The Development of China's Stock Markets

The Development of the Chinese Stock Markets

Frank Song*

Center for China Financial Research & School of Economics and Finance

University of Hong Kong

Hong Kong, PRC

May 2002

Abstract

I briefly review the history of the development of China’s two stock markets – the Shanghai Stock

Exchange and the Shenzhen Stock Exchange – in the past decade or so. I summarize the basic

characteristics of the Chinese stock markets and evaluate the contributions of the markets to the

Chinese economy. I also discuss the drawbacks and challenges of the Chinese stock markets as

China enters the World Trade Organization.

* Mailing address: School of Economics and Finance, University of Hong Kong. Hong Kong.

Email: [email protected] Telephone: (852) 2857-8507. Fax: (852) 2548-1152. I thank

Chuntao Li and Michelle Leung for their excellent research assistance. Financial aid from Hong

Kong’s RGC competitive Earmarked Research Grants 2000–2001 is gratefully acknowledged.

1

mailto:[email protected]

The Development of the Chinese Stock Markets

The early 1990s saw the opening of two stock exchanges in the People’s Republic of China- the

Shanghai Stock Exchange in 1990 and the Shenzhen Stock Exchange in 1991. Since then, the

Chinese stock markets have been developing at a rapid rate, contributing greatly to the country’s

economic growth. They provide important stimuli to China’s reform in financing and investment,

corporate governance, and the financial system as a whole. In Section 1 of this paper, I briefly

review the short history of China’s two organized exchange markets. In Section 2, I examine the

current state of the two markets in terms of the number of listed companies, composition of shares,

the investor profile, market turnover, and so on. In Section 3, I evaluate the positive role of the

stock market in the economic development of China and discuss the existing problems with the two

stock markets. In the last section, I conclude with a look into the potential growth and development

of China’s stock markets in the future.

1. The History

In the early 1980s, some economists in China raised the possibility of using a shareholding system

to improve the corporate ownership and governance structure. At the same time, some enterprises

started to issue equity shares to the public in order to raise capital. For example, Shenzhen Baoan

Joint Investment Company made China’s first initial public offering of equities in 1983, followed

by Beijing Tianqiao Baihuo Company and Shanghai Feiyue Yinxiang in 1984. The success of the

early shareholding companies encouraged more enterprises to follow, and shareholding became a

2

general practice accepted by the government. The increasing number of shareholding companies

and equity shares created a demand for exchange of these shares among shareholders. By the late

1980s, the over-the-counter trading of shares had become popular in cities such as Shanghai and

Shenzhen, where shareholding companies concentrated. In order to discourage unorganized and

black-market trading, the government established the Shanghai Stock Exchange in December 1990

and the Shenzhen Stock Exchange in July 1991. The setting up of the two exchanges has helped to

centralize the trading of shares and promote advanced trading mechanisms such as computer

matching of orders and paperless trading. These innovations have improved tremendously the

efficiency of the market for equity share trading. In 1991, the two exchanges also launched B-

shares, denominated in U.S. or Hong Kong dollars.1 The B-shares were available exclusively for

investors outside mainland China, and they were designed to attract foreign-currency investment to

China. 2 In late 1993, the government further stipulated that the shareholding system and stock

market are essential components of China’s socialist market system. It was realized that

shareholding as a modern corporate structure has the advantages of being transparent in ownership

of property and of accumulating public capital for large-scale production. Further, the government

realized that the stock market is an important part of a market system that helps efficiently allocate

society’s resources.

1 China further issued H-shares in Hong Kong and N-shares in New York after 1993.2 The Chinese government opened B-share trading to domestic investors only recently. Among other problems, B-shares had low liquidity in trading. China has also accumulated sizable foreign-currency reserves (currently over 200 billion U.S. dollars), and Chinese citizens now hold a large amount of foreign currencies. So the initial need for raising hard currency from foreign investors is diminished.

3

Because of the direct impetus from the government, China’s stock markets underwent fast growth

in 1992 and 1993. Not only was there an increase in the number of companies listed on these

markets, the market infrastructure was also improved. Both exchanges made important progress in

their trading systems. Meanwhile, the number of securities companies to serve the ever-growing

population of listed companies and investors was also on the increase. In addition, the government

enacted several important laws and regulations to formalize the operation of the stock market. In the

next section, I survey the current state of China’s stock markets in terms of the size of the market,

the distribution of publicly listed companies, and securities-market regulations and laws and

compare China’s stock markets with other major markets and with markets in neighboring

economies.

2. The Characteristics of China’s Stock Markets

2.1 Overall Growth of the Markets and Their Contribution to the Economy

By 2000, China’s two stock markets had issued a total of 379.17 billion shares, of which 135.43

billion are negotiable shares. Their total market value is 4,809.09 billion reminbi (RMB), about one-

third of which, 1,608.75 billion RMB, is negotiable (see Table 1). This represents a dramatic

increase from 1992 -when the total issued capital and total market value were only 6.89 billion

shares and 104.81 billion RMB respectively. Table 1 also provides information about the number of

listed companies (A and B shares), which increased from 53 in 1992 to 1,088 in 2000. During the

same period, the number of B-shares increased from 18 to 114. H-shares – shares listed on the

4

stock market of Hong Kong – also increased, from 6 in 1993 to 52 in 2000. In addition, the total

trading volume and total turnover expanded from 3,795.39 million shares and 68.125 billion RMBs

to 475,838.21 million shares and 6,082.67 billion RMB, increases of more than 125 and 89 times

respectively. Both the Shanghai Stock Exchange Composite Index and the Shenzhen Stock

Exchange Composite Index more than doubled in the nine-year period. Finally, the number of

investors increased from 2.16 million in 1992 to more than 58 million by the end of 2000. In sum,

Table 1 shows tremendous growth in China’s stock exchanges in the last decade.

I now turn to the issue of the relative contribution of China’s stock market to China’s aggregate

investment and GDP. Table 2 reports the ratio of market capitalization to GDP and that of domestic

raised capital to newly increased fixed assets. China’s stock-market capitalization as a percentage of

GDP increased from a mere 3.93% in 1992 to more than 50% in 2000. The ratio of negotiable

market capitalization to GDP increased from 2.06% in 1994 to 17.99% in 2000. However, its

contribution to China’s domestic raised capital, though also on the rise, is still small, from 0.60% in

1992 to 3.04% in 1999. Figure 1 provides a graphical representation of the ratio of market

capitalization to GDP from 1992 to 1999. The dramatic rise in the importance of stock markets in

the Chinese economy is apparent. Table 3 shows the ratio of domestic capital raised in the stock

market to the amount of loans by state-owned banks. It increased from 5.70% in 1993 to 14.88% in

1999. Although this ratio has been increasing in recent years, its magnitude is still very small,

5

suggesting the important role of China’s commercial banks in the financial sector and the remaining

great potential for the growth of stock markets.

Table 1 also provides the number of investors in China’s two stock markets since 1993. A rapid

increase was observed over the past decade in the number of investors, from 2.16 million in 1992 to

more than 58 million in 2000. However, the ratio of investors to the total population remains low. In

light of the large household savings in China (7400 billion RMB in 2000 and growing), there is

great potential for the growth of China’s investor population. So from either the demand or the

supply side, there is great room for China’s stock market to develop. Indeed, according to a high-

ranking government official in China, within five years, China will have between 2,000 and 3,000

listed firms and the Shanghai Stock Exchange will become one of the prominent stock markets in

the world.3

2.2 The Distribution of Publicly Listed Companies

China’s publicly listed companies come from a wide range of provinces and cities in China. Table

4 presents the distribution of China’s listed companies across geographical regions. It is shown that

a majority of listed companies come from the more developed eastern coast, while the central and

western regions share the remainder. Table 5 reports the industry distribution of the listed firm. In

the year 2000, 61.03% of the listed firms were in manufacturing and 9.74% were in wholesale and

retail.

3 See “Exchange Upgrades to Lure Foreigners” May 10, 2001, South China Morning Post, Hong Kong.6

Another interesting aspect of China’s stock market is the proliferation of different categories of

shares. Table 6 presents changes of listed companies by share categories in recent years. In the year

2000, 955 out of 1,088 listed companies issued A-shares only, 86 companies issued both A and B

shares, 28 companies issued only B-shares, and 19 companies issued both A and H shares. The

cross listing of shares in different markets generates a lot of interesting research issues. For

example, there is significant difference in price and trading volume of A-shares, B-shares and H-

shares. Responses of these shares to the same fundamental information also differ due to the

segmentation of markets.

In addition to the classification of Chinese listed companies into A, B, and H shares, the

shareholding structure of listed companies is further decomposed into the following:

a. State-owned shares refer to shares obtained by a state institution in exchange for a capital

contribution made by that institution to a corporation.4

b. Domestic legal-person shares refer to sponsor’s shares held by domestic legal persons.

c. Foreign legal-person shares refer to sponsors’ shares held by foreign legal persons.5

d. Private placement of legal-person shares refers to shares issued by private placement and

subscribed by legal persons other than sponsors.

e. Staff shares refer to staff shares issued by private placement of companies and yet not listed

at the report time.

4 See the State Council’s “Interim Measures on the Administration of State-owned Shares by the Limited Companies”.5 Foreign legal persons include the merchants from overseas – Hong Kong, Macao, Taiwan, etc.

7

Figure 2 shows that in 2000, state-owned shares accounted for 37%, and domestic legal-person

shares, legal-person shares obtained through private placement, and staff shares together accounted

for 26% of the total shares. Neither state-owned shares nor legal-person shares are allowed to trade

in the market. The publicly traded A-shares, the only shares to be traded in mainland China,

accounted for only 26%. In other words, less than 30% of all the shares of China’s listed companies

are traded on the Shanghai and Shenzhen stock exchanges.

2.3 Securities-Market Regulations and Laws

Like any emerging stock market, China’s stock markets have gone through a series of institutional

reforms. The major motive is to establish the so-called “open, fair, and just” legal and regulatory

framework for the governance of China’s stock market. In the early 1990s, the Shanghai Stock

Exchange and Shenzhen Stock Exchange were mainly governed by the “Interim Rules on

Administration of Shanghai Securities” and “Interim Rules on Administration of Issuing and

Trading of Shenzhen Stock Exchanges”. In May 4, 1993, the State Council issued “Interim

Measures on the Administration of Stock Issuing and Trading”. This is an important regulation for

normalizing the development of the Chinese stock markets. It not only regulates the administration

of the two Chinese stock markets, but also makes detailed rules about the issuing and trading of

shares, the disclosure of information on listed companies, the investigation and punishment of

security crimes, and so on. Later, the government issued further laws and regulations, including the

8

“Company Law” and “Rules on Administration of Securities Exchanges”. In July 1999, the

government finally announced the full implementation of the comprehensive “Securities Law”. This

long-awaited law was initiated by China’s National People’s Congress in July 1992. The aim of the

law is to protect the interests of investors, normalize the development of China’s stock market, and

ultimately make China’s stock market compatible with internationally accepted practice.

China’s regulatory structure for securities markets has changed a great deal over the years. Before

October 1992, China’s stock markets were governed by the central bank – the People’s Bank of

China. In October 1992, the State Council established the Chinese Securities Regulatory

Commission (CSRC). The main functions of the CSRC are to design and implement laws and

regulations for the Chinese securities markets. The CSRC also supervises, among others, the issuing

and trading of securities, and the operation of securities companies and listed companies.

2.4 International Comparison

Although China has made significant progress in the development of stock markets, there still exist

tremendous opportunities for further growth, as shown by comparison with more advanced markets.

Table 7 compares the number of listed companies in major stock markets. In 2000, the total number

of listed companies in China was 1,088, far below the numbers in New York (2,468), London

(2,929), and Tokyo (2,096), but higher than those in some other markets such as Korea (702), Hong

Kong (790), and Taiwan (531). This is especially remarkable in that China has more than 300,000

9

state-owned enterprises (SOEs) and many more non-state-owned enterprises. Many of them are

waiting to be restructured and listed on the stock markets.

In trading values, China fell far below New York, London, Tokyo, and even Taiwan, but is above

some others including Hong Kong and Singapore. Table 8 displays the comparison of trading

values of China with major markets.

Table 9 compares turnover ratios across major stock markets. It is clear that China’s turnover ratio

is much higher than in other markets. For example, in the year 1999, the Shanghai Stock Exchange

had a turnover ratio of 421.55, while the ratios in New York and London were 74.61 and 56.70

respectively. Even most emerging markets, with the exception of Korea, have much lower turnover

ratios than those in China.

Table 10 compares price–earnings (P/E) ratios across major stock markets. In 1999, China had a

higher P/E ratio than many markets in the world. However, the P/E ratios are not stable over time

and are sometimes quite comparable with those of other markets.

3. The Evaluation of China’s Stock Markets

China’s stock markets have played an important role in the development of the Chinese economy

and its market system. The stock markets have not only helped Chinese companies to raise the

10

much-needed financial capital, but also helped to improve corporate governance of the listed

companies. In this section, I first discuss the positive contributions of the stock markets to China’s

rapid growth in the last decade and then evaluate its existing weaknesses.

3.1. Positive Contributions of the Stock Markets

The stock markets help to expand the financing channels and optimize the capital structure of

China’s listed companies. In the past ten years, China’s stock markets have helped to raise more

than 500 billion RMB for the listed companies. The injection of capital into the listed companies

provides necessary funds. For a long time, China’s enterprises were mainly financed by government

fiscal allotments and bank loans. Since the start of the economic reform, the newly created capital

of enterprises has been coming mainly from bank financing. The over-dependence of China’s

enterprises on bank funding results in a very high debt–asset ratio. For example, before 1995,

China’s enterprises had an average debt–asset ratio of more than 80%. Even in 1999, the average

debt–asset ratio for state-owned and large non-state-owned enterprises was still as high as 61.99%.

With the availability of equity capital from the stock markets, the listed companies have

tremendously improved their asset–liability structure. Today, the average debt–asset ratio of listed

companies is around 50% (see Huang and Song (2002)).

The stock markets have also given impetus to the transformation of management and governance of

China’s SOEs. Before the economic reform, China’s SOEs were dependent on state funding.

Because of the lack of representation of state interests, the managers of SOEs had inadequate

11

incentives to operate their businesses efficiently. A shareholding system provides the hope of

reforming that distorted incentive structure by making managers more responsive to the interests of

shareholders. It further encourages managers in SOEs to adopt modern techniques of operation and

risk management. For these reasons, the Chinese government has adopted a policy of using the

stock market as one of the important instruments in its attempt to reform the SOEs. Indeed, most of

China’s listed companies evolved from large and medium-size SOEs. Recently, more and more

listed companies have been merging with or taking over important SOEs, subsequently improving

their performance.

Finally, the development of China’s stock markets has fostered a generation of Chinese investors

and mobilized the allocation of capital in the society. In the past decade or so, there has been a

steady increase in the number of investors. Today, the number of investors exceeds 60 million.

Before the emergence of the stock markets, most people in China could only save their money in

banks in the form of various kinds of deposits. They only had a notion of preserving the value of

their savings, rather than increasing it through investment. Since the opening of the stock markets,

many Chinese have found a rewarding opportunity in investing in stock markets. An increasing

numbers of households in China are participating in the stock markets. The diversion of savings

deposits toward stock markets has enhanced the liquidity of capital in the economy and improved

the allocation of resources.

3.2. The Challenges Facing China’s Stock Markets12

The stock market in China is still at a tender age and faces a lot of challenges. In this subsection, I

provide a brief account of the major challenges for the Chinese stock market. First, this market was

born out of a centrally planned economy and hence inherited the formidable weaknesses of that

economy. The development of the stock markets has been subject to constant interventions from the

government. Rather than leaving the market to decide for itself when to expand or contract, the

government holds the key to the changes of the stock market. The market has been mainly used as

a place to raise much-needed capital for SOEs. Today, most of listed companies in China’s stock

markets are controlled by the state, while a majority of well-run private enterprises are excluded

from access to the stock market. With regard to financing in equity markets, there is tremendous

bias in favor of SOEs over non-SOEs. This is incontrast with the increasing importance of non-

state-owned firms in the Chinese economy (now accounting for more than 2/3 of China’s GDP).

Second, in a mature market, an equity share is classified as common stock or preferred stock

according to differences in equity right and responsibility. In China, before the implementation of

the “Company Law”, equities were classified according to the status of the investors. As discussed

in Section 2, equities of the same company were, in addition to publicly traded domestic A-shares

and foreign B, H, and N shares, further classified into non-publicly-traded state-owned shares,

legal-person shares, and staff shares. The huge difference in transaction cost and liquidity of these

shares makes it impossible for their owners to exercise the same rights and responsibilities with

respect to the same company. In Section 2, we observe that the state-owned shares accounted for

close to 40% of total capital, followed by individual shares and legal-person shares. The shares that

13

are publicly tradable accounted for only about 30%, leaving some 70% of shares of listed

companies non-tradable. The representatives of the state shares often dominate the board and

management decisions and ignore the interests of small and public shareholders.

Another drawback of the large proportion of non-publicly-traded shares is that mergers and

acquisitions of listed companies can only be done in private, without resorting to the public market.

In many of these private deals, individual investors and even market regulators were kept in the

dark until in the final stage. This fact implies that the stock market is not able to perform well the

basic functions of fostering the exchange of property rights and efficiently allocating resources. In

order to allow the stock market to perform its due functions, it is essential to have more state-owned

shares and legal-person shares for trading in the market. Recently, the government launched a test

scheme of reducing state-owned shares in listed companies. However, the government is facing a

dilemma in that selling these large state-owned shares will greatly depress the market.

Third, in a mature stock market, the number and pricing of IPOs are determined by investment

banks and listing companies according to the market condition. In China, the government controls

the timing and pricing of IPOs. When the market is down, the government often announces a delay

in the offering. Even if the shares are offered as scheduled, the issuing price may be a lot higher

than the market price, generating a huge loss to investors. When the market is booming, the

administratively determined price is often much lower than the market price, resulting in a great

payoff to investors. Recently, the government has made some attempt to relax its tight control on

14

the IPO process by converting it to the system of admission control in which any qualified company

can apply to list its shares on the stock markets. However, there is still a long way to go before a

fully market-driven IPO system is established in China.

Fourth, in the development of China’s stock markets, there is a lack of systematic securities laws

and regulations to govern the operation of the markets. In the early years, the stock markets were

regulated by piecemeal legislation, some of which was combined with departmental regulation by

political establishments over different aspects of the market. Oftentimes, government policy is the

main instrument to govern and control the stock market. For example, when the market is down, the

Chinese government tries to stimulate it by relaxing regulations and policies. When there is a boom,

the government reverses its policy and tries to cool down the market. Unfortunately, the

government often overextends its role in the stock markets and exacerbates rather than reduces

market volatility. The fundamental reason for government’s contribution to volatility and instability

in the market is that the policy for controlling the stock market is itself full of uncertainties in

content, the timing of announcements, and impact on the market, as compared to law and

regulation, which, by their nature, provide more certainty, predictability, and openness. Recently,

the Chinese government has made significant progress in addressing this problem. In July 1999, the

government fully implemented a groundbreaking national “Security Law”. This law was hailed by

observers as the foundation on which China’s securities market would develop.

15

Fifth, overall, China’s listed companies were chosen from among the most well-known, efficient,

and rapidly growing firms from various industries and regions in China. But unfortunately, a

substantial number of these companies ignored the necessity of change in their corporate

governance after listing. For example, some listed companies have intricate webs of rights and

responsibilities among the board and high-level management. Oftentimes, the board intervenes too

frequently in the daily operation of the company and the managers are reduced to a rubber-stamp

role. Some listed companies use the capital raised from the market to engage in high-risk

speculations in real estate and stocks, refuse to disclose important information required for annual

and semiannual reports, or ignore the interests of shareholders and use share allocation to replace

dividends. All of these problems boil down to the motivation of the companies to list their shares in

the market. A large number of listed companies treat the stock market as a place to raise money and

gain publicity but ignore the market’s function in improving corporate governance. The government

has also realized the importance of good corporate governance in improving the performance of

listed companies. For example, recently, the CSRC raised the requirement for information

disclosure of publicly listed companies.

Because of the problems discussed above, it is essential for government to strengthen regulations

over listed companies. The listed companies should improve the quality of their disclosed

information. The dividend policy and other internal organizational policies should all comply with

international standards. Listed companies should be prevented from abusing the funds raised in the

16

market. Only by reforming the corporate governance of listed companies and adopting regulatory

policies consistent with international standards can China’s listed companies become efficient and

competitive. In this respect, China seems to have a long way to go.

Sixth, the Chinese stock markets are dominated by trading by individual investors. Table 11 reports

the distribution of both A-share and B-share investors. In both A-share and B-share markets, the

individual investors dominate. In the A-share market, more than 99% of traders are individuals

while in the B-share market, more than 93% are individual traders. The individual investors tend to

follow the market in their trading and exhibit apparent herd behavior.

Although China’s institutional investors are few, they account for more than 60% of the capital in

the market. Unfortunately, instead of stabilizing the stock market, these institutional investors tend

to manipulate the market or some individual stocks and profit from the resulting high volatility.

This is because China’s institutional investors are mainly trust companies, finance companies, and

enterprises, with only a very small minority being investment funds. The main goal of many of

these institutional investors is to speculate on the movement of stock markets, and the sources of

their funding are also quite volatile.

Of course, the main reasons behind the excessive short-term speculation as opposed to long-term

investment in China’s stock market are related to the fundamental institutional problems mentioned

above. To the extent that institutional investors such as life insurance companies and pension funds

17

tend to hold a long-term view of the stock market, the presence of these institutional investors will

serve to reduce the turnover of trading. This may help reduce the volatility of stock markets. The

Chinese government has recently made some attempts to allow insurance companies to participate

in both the IPO market and the secondary market.

Seventh, besides the Shanghai Stock Exchange and the Shenzhen Stock Exchange, China also has

two electronic trading systems: the Securities Trading Automated Quotations (STAQ) system and

the National Electronic Trading (NET) system. These are NASDAQ-type computerized trading

systems. There also exist several regional trading centers such as Wuhan Securities Trading Center,

Shenyang Securities Trading Center, and Tianjin Securities Trading Center. A-shares are mainly

traded in the two stock exchanges, while legal-person shares are traded in the STAQ and NET

systems. In light of the rapid development of the Chinese economy, the current scale of the two

exchanges no longer satisfies the needs of the increasing number of listed companies. In addition,

because of the location of the two exchanges, China’s financial capital flows from hinterland

provinces to those two coastal cities. This further aggravates the existing shortage of capital in the

hinterland provinces and worsens the imbalance of regional economic development. Because of the

vast land area and differences in the level of economic development in China, it is advisable to have

several more regional stock exchanges in order to meet the demand of local firms. China can

achieve this by reforming and normalizing the current regional securities trading centers and

upgrading them into regional stock exchanges. China can also encourage more over-the-counter

18

trading in the STAQ and NET systems. These OTC trading systems may be expanded to trade

legal-person shares and staff shares of the listed companies. Because China’s shareholding system

has many different forms of share structures, a correspondingly versatile stock trading system will

help to meet the needs of shareholding companies in China.

Last, but not least, there is a tremendous challenge to China’s stock markets as China enters the

WTO. Although China has made some attempts to open up its stock markets in allowing foreign

investors to buy B-shares and to issue H-shares in Hong Kong, N-shares in New York, and S-shares

in Singapore, the pace of opening up is slow relative to other financial sectors such as banking and

insurance. This is because some of the prerequisites for completely opening of securities markets

are not yet met. For example, one of the most important prerequisites is complete convertibility of

the RMB through both current account and capital account. China made the RMB fully convertible

under current account in 1998, but its convertibility under capital account is still subject to stringent

control. Another important prerequisite is the development of important financial markets, such as

foreign exchange markets and inter-bank markets, to facilitate the movement of international

capital. China also lacks sophisticated financial instruments such as financial derivatives and short-

sale mechanisms to help investors manage risks in their investment. Finally, as mentioned before,

China still needs to do a lot of work to improve its accounting, regulatory, and legal framework in

order to make it compatible with internationally accepted practice.

19

4. Concluding Remarks

In this paper, I provide a brief overview of the development of China’s stock markets in the past

decade or so. When the Shanghai Stock Exchange and the Shenzhen Stock Exchange opened for

trading in the early 1990s, the number of stocks was small and the trading volume was also limited.

Today, with more than 1,000 listed companies and very active trading in both markets, China’s

stock market plays an essential role in financing companies in various industries and regions in

China. Further, it plays an increasing role in reforming the corporate governance of listed

companies and provides an example for other firms to follow. The stock markets, along with

commercial banks, insurance companies, and other financial markets and institutions, have formed

an integrated financial system to serve the rapid growing Chinese economy.

In spite of the important and positive role of the stock market in China’s economic development, it

is imperative to keep in mind its shortcomings. Among others, I listed several prominent problems

such as lack of enforceable regulations and laws governing the stock markets, segregation of

different shares and non-trading of state-owned and legal-person shares, over-speculation in the

market, and the need to strengthen the role of the stock market in improving the corporate

governance of listed companies. If China can address these problems in an effective way, her stock

market will continue to play its important role in raising capital and help reforming the governance

of companies. It is also quite possible that China’s stock market will become one of the largest and

most efficient markets in the world.

20

Literature:

Annals of Chinese Securities Regulatory Commission, various issues, Beijing, PRC.

Annals of Shanghai Stock Exchange, Shanghai, PRC.

Annals of Shenzhen Stock Exchange, Shenzhen, PRC.

Huang, Samuel, and Frank Song, 2002, “The Capital Structure of China’s Listed Companies”,

Working paper, School of Economics and Finance, University of Hong Kong.

Wang, Guogang, 1999, “China’s Finance in 21 Centuries”, Social Science Literature Publisher,

Beijing, PRC.

21

Table 1: Summary for Securities Market

1992 1993 1994 1995 1996 1997 1998 1999 2000

Number of listed Companies (A&B Share) 53 182 291 323 530 745 851 949 1088

Number of Listed Companies

(B Share)

18 41 58 70 85 101 106 108 114

Number of Listed Companies

(H Share)

6 15 18 25 42 43 46 52

Total Market Shares (Billion Shares) 6.887 38.773 68.454 84.842 121.954 194.267 252.679 308.895 379.171

Negotiable Shares (Billion Shares) 2.118 10.788 22.604 30.146 42.985 67.144 86.196 107.965 135.426

Total Market (billion yuan) 104.813 353.101 369.061 347.428 984.238 1752.924 1950.564 2647.117 4809.094

Negotiable Market Capitalization (Billion Yuan) 86.162 96.889 93.822 286.703 520.442 574.559 821.397 1608.752

Trade Volume (million shares) 3795.39 23422.17 201333.91 70547.06 253314.06 256079.12 215411.00 293238.88 475838.21

Total Turnover (Billion yuan) 68.125 366.702 812.763 403.647 2133.216 3072.184 2354.425 3131.96 6082.665

Shanghai Stock Exchange Composite Index 780.39 833.8 647.87 555.29 917.01 1194.10 1146.70 1366.58 2073.48

Shenzhen Exchange Composite Index 241.2 238.27 140.63 113.24 327.45 381.29 343.85 402.18 635.731

P/E, Shanghai 42.48 23.45 15.70 31.32 39.86 34.38 38.13 59.14

P/E, Shenzhen 42.69 10.28 9.46 35.42 41.24 32.31 37.56 58.75

Turnover Ratio (%), Shanghai 341.00 787.00 519.41 760.05 534.99 355.3 421.55 504.07

Turnover Ratio (%), Shenzhen 265.45 324.44 691.79 309.56 949.68 662.32 411.14 371.61 396.47

Number of Investors (10000) 216.65 777.86 1058.98 1242.47 2307.23 3333.33 3911.13 4481.19 5801.13

Source: The Chinese Securities and Futures Statistical Year Book, 2001

22

Table 2: Ratio of Market Capitalization to GDP and Domestic Raised Capital to Newly increased Fixed Asset.

Unit: 100,000,000 yuan

GDP Market

Capitalization

% Negotiable

Market

Capitalization

% Newly

Increased

Fixed

Asset

Domestic

Raised

Capital

%

1992 26638.1 1048.13 3.93 8317.0 50 .06

1993 34634.4 3531.01 10.20 12980.0 276.41 2.13

1994 46759.4 3690.62 7.89 964.82 2.06 16856.3 99.78 .59

1995 58478.1 3474.00 5.94 937.94 1.60 20300.5 85.51 .42

1996 67884.6 9842.37 14.50 2867.03 4.22 23336.1 294.34 1.26

1997 74772.8 17529.23 23.44 5204.43 6.96 25154.2 856.06 3.40

1998 79552.8 19505.64 24.52 5745.59 7.22 27630.8 778.02 2.82

1999 82054.0 26471.17 32.26 8213.97 10.01 29475.2 896.83 3.04

2000 89404.0 48090.94 53.79 16087.52 17.99 NA 1498.52 NA


Table 3, Ratio of Domestic Raised Capital in Stock Market to Account of Loan in Banks

Unit: 100,000,000 yuan

Domestic Raised

Capital

Amount of Loan

of Bank

% Domestic Raised

Capital

Amount of Loan

of State-owned

Bank

%

1993 276.41 6335.4 4.36 276.41 4845.61 5.70

1994 99.78 7216.62 1.38 99.78 5161 1.93

1995 85.51 9339.82 0.92 85.51 6915.45 1.24

1996 294.34 10683.33 2.76 294.34 7937.75 3.71

1997 856.06 10712.47 7.99 856.06 8149.96 10.5

0

1998 778.02 11490.92 6.77 778.02 9100.39 8.55

1999 896.83 10846.36 8.27 896.83 8742.71 10.2

6

2000 1498.52 13346.61 11.23 1498.52 10074.02 14.8

8


23

Table 4: Distribution of Listed Firm Across China Unit: Number of Firms

Shanghai Shenzhen Total (percent)East 343 268 56.16%Central 110 126 21.69%West 119 122 22.15%Total 572 516 100Source: The Chinese Securities and Futures Statistical Year Book, 2001

Where East region includes Liaoning, Beijing, Tianjin, Shandong, Jiangsu, Shanghai, Zhejiang,

Fujian, Guangdong and Hainan, totally ten Provinces and Municipals; Central Region

includes Heilongjiang, Jilin, Hebei, Henan, Anhui, Jiangxi, Hubei, Hunan, eight provinces;

West region includes Inner Mongolia, Xinjiang, Ningxia, Shanxi, Shannxi, Gansu, Qinghai,

Tibet, Sichun, Guizhou, Yunnan, Chongqing, Guangxi, thirteen provinces, autonomous

region and municipals.

Table 5: Distribution of Listed Firms Across Industry Unit: Number of Firms

　 Total (%) Shanghai Shenzhen

Agriculture 2.48% 16 11

Mining 1.28 5 9

Manufacturing 61.03 339 325

Electricity, Gas and Water Supply 3.68 22 18

Transportation & Storage 3.86 24 18

Construction & Real Estate 4.78 25 27

Wholesale & Retail 9.74 64 42

Other Industry 13.14 77 66

Total 100% 572 516


24

Table 6, Changes of Listed Companies by Shares Categories in Recent Years (National)

Unit: Number of Companies

Year 1994 1995 1996 1997 1998 1999 2000

Only A Shares 227 242 431 627 727 822 955

A & H Shares 6 11 14 17 18 19 19

A & B Shares 54 58 69 76 80 82 86

Only B Shares 4 12 16 25 26 26 28

Total 291 323 530 745 851 949 1088

Total of A Shares 287 311 514 720 825 923 1060

Total of B Shares 58 70 85 101 106 108 114


Table 7, Comparison of the Number of Listed Companies in Major Stock Markets

Unit: Number of Companies

Year China Taiwan

New

York Tokyo Korea London Hong Kong Thailand

Singapor

e

1992 53 256 2089 1651 688 1878 413 320 319

1993 183 285 2362 1667 693 1927 477 269 338

1994 291 313 2570 1689 699 2070 529 289 362

1995 323 347 2675 1714 721 2078 542 416 384

1996 530 382 2839 1749 741 2136 575 454 402

* 1997 745 404 2626 1865 776 2513 658 431 334

* 1998 851 437 2669 1890 748 2423 680 418 349

* 1999 949 462 2592 1932 712 2791 708 392 317

2000 1088 531 2468 2096 702 2929 790 381 388


Table 8, Comparison of Trading Values in Major Stock Markets Unit: US $ Billion

Year China Taiwan New York Tokyo Korea London

Hong

Kong Thailand Singapore

1992 8.21 247.00 1745.00 482.00 115.00 407.00 91.00 73.00 18.00

1993 44.19 353.00 2260.00 793.00 211.00 843.00 157.00 86.00 80.00

1994 97.94 737.00 2454.00 859.00 287.00 930.00 147.00 84.00 81.00

1995 48.63 390.00 3083.00 878.00 186.00 1025.00 107.00 62.00 59.00

1996 257.05 477.00 3347.00 865.00 157.00 838.00 162.00 49.00 52.00

25

　　　　　　　　　　* 1997 370.14 1308.62 5777.61 896.06 170.82 1989.49 453.67 24.60 74.15

*1998 283.67 859.99 7317.95 750.83 145.06 2877.89 206.15 20.98 58.51

1999 377.35 913.62 8945.21 1675.65 733.42 3399.26 230.03 37.25 107.41


26

Table 10, Comparison of P/E Ratios in Major Stock Markets

Year Shanghai Shenzhen Taiwan New York Tokyo Korea London Hong Kong Thailand Singapore 1992 - - 22.90 22.70 36.70 10.80 17.50 13.10 16.30 19.501993 42.48 42.69 39.70 23.40 64.90 16.00 24.80 21.60 26.10 37.301994 23.45 10.28 33.50 29.70 79.50 21.80 17.40 10.70 19.50 26.201995 15.70 9.46 21.30 35.30 86.50 16.00 15.60 11.40 19.80 24.001996 31.32 35.42 29.00 26.30 79.30 16.00 15.90 16.70 12.00 21.701997 39.86 41.24 27.00 26.40 37.60 NA 19.20 12.10 6.60 15.201998 34.38 32.31 NA 37.20 103.10 27.80 23.30 10.70 10.40 19.001999 38.13 37.56 47.70 31.30 NA 34.60 30.50 26.73 14.70 99.20


Table 11, Investors Summary in 2000

Panel A: A Shares Investors Summary 　 Total Shanghai ShenzhenTotal Investors (Unit: 10000) 5773.71 2943.32 2830.39Legal Persons (Unit: 10000) 26.04 12.12 13.92Individual Persons (Unit: 10000) 5747.67 2931.2 2816.47Ratio of Legal Personal Investors to Total Number of Investors 99.54% 99.58% 99.51%

Panel B: B Shares Investors Summary 　 Total Shanghai ShenzhenTotal Investors (Unit: 10000) 27.43 14.52 12.91Legal Persons(Unit: 10000) 1.66 0.83 0.83Individual Persons (Unit: 10000) 25.77 13.69 12.08Ratio of Legal Personal Investors to Total Number of Investors 93.94% 94.28% 93.57%


Table 13, Summary Statistics of Monthly Turnover rate

Year Mean Std. Dev. Min Max1992199219941995199619971998199920002001

.1704958 .0638057 .0770335 .2908852

.2836436 .1154038 .1334102 .4807411

.4188635 .4055977 .1160487 1.346954

.2127732 .1352032 .0559316 .4987576

.5471429 .3420382 .0416881 1.091829

.3947013 .1995625 .2002398 .7707209

.2266187 .0828892 .1127351 .4066433

.2466301 .2161043 .0362618 .837316

.3247193 .12354 .1454418 .5859943

.1686583 .0754038 .0937296 .3292862

Source: Shenzhen GTA Database

Table 14, Summary Statistics of Monthly Standard Deviation

Year Mean Std. Dev. Min Max1992199219941995199619971998199920002001

.0279075 .0281862 .004778 .1092801

.0234108 .0084172 .0092082 .0354255

.0335041 .0228274 .0177399 .0933681

.0198245 .0184043 .0079245 .0752475

.0205525 .0095214 .0105673 .0472055

.0188753 .0105793 .007146 .0387938

.0108944 .0048386 .006458 .0243055

.0142647 .0070651 .0074894 .0290173

.0113791 .0064281 .0050314 .0287644

.0118753 .0063323 .0052002 .0300744Source: Shenzhen GTA DatabaseRemarks: Monthly Standard Deviation is defined as the standard deviation of daily return during a month, where return is the equally weighted average return for all the A&B shares in China’s two Stock markets



31

The Development of China's Stock Markets

Business

Transcript of The Development of China's Stock Markets