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Administration and Rectification Phase, 2001 to 2005

Although governance of the Chinese securities companies started as early as 1995,[1] the official complete establishment of the Chinese securities regulatory system and full-scale cleanup of securities companies started in 2001. For our purposes, the time frame from June 2001 to 2005 consists of the full-scale cleansing and rectification phase for the Chinese securities industry.

Structural adjustments of the Chinese securities market that commenced on June 24, 2001, caused four consecutive years of securities market slump, resulting in a challenging situation for Chinese securities companies. Statistics indicate that by 2004, total assets of the 114 securities firms were CNY 329.373 billion, each company averaging CNY 2.989 billion. This is a considerable fall from the average of CNY 4.013 billion registered in 2003. Their net assets fell sharply from CNY 587 million to CNY 996 million.8 Many securities companies faced a survival crisis in such a harsh market environment. A number of securities firms were at serious operational risk as a result. Some firms were taken into custody, while others were controlled by the government or shut down altogether due to serious insolvency, huge capital "black holes," and enormous social risks.

Figures show that in August 2002,31 securities firms, including Anshan Securities, were disposed of because of serious violations and the huge risks they faced. This accounted for 22.79 percent of all firms. Among the 31 firms punished, most conducted behaviors such as appropriation of client deposits and government bonds and illegal wealth management actions. Some firms loaned personal OTC bonds or manipulated the market, among other illegal activities. For example, Anshan Securities was censured by the CSRC in August 2002 for embezzling CNY 1.517 billion of client transaction funds, and for lending out CNY 2.63 billion in personal OTC bonds, for a total of CNY 4.147 billion. Dalian Securities was shut down by the CSRC for rectification in September 2002. Dalian embezzled CNY 580 million of client transaction funds and loaned out CNY 830 million in personal OTC bonds for a total of CNY 1.41 billion. Table 1.3 details violations by securities companies punished between 2002 and 2006.

These securities firms were subjected to remedies including government aid, suspended rectification, forced closure and cancellation, merger

Table 1.8. Main Violations of 31 Disposed-of Securities firms

Main Violations of 31 Disposed-of Securities firms

or acquisition, government takeover, and bankruptcy. In order to manage future risk, the CSRC optimized related regimes in market access, corporate governance, categorized management, third-party capital depository, and information disclosure. Brand new frameworks for comprehensive administration of securities firms were subsequently established. Most important was the enacting of the Regulations for Administration of Clients' Trading and Settlement Funds in 2002. This stipulated that clients' trading and settlement capital must be placed at an independent third-party institution, inhibiting securities firms from embezzling clients' funds and providing a solid institutional foundation for the regulated operations of securities firms.

This phase also ushered China's entry in the WTO, an important historical event. The time had come for Chinese securities companies to open up to the international market. The CSRC published the Rules for the Establishment of Foreign-Shared Securities Companies on June 4, 2002. The rules required that the proportion of shares held by overseas institutions in a securities firm in China should be capped at one-third. Following this provision, three Sino-foreign joint ventures—China Euro Securities, Changjia Paris Peregrine, and Daiwa SSC Securities—were established. However, international cooperation in the Chinese securities industry had actually started some time before that. In addition to the China International Capital Corp. Ltd., incorporated in 1995, approximately 20 joint Chinese-foreign securities institutions[2] were founded, or were about to incorporate, during the 2000 to 2001 window.

  • [1] From 1995, the regulatory authorities started to deal with high-risk securities firms such as Wanguo Securities (1996) and Zhongchuang Investment (1998). Statistics show that as of August 2002 (exclusive), eight securities firms had been taken into receivership. 8Wang (2006).
  • [2] Jiang (2001,23-27).
 
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