market reforms on right track
(Alexander Wan and Selina Lo)
visions for industry efficiency, better pricing, definition of
risks amid others are what China needs for its capital market
development, said Kevan Watts, Chairman of Merrill Lynch International
Inc at the 18th China Daily CEO Roundtable on November 18 in Beijing.
roundtable, with the theme "Capital Market Reforms - Visions,
Process and Imperatives", involved senior officials from
China Securities Regulatory Commission (CSRC) and China Banking
Regulatory Commission (CBRC) together with some 30 CEOs and senior
executives from global financial institutions.
systems dominated by banks cannot work anymore. They need to be
more flexible and sensitive to prices and risks," said Watts,
who has decades of extensive industry experience in Europe, the
Middle East, Africa and the Asia Pacific and is also the honorary
chairman for the roundtable.
started discussions with an assessment of China's inherent financial
systems structure. "A system based on banks is not sustainable.
Financial services all over the world have revolutionized through
quoted year-end 2004 figures to support his statement. "Only
2 per cent of financial assets in China was recorded in securities
firms. About 4 per cent is owned by insurance companies. In 2004,
the capital market industry as a whole lost 50 billion yuan in
value and brokerage revenues dropped by 45 per cent. China's capital
market is very small in size today."
role of banks
Schmidt, General Manager of Dresdner Bank AG Beijing Branch, testified
to China's dependence on banks.
70 per cent of the finance of Chinese corporations involves Chinese
banks. We need independence of Chinese corporations in banking."
achieving a better balance with a less-bank-dependent structure,
Norman Warner, President of Warner Financial Corporation in Canada,
suggested channeling good-performance assets more efficiently.
area I see that needs improvement is the disposal of non-performing
assets," Warner proposed.
of having a brand auction where they're auctioned in large blocks,
it might be better to deal with the individual companies more
carefully. Quite often, there is maybe only a small percentage
of (the large blocks) that are of interest to the buyer, and the
others are not dealt with as they could be."
claimed the end product would be better for the market if more
specialists were involved with disposal of the units. He said
bringing in new management could be one step and he hoped to see
many more products available for investors in 5 years' time.
commended the Chinese Government's efforts to eliminate non-tradable
shares. "I think the CSRC themselves backed by the government
have reformed about 200 companies by eliminating non-tradable
shares and they expect to have completed a further 100 companies
by mid-2006, which will then represent 80 per cent of the market
capitalization. Dealing with that is absolutely critical because
the capital market will not develop otherwise."
also thought China's vision should include making non-tradable
shares tradable under the Asia market's capital trade.
to ensure what he called a "vibrant condition in the industry"
and "market functionality," Watts stressed the importance
of enlarging the base of institutional investors.
China needs almost more than anything are domestic institutional
investors." Watts reiterated this many times. "The market
is full of individual investors... who have brought in a lot of
money over the last 4 or 5 years. But individual investors need
a lot of advice when investing in equities. Institutions, on the
other hand, can pool funds to create diversified risk and devote
time and effort to research. Institutions are much more focused
on long-term return despite short-term performance measurement."
furthered his argument by citing South Korea as an example. "South
Korea is quite an advanced industrial economy and has many global
corporations. In my view, South Korean companies sell at a marked
discount to their true value because South Korea has not developed
an institutional investor base, so the true value of those companies
is not adequately reflected in the market. At the next stage,
a QDII proposal will help to develop an institutional market in
way to increase capital flow in the long-run would be to develop
the State's pension funds, an area where most Asian countries
total pension fund in China is only 100 billion yuan (US$12 billion),
not much for a big country like China. Corporate-funded pension
schemes are a long-term value investment. It's a natural source
of institutional investment of capital," Watts explained.
also pointed out that structural issues over the equity market
in China have led to a divergence between the onshore and offshore
markets, which cannot be used as a sustainable model.
need to work towards a system in which they can raise money at
home and abroad at similar prices," Watts argued.
added optimistically: "I think there is an opportunity now
for the correlation between Chinese and offshore markets to be
much closer, and to develop both markets."
addition to domestic reforms on institutional and capital market
structure, Peter Schmidt of Dresdner Bank urged the Chinese Government
to take measures to boost investors' confidence.
must step up the information system where people who want to buy
bonds are sure that the information is reliable, because we cannot
evaluate whether these figures are reliable or not," Schmidt
remarked. "The first step would be to establish some kind
of bond market where Chinese companies have to be pushed to offer
the right management."
Livett, Project Co-ordinator Director of the Security Industry
in the EU-China Financial Services Cooperation, agreed.
good quality of the companies listed can promote pricing and dessiminate
growth both domestically and overseas," Livett added.
perhaps the most debated topic was the role and participation
of foreign firms in the China market.
not only for Merrill Lynch, which is still waiting to set up its
securities joint-venture in China, but also for other foreign
financial firms in China's capital market, Watts confessed that
they are doing what they can but they would "prefer to have
more rather than less."
foreign firms are very pragmatic. We recognize that the Chinese
authorities have all the control and we're doing what we can do."
Watts continued, "I do not think the banks in this world
would like to have minority stakes - they're doing it because
they don't have a choice. It's in the instinct of every senior
manager to have 100 per cent control and ownership because it's
about our profitability and accountability."
Jiansheng, Principal Investment Officer of IFC, who has worked
with the management of many Chinese banks and financial institutions
across China, held a more moderate view, what he called "a
convergence of the views in Chinese thinking and foreign thinking".
think the Chinese Government recognizes that Chinese financial
institutions need to improve in management, and also foreign expertise.
Today we will see more and more foreign banks willing to take
minority stakes in Chinese banks and participate actively in management
because of the opportunities, and we see steady improvement in
management, in corporate governance and in foreign co-operation."
I think they (the Chinese Government) will need a while to see
how foreign firms should co-operate in this environment,"
said Wang. Standard Chartered Bank's Chief Representative, Lyn
Kok, also agreed the government was taking steps to open up the
domestic market little by little.
of market opening
we've got to open up the domestic market before we invite foreign
players to come into it. Obviously, the question is in the timing,
how fast you open up to the international market in terms of allowing
other people who want to buy fixed income bonds to play more fully
in the market, and allow a much more transparent interplay,"
in spite of the efforts of China's regulatory bodies, almost all
the delegates acknowledged that accessibility to foreign participation
remains a complicated and sensitive issue due to the wider political
issues involved and the fact that China's financial industry and
market are still underdeveloped.
has done in 15 years what took most Western markets a century
to achieve, and I think the CSRC has taken commendable steps to
restructure the capital market in China," said Livett.
are a lot of issues with the fixed income market and the equity
market in China today, given the little time it has had to get
where it is," said Watts.
regulators' focus on different issues is absolutely right, the
reforms they focused on are absolutely right.""But the
CSRC and the CBRC cannot create the industry by themselves,"
can put the framework in place, namely good securities values,
good institutional values, good banks, good bank management and
good investors. But to develop it is about a lot of things: time,
education, technology, increased transparency, more accountancy
- a lot of things which have to be developed and work together."
the roundtable delegates agreed there are still many areas that
need to be strengthened, they also believed that effective reforms
and market maturity was only a matter of time.
is very valued internationally. I would expect China equities
to be seen as more favourable assets because of the growth prospects
in China relative to the rest of the world," Watts said.