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Two major laws introduced at the beginning of this year in China have meant increased sophistication in capital markets once plagued by embezzlement scandals and a lack of transparency, top officials said on Friday.

 

The Company Law and Securities Law, enacted on January 1, 2006, have brought about fundamental changes in the nation's capital markets due to a number of measures aimed at increasing corporate governance, creating more transparency, and putting more power in the hands of shareholders.

 

"The two laws provided the foundation for the construction of China's comparatively underdeveloped capital markets," Cheng Siwei, vice-chairman of the Standing Committee of the National People's Congress, said at a conference held to celebrate the first anniversary of the laws' implementation in Beijing on Friday.

 

The main index of China's stock market witnessed 127 percent growth in 2006, and the total market capitalization of the Shanghai and Shenzhen bourses reached over 8 trillion yuan (US$1.02 trillion), making China one of the best performing markets in the world.

 

A total of 70 related rules and regulations have been published since the release of the two laws, according to the China Securities Regulatory Commission (CSRC), the nation's major financial regulatory body. Among the laws were calls for the release of more detailed financial results, increased consultation with shareholders, and improved auditing practices.

 

"The principle that 'every share should have the same right' in the two laws has provided a basis for ongoing securities reform," said Shang Fulin, chairman of the CSRC. "The laws are aimed at solving systematic problems that have kept the stock market in a four-year slump."

 

By November of this year, 1,248 listed companies, accounting for 93 percent of domestic listed companies, had converted their non-tradable State-owned shares to tradable ones in the share structure reform launched in May 2005.

 

The new Company Law and Securities Law were intended to ensure such companies follow market principles and protect investors' interests. In the past, people investing in public companies have been hit with heavy losses due to illegal embezzlement conducted by major shareholders.

 

In recent years, firms such as China's biggest refrigerator maker, Guangdong Kelon Electrical Holdings Co Ltd, the Xinjiang Uygur Autonomous Region-based D'Long (Group) Co Ltd and large brokerages including China Southern Securities and Eagle Securities, were all accused of embezzlement and financial reporting frauds.

 

A total of 27.5 billion yuan (US$3.5 billion) of capital embezzled in those illegal activities has been returned to investors by the end of December 2006. That accounts for over 70 percent of the embezzled cash, according to the CSRC.

 

While the new laws are helping to combat such scandals in the future, they are also allowing more products to be introduced into the markets.

 

In 2006, new investment products such as securities warrants, asset-backed securities, and corporate convertible bonds were introduced. Advanced trading tools including margin trading, which allows investors to buy and sell with money and stocks borrowed from brokerages and the trading of stock, are expected to be launched in 2007.

 

In 2006, as much as 41 percent of the funds in the stock market came from institutional investors, an increase of 10 percent compared to 2005.

 

China's securities regulator has granted a combined quota of US$9.04 billion to a total of 52 qualified foreign institutional investors introduced in a bid to link A shares with the world's capital markets, according to Shanghai-based Wind Data.

 

In addition to the introduction of more institutional investors to the A share market, China is building a multi-level capital market through which small and medium-sized enterprises and high-tech firms are able to raise capital.

 

(China Daily December 30, 2006)