Brokerages need reforms
(China Daily)
Updated: 2004-06-08 10:54

Securities authorities should take more aggressive steps to push forward reforms in the domestic market, according to an article in Beijing-based Caijing magazine. An excerpt follows:

The small- and medium-sized enterprise (SME) board was launched last month. Despite hopes it brings to investors, the new arrangement fails to solve the lingering problem of non-tradable shares in the nation's listed companies.

A historical footnote of the Chinese stock market is its segmentation of shares, with the large amount of State and legal person shares made non-tradable in the exchange.

Non-trading control is behind the drastic fluctuations of the market in recent years.

Even though there are so many problems incurred by the non-tradable arrangement in the main market, the new SME board will maintain this practice.

Policy-makers explain there are three main reasons for keeping the old system. One is that if all shares became tradable, "bankers" would control the market to their advantage.

Another reason they mentioned is that it will prevent the major share-holders from dumping shares they hold to profit right after a company starts trading in the market.

Policy-makers fear that if all shares are made tradable in the SME board, capital will be diverted from the main board to the new market, further sapping funds from the main exchange.

The primary duty of securities supervisors, however, is to improve supervision capacity in order to ensure a clean market. Boosting market indices should not be the focus of their work.

In recent years, the stock market has seen improvements in many facets after a series of reforms. The State-owned brokerage firms, however, remain the weakest link in the market with their capital trapped in the stagnant main board market.

The securities watchdog seems to be catering to the interests of these firms in devising the trading rules of the SME board.

It is high time the authorities started to introduce more competition into the industry, allowing private and foreign investors as well as other social funds to enter the monopolized zone.

Reforms should be encouraged to improve the governance structure of the State-owned brokerage companies to sharpen their competitive edge and become more market-oriented.

And a sound entry and exit mechanism should be established to kick out dysfunctional brokerages.

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