China's first reaction following its accession to the World Trade Organization (WTO) was to open up its stock market. With a history of merely 10 years, China's securities industry is still at the infantile stage. In the face of pressures, challenges and opportunities following the country's WTO entry, industry insiders cannot afford to be slack in their efforts, and must square up to the challenges.
Opportunities and challenges
Yao Erqiang, Director of the Finance and Securities Institute of Beijing Technology and Business University, said WTO entry brings about challenges as well as opportunities, and disadvantages as well as advantages to China's securities market.
WTO entry will benefit China's securities market in the following aspects:
1. The accession to the WTO is good for China's steady economic growth in the long run. It will provide the most basic conditions for the rapid and healthy development of the capital market. Policies and regulations will increase their transparency, government functions will be shifted and administrative efficiency will be significantly raised.
2. Following WTO entry, overseas capital will gradually flow into China's capital market. The increased capital supply will help enlarge the capital market.
3. WTO accession will quicken the pace of China's industrial restructuring. With more and larger corporate mergers and acquisitions, the capital market will have more opportunities for development.
4. WTO accession will help improve the quality and performance of listed companies, thus providing a solid foundation for the prosperity and development of the securities market.
5. Following WTO accession, the market operational mechanism and regulatory rules will gradually be linked with international practice. This will enable China's capital market to become mature.
However, due to various reasons, including institutional defects, acts of investors aimed at quick results and instantaneous gains, and the lack of a micro credit system, large numbers of financial risks have accumulated. If these risks are not dissolved, they will eventually impede the normal development of the securities market.
Unfavorable conditions in China's securities market mostly include:
1. Owing to stock issue by quota in the early stages, many local governments regarded the stock market as a means to relieve State-owned enterprises (SOE) of their difficulties.
2. The inappropriate arrangement of trading systems and the excessively large proportion of non-tradable shares make it hard for the market to form an effective pricing mechanism. There is a great disparity between stock price fluctuation and the actual performance of listed companies.
3. The corporate governance structure of listed companies lacks effective incentive and restrictive mechanisms. Investors are immature and irrational. Intermediary institutions lack basic good faith. The regulation is too simple, and a multi-level supervisory system comprising regulatory authority, industrial self-discipline and media supervision is yet to take shape. The market lacks basic transparency and the disclosure of market information is seriously asymmetric. Some listed companies, intermediary institutions and accounting firms collaborate in the public offering of companies with poor asset quality. As a result, the securities market cannot give play to its basic role of optimizing resource allocation and improving economic returns. In addition, immeasurable systematic risks are formed.
All these have seriously weakened the confidence of investors, giving rise to concern about the situation of the securities industry following China's WTO accession.
Chinese economist Wu Xiaoqiu said China's securities market would face two major difficulties after WTO accession. One is how to deal with the trading problem of State shares and legal person shares. The other is how to link Chinese regulations and rules with WTO rules. Many market rules in China still have distinct characteristics of a planned economy, which are in discord with WTO rules. Required by internationalization, many need to be revised or replaced by new rules and regulations. This is an extremely arduous task. In the meantime, China's regulatory mechanism will also face challenges in raising efficiency and guarding against risks.
According to Wu, in the 10-plus years since its founding, China's securities market has been operating in a relatively closed environment while implementing a set of rules with strong Chinese characteristics. With WTO accession, China's securities market will be integrated with the global capital market. As a matter of course, some practices will become obsolete and new rules must be adopted.
Some experts also pointed out that WTO accession would promote the adoption of international practice in the Chinese securities market, which still lacks standards. This would benefit the Chinese economy. Wang Lianzhou, leader of the National People's Congress (NPC) group for drafting the Investment Fund Law, said WTO accession would improve the regulation of China's securities market.
Li Kang, Director of the Shanghai Jinxin Securities Research Institute, said WTO accession wouid change China's securities market. Changes would take place in the structure of investors. More domestic and international institutional investors would participate in investment in the securities market, which would make behavior on the securities market more predictable and reduce non-systematic risks. Changes would also take place in the structure of listed companies. With foreign capital companies being allowed to enter the market, the overall quality of listed companies would improve. WTO entry would also produce a significant impact upon intermediary institutions. Securities companies, law firms and accounting firms would face formidable challenges in adopting international practices.