 and 1994. The former regulation, considered the most important administrative decree for standardizing China's stock market, serves as a stop-gap measure prior to enactment of the Securities Law. Implementation of the regulation has effectively controlled overlapping management and disorder once prevalent in the stock market. The examination and ratification system for the issuance of stocks outlined in the regulations has effectively curbed the rush to introduce the shareholding system and slowed the development of stock markets in some localities.

At the end of 1994, acting in accordance with related regulations and laws on securities transaction, the China Securities Supervision and Management Committee investigated four cases in Shandong, Fujian and Guangdong provinces. The cases involved speculators who attempted to gain exorbitant profits by manipulating stock prices. In all cases, illegal income was confiscated, and the perpetrators were fined a total of 10 million yuan.

In order to standardize the behavior of intermediary agencies, define their obligations and responsibilities, and ensure the quality of business operations, the China Securities Supervision and Management Committee has joined forces with the Ministry of Finance, the Administration of State-Owned Assets, the Ministry of Justice and the State Auditing Administration to formulate and promulgate a series of decrees designed to standardize the behavior of accounting, auditing and legal offices, as well as assets evaluation agencies engaged in stock related operations.

The committee has also introduced a number of rules and regulations for trial implementation, including the Rules for Companies Announcing Public Issues of Stocks and the Content and Form of a Company Prospectus. These regulations define the responsibilities of companies concerning the disclosure of information.

Problems and prospects

Many Chinese experts contend that China's stock market is still in the initial stage when compared to mature markets abroad. While enjoying vast potential for development, the market also faces numerous problems.

China's current stock market features the coexistence of shares owned by the state, legal entities and the public, with Renminbi denominated A-shares available to domestic investors and B-shares denominated by foreign exchange sold to overseas investors. These factors have led to the emergence of a number of specialized securities exchange markets. For example, the STAQ and NET markets in Beijing are dedicated to nationwide transactions of shares held by legal entities. This practice has resulted in a great disparity in stock prices on different markets. Finding a solution to this problem constitutes a major task involved in the construction and standardization of China's stock market. The precondition for merging the A-share and B-share markets centers on the the free convertibility of the Renminbi, while efforts to merge shares owned by the state, legal entities and the public is dependent on the deepening of the economic structural reform. However, the general development trend calls for merging different types of stocks and different types of stock markets into a unified market. The need to do so has been jointly acknowledged by China's economic and financial sectors.

Moreover, the fact that China's stock market reacts unduly to policy changes often causes acute short-term fluctuations in the market. Although fluctuation is a natural phenomenon in the stock market, wide-ranging fluctuations appearing for only a short period are abnormal. Since 1991, the short-term fluctuation rate on China's stock market has surpassed 100 percent on numerous occasions. For example, on July 29 last year, responsible members of the China Securities Supervision and Management Committee, relevant departments of the State Council, and representatives from the Shanghai and Shenzhen stock exchanges attended a meeting in Beijing, during which they decided to adopt measures to reverse the stock market's prolonged sluggish price index. Within only one week after the announcement, stock prices on the Shenzhen and Shanghai stock exchanges skyrocketed by 100 percent. However, on October 7 last year, the stock price index on the Shanghai Stock Exchange plummeted by 40 percent. Many investors were caught by surprise and suffered severe losses. In an effort to prevent a recurrence of this situation, on November 1, 1994, the Shanghai and Shenzhen stock exchanges changed the previous practice of releasing information only on Friday, and began releasing information on a timely basis. On January 1 this year, the two stock exchanges began replacing settlements on a daily basis with settlement on every other day. The new methods have significantly mitigated the fluctuations on the stock market.

The current total market value of stocks in circulation on the Shanghai and Shenzhen stock exchanges accounts for 6 percent of the country's gross domestic product (GDP), with the figures for the United States standing at 67.7 percent, Japan 68.1 percent and Hong Kong 189.4 percent. China's stock market is expected to enjoy further development along with sustained, steady and rapid national economic growth and the deepening of economic structural reform.