John Phelan, former chairman of the New York Stock Exchange (NYSE), got a special gift from Chinese leader Deng Xiaoping during his visit to China in November 1986.
It was a stock certificate with a face value of 50 yuan issued by a company named Shanghai Feilo Acoustics Co. Ltd. Chinese media reported that Phelan was very excited at becoming a foreign shareholder of a Chinese company. But when he found that the stock was not under his own name, he immediately flew to Shanghai to register a name change at the stock trading counter.
The souvenir that was later brought back by Phelan to New York was part of the first publicly issued stock in China and signaled the country’s resolve to develop its capital market.
The small Shanghai trading counter where Phelan paid a short visit in 1986 -- a single room of 10 square meters without even a toilet -- was later developed in 1990 into the Shanghai Stock Exchange, now the world’s sixth largest stock market by market value. (The Shenzhen Stock Exchange was established in 1991.)
Small Counter to Major Market
"Hundreds of customers, some of whom had lined up the day before, gathered at No. 1806 Nanjing Xilu, where the first stock trading counter was located. The crowd almost broke down the gate in front of the counter,” local media reported when China’s stock began trading on September 26, 1986.
During the first trading day, 1,540 shares for a total amount of 85,280 yuan were sold. Only two stocks were traded at that time, the Shanghai Feilo Acoustics and the Shanghai Yanzhong Industrial Co. Ltd. The capitalization of the two companies was 500,000 yuan and 5 million yuan respectively.
By the end of 2007, 1,550 companies had been listed in Shanghai and Shenzhen stock exchanges, with a combined market value of 32.71 trillion yuan and accounting for 140 percent of the country’s GDP, figures from the CSRC shows.
The Shanghai Stock Exchange witnesses a daily trading volume of trillions of shares. Over 100 million Chinese have invested in stocks. Besides stocks, the two bourses also trade bonds, funds, warrants and will soon initiate the trading of stock index futures.
For years, foreigners were not permitted to participate in the yuan-denominated A-share market -- although prominent visitors were allowed to buy a single share as a souvenir. But at the end of 2007, foreign qualified institutional investors, with a combined quota of 30 billion, were able to invest in the A-share market.
Growing Pains
The year 1992 witnessed the birth of a national regulator, the China Securities Regulatory Commission, or CSRC. The organization was largely modeled on the US Securities and Exchange Commission.
Yet it was not until 1998, after several years of heated debate, that the National People’s Congress finally passed the Securities Act -- one of the milestones in the development of China’s securities market.
For the first time, issuance of securities, the rights and obligations of investors and market participants, as well as the powers and authorities of the securities regulator were clearly set out by a statute.
However, the country’s stock market has had a long and winding journey during its development. Its securities operation had long differed from the norm of the developed countries.
The lack of investment channels, with far more buyers than sellers, and the split of equity ownership, with very limited shares traded, plagued all of China’s stock markets.
This caused China’s stock market to be extremely volatile and it was labeled as a "policy-controlled" market rather than an actual free market.
Shares such as the Shanghai Feilo Acoustics Co. Ltd. were sold and bought at a fixed prices rather than letting buyers and sellers agree on a price.
On May 21, 1992, when officials finally loosened controls to allow prices to fluctuate according to market demand, the Shanghai stock market soared 104.27 percent from the previous day. Five new shares even jumped 2,500 and 3,000 percent from their issuing price.
According to international routine, the shares a company issued were usually divided into common shares and priority shares. But in China, the shares issued by a listed company were divided into state-owned shares, corporate shares and public shares. Only public shares, which accounted for no more than 30 percent of the total equity, could be traded on the stock market.
Due to the split equity ownership structure, stock prices never really reflected the real supply and demand of a company’s share. The share price in the stock market and the share price of non-floated shares were decoupled with the market price trading much higher than the non-tradable state-owned shares or corporate shares.
A famous scandal was Shenzhen-listed Guangdong YorkPoint S&T Co. Ltd., whose share price soared up to 126.31 yuan in 70 trading days between October 1999 and February 2000. Four institutional investors had manipulated the stock’s price, which had become the first to break 100 yuan.
Small investors in the stock market were also under-protected. In many cases, there were still no annual meetings at which small shareholders could complain to management. This led to a lack of transparency on the part of many Chinese listed companies. In many cases, the public companies served as a capital-raising tool which the parent companies or major shareholders could take advantage of and the stock market became an easy ride for looters through insider trading or embezzlement.
And that was why when the country started to gradually float its State-owned shares in 2001, the stock market suddenly fell into a five-year long slump.
It was not until 2005 when China launched a national share structure reform in a bid to change its split equity ownership into fully floated share structures. It was the first time that China’s stock market began to meet international standards.
With no doubt, securities reform was a milestone in the history of the country’s capital market.
In the following two years more than 1,300 listed companies had converted their non-tradable state-owned shares to tradable ones.
Meanwhile, another major law, introduced at the beginning of 2006, brought increased sophistication into the capital markets once plagued by embezzlement and lack of transparency.
The Company Law and Securities Law, enacted on January 1, 2006, aimed at increasing corporate governance, creating more transparency and putting more power in the hands of shareholders. Seventy related rules and regulations have been published since the release of the law.
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) by the end of that year. Since then, China’s stock market has become one of the best performing markets in the world.
By ZHANG RAN
Milestones
November 1990: The Shanghai Stock Exchange was established.
June 1991: The Shenzhen Stock Exchange was set up.
October 1992: The China Securities Regulatory Commission (CSRC) was formed to strengthen the management of the Chinese stock market.
December 1992: The Circular for Further Strengthening Macro Administration of the Securities Market was issued. The powers and authorities of the securities regulator were detailed for the first time.
May 21, 1992: Officials finally loosened controls to allow prices to fluctuate according to market demand. The Shanghai stock market soared from 617 points to 1,266 points. Some shares even jumped 500%.
March 1, 1993: For the first time, employees of the Shanghai Feilo Acoustics Co. Ltd. could trade shares of their company in the stock market.
August 17, 1993: The share trading system in Shanghai broke down, and triggered the "8.17" turmoil. The securities regulator increased its regulations and monitoring of the stock market.
July 1994: Because of the sluggish trading volume, government issued a batch of "redemption measures" to activate the market. The stock index witnessed the most rapid growth in China’s stock market history by jumping from 326 points to 1,052 points in one and a half months.
1995: After the bond market in Shanghai saw sharp fluctuations in February, the government suspended bond futures trading in May. As a result, the market jumped 31 percent on May 18.
1996-2002: Between 200-250 listed companies changed from state-owned to private entities.
July 1999: The Securities Law was enacted.
From September 1999: The securities regulator took a series of measures to add fund supplies to the market. Three types of new enterprises were allowed to invest in the stock market. In October, insurers were allowed to invest in the stock market by buying securities funds.
July 2000: The number of listed companies in Shanghai and Shenzhen broke 1,000, leading China to rank within the top 10 in terms of the number of public companies.
2002: The A-share market was opened to foreign investors under the scheme of Qualified Foreign Institutional Investors (QFII).
April 29, 2005: China launched the long-waited split share structure reform.
2006: China’s stock market resumed its fund raising function. The stock index witnessed a 127 percent growth.
