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Number of Securities Companies Stabilized, Industry Competition Sharply Increased

The number of securities companies increased from the 94 in 1996 to a total of 109 in 2001. The number of service outlets rose by merely 11.57 percent from 2,420 to 2,700 (see Figure 1.1).

In order to leverage the opportunities brought on by the prosperity of the securities market, however, competitiveness of the industry improved with mergers and acquisitions, and a number of outstanding companies emerged. Meanwhile, securities institutions entered a phase of regulated growth, with regulators cleaning up the business scope, internal control system, outlets

Changes of Number of Chinese Securities Companies and Outlets (1996-2004)

FIGURE 1.1 Changes of Number of Chinese Securities Companies and Outlets (1996-2004)

Source: China Securities and Futures Statistical Yearbook (2005).

6Xie, Liu, and Wang (2004, 26-27).

distribution, and risk control of securities firms. Securities companies themselves also strengthened their regulatory development and risk controls. With the capital and shares expansion program in 1999, a number of major securities brokerages of strong monetary prowess quickly arose. Business competition in the industry became increasingly furious. Securities companies rushed to upgrade their strength through M&A and internal consolidation, resulting in drastically increased size and assets, coupled with business scale. Issuance in the first-tier market significantly increased, and vitality in the second-tier market became unprecedented. Some listed companies also participated in the securities operation institutions. Meanwhile, securities firms actively engaged in business expansion by starting underwriting and wealth management services, among other activities.

Securities Regulation System Further Streamlined

The People's Bank of China published the Circular on Separating PBC-Affiliated Securities Firms from All Levels of PBC Branches on July 2, 1996. This rule required the 63 securities firms with equity relationships with the PBC to clear up their connection within the specified term. Starting in October of that year, the PBC enforced the principle of separated operations by removing and transferring 763 securities trading units set up under commercial banks, insurers, urban credits unions, corporate financial enterprises, leasing companies, and pawnshops. This strengthened the idea of separate operations among banking, insurance, and securities industries. Meanwhile, the PBC cleared up and regulated the business scope, internal control system development, outlets distribution, and risk control of securities firms. It explicitly prohibited securities units from engaging in self-manipulation, lending, or appropriation of investor deposits. Specifically, the PBC demanded securities firms to establish a complete and effective system for internal controls, in addition to a number of other measures for active regulation.

The CPC central committee and the State Council decided in November 1997 that the PBC would transfer its regulatory responsibilities over securities institutions to the China Securities Regulatory Commission, which would take complete control of the regulation of the securities market and institutions. With this drastic move, China corrected the regulatory system for securities entities, giving a strong push to the growth of the Chinese securities market and institutions. The regulatory baton was officially transferred from the PBC to CSRS in June 1998. The enacting of Securities Law of the People's Republic of China in December 1998 further established the "separated operation and administration" system for the securities, banking, trust, and insurance industries. As instructed by the Commercial Banking Law and the Securities Law, a major number of securities units were separated from commercial banks and trust companies to become independent securities firms.

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