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Chapter 1. Review and Judgment of Historical Roles of Chinese Securities Companies

There is a high degree of consistency between the evolution trend and progress of Chinese securities companies and the tracks of economic, financial, and social development along China's reform and opening-up program. However, some inconsistency is also evident. Various aspects are involved in China's social and economic development, financial reform, development of the securities market, and regulatory reform of the securities industry. In respect to these aspects, the history of Chinese securities companies can be divided into the following four important stages:

1. Stage one: 1987 to 1995. This is the embryonic period.

2. Stage two: 1996 to 2001. This is the phase into prosperity.

3. Stage three: 2001 to 2005. This is the time to pick up the slack.

4. Stage four: This is the phase of standardized development after the shareholding reform in 2005.

Historical and modern financial theory define the fundamental function of securities companies—an important intermediary of capital markets—as risk filtering, asset pricing, and asset management. On this basis, we identify the way to judge the contributions Chinese securities companies have made to benefit economic and financial development, and the existing problems they should acknowledge of the past two decades.

The resulting conclusion is as follows: Securities companies have been assisting in the promotion of the privatization of state-owned enterprise and the improvement of the quality of enterprise management. They have made great contributions in mobilizing the nation's capital stock efficiently and further improving the quality of the nation's economic performance.

They have also had an effect on constructing the financial system with the securities market at its heart, diversifying the nation's capital structure and residents' investment channels and increasing information transparency of capital markets. The existing problems include tunneling caused by direct investments and initial public offerings (IPOs), damages to the credibility of the market and interests of investors boiled down to insider trading, and securities companies' lack of innovation and core competitiveness.

In this chapter, we highlight seven securities companies as a typical case study, which supports the above review and conclusion.

As the new member and an integral part of the new Chinese financial system, securities firms are a major achievement of China's reform and opening-up program. They evolved as the institutional factors hindering China's economic growth were removed and the country developed in terms of economy, finance, and society. During the evolution, securities companies expanded in scale and diversified their services, which gradually raised their profitability and contributed greatly to the development of China's capital market. In the first half of 2011, China had 109 securities companies. Their total business income for that year was CNY 75.102 billion (including net profit: CNY 26.054). That total comprised CNY 40.995 billion from securities brokerage (their primary business); CNY 13.277 billion from securities underwriting and sponsorship and from financial consultation; CNY 0.898 billion from trusted customer asset management; and CNY 6.897 billion (including changes in fair value) from securities investment. Of these 109 securities companies, only 94 (86.24 percent) were profitable. As of June 30, 2011, these 109 companies had total assets of CNY 1,670 billion, their total net assets were CNY 580.896 billion, their net capital was CNY 435.717 billion, and their total trust fund was CNY 248.673 billion.

To better serve the reform and opening-up program in China's economy and society,[1] efforts were made to modernize and improve the financial system and market. With financial "uniformity"

[2] removed, the securities companies developed differently from other financial institutions, as the key intermediaries in China's capital market. But before we can understand the uniqueness of the development of Chinese securities companies and their influence on China's economic and social development, an overall analysis of the economy, society, financial system, trade supervision, and market of the country is needed.

This book is an overview of the merits and demerits of Chinese securities companies. To ensure the comprehensiveness and accuracy of this overview, the book covers the causes of the existence, evolution, and features of all phases of the securities company, as well as trends and functional demands on the global financial system. A comparison is then made between Chinese and foreign securities companies. The study moves chronologically over impacts on different population groups, in terms of variables. Facts and logic are well integrated, and theory and practice are equally emphasized.

  • [1] Although the Chinese economic reform started with the household contract responsibility system for farming in the countryside, the reform of government-owned companies was the prelude to the extensive makeover of the Chinese investment, finance, and financial system. Because of that, the Chinese financial system reform fell one step behind and came to respond to internal needs and serve the overall economic reform and opening.
  • [2] See Chapter 1 in Wu (2006) for a systematic review of the Chinese financial system reform.
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