Changing China's Financial System


As the debate grows over China's financial system and the reforms needed to make it more efficient, People's University Professor Wu Xiaoqiu has emerged as a prominent and often outspoken authority. Wu heads the Finance and Securities Research Institute at the university's campus in northwestern Beijing. He also publishes the bimonthly Economics Herald.

Wu minces no words about what he thinks must be done. In a recent interview with BusinessWeek Beijing Bureau Chief Dexter Roberts and Asia Regional Editor Mark L. Clifford, Wu ticked off the financial sector's shortcomings. Here are edited excerpts from that conversation:

On improving China's financial infrastructure:

The most important [change required] is the underwriting and listing system [for stocks]. The biggest shortcoming is government interference in the listing process. We changed the listing system from government approval to registration. The system still has problems. There is still intervention from the government.

We need about five years to change from government approval to a registration system [regulated] by exchanges and intermediaries [like investment banks].

On disclosure requirements:

We should radically improve disclosure requirements for listed companies. Chinese companies listed abroad disclose more than domestic companies. [False and misleading, as well as incomplete] disclosure have hurt the development of China's financial markets...[Recent share-price scandals] show China is still not a legal society.

A lot of companies only know [that], from issuing shares, they can raise lots of money. They don't know you should have more legal responsibilities...During this period [following a pair of recent share-manipulation scandals] a lot of people may go to jail.

On improving the investment banking system:

Chinese investment banks have manipulated the market a lot. This harms the development of the stock market and is far from the basic [proper] function of investment banks. There are more than 90 investment banks and security houses. We will need 5 to 10 years to restructure according to the market. But [at that time] we [will] only need 5 of these companies, not 90. Restructuring is the way [forward] for China's securities houses.

It is very regrettable that the CEOs of China's securities houses don't think about the importance of this trend. They don't know that the opening of China's securities industry is only a matter of time. Restructuring has met a lot of interference from China's provincial governments.

On insurance companies and pension funds being allowed to invest in the stock market:

There are more than 50 million stock-investment accounts. Over 90% of them [belong to] small investors. [Pension funds and foreign funds aren't yet allowed to invest in the market.] China's mutual funds are sponsored by securities houses. This can cause [conflict-of-interest] problems [as a recent scandal involving widespread price manipulation among a broad swathe of the country's mutual funds showed]. Major shareholders may ramp prices and then sell to the funds. This is very, very dangerous.

On improving China's corporate shareholding structure:

On average, 68% of listed companies' shares are owned by the state. There is little liquidity [and poor corporate governance]. Often, there are only one or two people at shareholders' meetings. The situation hurts the health of the market. It will take 5 to 10 years to make the 68% that is state-owned tradeable. [In 10 years] the market capitalization will nearly quadruple, to 13 trillion renminbi.

On regulating intermediaries, such as law firms and accounting firms:

A major problem is our intermediary institutions. This damages [markets'] credibility. With undeveloped credibility it's very hard to develop the capital market. They have an obligation to perform due diligence, [assess] fairness, take responsibility for transactions. We have thousands of [financial and financial support] institutions. But very few can fit this criteria. [For example, foreign accounting firms like Arthur Andersen and PricewaterhouseCoopers do the accounting for IPOs of Chinese firms listed abroad]. We have to make intermediaries independent, and make them take full responsibility [for the transactions they work on and take part in].


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