But experts believe that, generally speaking, WTO accession would bring about more advantages than disadvantages, and China's stock market would head toward the better side.

Take the challenges

WTO accession marks the opening up of China's capital market to the outside world. Is the Chinese securities industry ready for strong competition from the outside?

China currently has more than 110 different sized securities companies. Their capital size, operation level and operational concepts are much different from overseas veteran securities companies. According to relevant agreements on China's WTO accession, China will fully open up its financial and securities markets after five years. Domestic securities companies will inevitably take the route of merger and association on the principle of survival of the fittest. In two or three years, the market will go through a large-scale consolidation.

Recently, cooperation and exchanges between Chinese securities companies, fund management companies and listed companies, and international renowned corporations have been underway in unprecedented breadth and depth. China's securities market has made considerable preparations to face competition from outside, following its WTO accession. Listed companies are improving corporate governance structure, securities companies are enhancing their strength and raising managerial efficiency, and open-ended funds are being launched at a high starting point.

China's securities market has made many efforts to enhance the governance of listed companies. In view of economic globalization, the Rules for the Governance of Listed Companies, aimed at improving the quality of Chinese listed companies and promoting their standard operation, has been issued to solicit public comment. With a number of listed companies being punished for false information disclosure and violation of regulations, such as Yinchuan Guangxia Industry Co., Ltd., 999 Pharmaceuticals Co., Ltd. and Zhengzhou Department Store and Stationary Co., Ltd., all listed companies have taken this as a warning. Imposing strict self-discipline, enhancing standard operations, raising credit ratings and building fine images, Chinese listed companies are ready to face challenges ensuing from the WTO entry with a new look.

In the funds sector, since the founding of the first standard close-ended funds, namely Fund Jintai and Fund Kaiyuan in March 1998, 46 funds are now listed in China. With the listing and issuance in September 2001 of the open-ended securities investment funds, Hua'an Innovation and Nanfang Stable & Growing, the asset size of fund management has surpassed 80 billion yuan.

On June 14, 2000, the Beijing Capital Group made its way into Fund Tianhua, the first time corporate and legal person institutions other than securities companies and trust investment companies have participated in the governance of securities investment fund. On July 19 that year, Hua'an Fund Management Co. introduced new shareholders. With its four major shareholders holding 30 percent, 20 percent, 20 percent and 10 percent of shares respectively, it realized the transition of equity structure from the controlling type to the decentralized type. This move has given more play to the supervisory function of corporate governance structure, while standardizing behavior of fund management firms and better protecting the interests of investors.

In the meantime, the restrictive and incentive mechanisms inside fund management firms are also improving. On February 23, 2000, 10 fund management firms issued a public notice on adjusting down overheads, thus realizing the transition from fixed rates to a combination of performance incentives and fixed rates in the charge of overhead, which links more closely the performance of fund managers with the development of the funds themselves.

In four years, China's fund sector has covered roads passed by developed countries in 100 years. After going through reforms in organizational form, financing channels, industrial regulations and corporate governance structure, Chinese fund management firms have made preparations for challenges following the WTO accession.

Sun Jie, Director of the International Department of the China Securities Regulatory Commission (CSRC), said China's securities market would take the following countermeasures in reaction to the WTO accession:

Establish a complete securities regulatory system, strengthen infrastructure and standardization construction of the market, and establish an effective risk-control system;

Perfect corporate governance structure and solve problems, such as boards of supervisors that exist in name only, unguaranteed interests of small and medium investors due to insider control and the excessively large proportion of State shares;

Give play to intermediary institutions, accelerate the development of accounting firms, law firms and consulting firms, and introduce competition from overseas counterparts;

Adopt practical measures to protect the interests of investors, establish shareholder civil procedures and investor claim systems, and attach importance to the interests of foreign investors;

Foster institutional investors, including securities investment funds, insurance funds and pension funds;

Conduct market and product innovation;

Build a multi-level market system for securities trading; and

Establish an orderly and multilevel regulatory system.

Conduct major reform

CSRC Vice-Chairwoman Shi Meilun noted that the securities market on the mainland is facing many problems, including a low level of market transparency and malpractices. Therefore, with China's WTO entry, major reform is urgently needed in the securities market so that it can be adapted to international practice.

Shi said that following WTO accession, overseas capital securities companies will enter other sectors of the securities market on the mainland, in addition to the A-shares market. As a result, the market will witness fiercer competition. However, many problems now exist in the governance structure of most of the 100 securities companies on the mainland, which feature weak risk control capacity and low level capability of self-supervision. They need to expand their business scope and provide customers with more value-added services, Shi said. Only by improving their corporate governance and risk control capacity can they deal with future competition. For this, the vice-chairwoman predicts that securities companies on the mainland will undergo merger and consolidation.

Shi also noted misunderstandings concerning China's WTO commitments. The first concerns the schedule for free RMB conversion. The second concerns the opening up of China's securities industry. Some people mistakenly think that the securities sector will open at the same time as Chinese banking and insurance sectors. In fact, free RMB conversion has not been included in China's commitments. Overseas securities companies and asset management companies will be allowed to engage in RMB conversion services only through joint ventures with companies on the mainland.

Following the WTO entry, more private businesses will go public. By the end of September 2001, 1,154 enterprises on the mainland had gone public, 1,100 of which are State-owned, with a market value of about US$60 million. In the future, foreign businesses and Sino-foreign joint ventures will also be permitted to be listed on stock exchanges on the mainland. Relevant rules are being drafted, Shi said.

Currently, there are 14 fund management companies on the mainland, with 46 funds being listed on stock exchanges on the mainland and their total assets valued at US$9 billion. However, they are facing a problem of excessive deposited funds due to the lack of investment instruments on the mainland, while on the other hand, there are many projects awaiting funds for development. Therefore, Shi said, more effective investment channels should be developed to turn deposited funds into investments of productive value.

Revision of the securities law

Cao Fengqi, Deputy Director of the Drafting Group of the Investment Fund Law, said that after China's WTO entry, corresponding amendments will be made to Chinese laws and regulations in relation to the securities market in line with international rules. On the one hand, some laws and regulations specifically concerning overseas securities companies' entry into the Chinese market will be formulated, while on the other hand, amendments and supplements will be made for provisions in the Corporation Law and Securities Law in discord with WTO rules.

According to legal insiders, hundreds of laws and regulations, including corporation, securities, banking and insurance laws, will be amended, and the whole amendment process will take several years.

Meanwhile, some legal experts do not believe the time is ripe for revision of the Securities Law. First, a clear understanding to the development structure of the Chinese securities market after WTO accession is still lacking. Second, the existing Securities Law has been implemented for a short time, just two years, and its defects have not been fully exposed. Under such circumstances, they believe rushed amendments cannot easily achieve expected results.

Active preparations are being made for revision of the Securities Law. The former Securities Law drafting group of the NPC Financial and Economic Committee plans to hold a high-level symposium jointly with related departments in March or April 2002, discussing specific matters concerning the revision of the Securities Law.

Wang Lianzhou, an expert with the NPC Financial and Economic Committee, pointed out that the Securities Law has played a positive role in the regulation and development of the securities market since it was put into effect two years ago. However, problems have arisen in its implementation, as a result of restrictions on its launch, and new developments on the securities market. As market practice has gone beyond legal provisions, Wang noted that the law needs corresponding revisions.

Li Cheng, Deputy Director of the Economy Section of the Research Office under the NPC Standing Committee General Office, pointed out that amendment supplements should be made to the Securities Law after China's WTO entry to better promote the development of the Chinese securities market and adapt it to international practice.

Amendments and supplements should involve aspects such as the legal regulation of the civil liability system, especially the civil compensation system, new securities products such as stock index futures and stock options, and improvement of the securities market system and the delisting mechanism for listed companies.