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Commentary: Make or break choice for regulator
( 2003-09-15 07:22) (China Daily)

As suspicion grows about the future of the currently bearish domestic stock market, the China Securities Regulatory Commission (CSRC) announced a provisional regulation earlier this month to allow securities companies to issue bonds from October 8.

Will bond issuance merely be a straw the CSRC offers for battered brokerage firms to clutch at, or an iron fist in a velvet glove that the country's securities watchdog wields to fix the intermediary sector for the health of the stock market?

The answer hangs on brokerage firms' performance several months or even years later after tapping into this new financing channel.

But all investors in the stock market are now justified to ask hard questions as how will the CSRC be resolved to ensure its latest effort is not merely another short-term stimulus which fails to seriously protect investors' rights.

It is true that domestic brokerage firms are currently hungry for funds to support their daily operations.

Since the country's stock market nosedived from its record high in mid-2001, a total of 1.2 trillion yuan (US$145 billion) in market value evaporated by the end of July this year.

The proportion of direct financing to the country's total financing has therefore plunged from 15 per cent in 2000 to only 4.2 per cent in 2002, stirring debate on whether the 13-year-old stock market would be marginalized during the country's financial reform.

The bearish market was caused by various reasons ranging from rampant corporate frauds to the government's failed attempt to sell non-tradable State shares at high prices the market refused to accept.

In the meantime, securities companies have been going through a difficult period which has seen their incomes dwindle steadily.

It was reported that the industry lost nearly 2.6 billion yuan (US$313 million) last year amid a 17-per-cent drop in the stock market.

However, securities companies can not blame all their shrinking revenues on the stock-broking and investment banking businesses on the stock market slump.

They sowed the seeds of their own troubles by irresponsibly recommending unqualified companies to float shares on the domestic stock market.

And the performance of newly listed companies was actually worse than the overall poor performance of the whole stock market.

Latest statistics indicated that the profits of all the 41 companies newly listed by the end of August this year plummeted by 97 per cent over the same period last year, with a weighted average earning per share of 0.0026 yuan (US$0.0003), about 2 per cent of the market's average in the first half of this year.

Although the CSRC has the final say in approving any companies' initial public offering (IPO) on the domestic stock market, securities companies that recommended and underwrote those shares should certainly also be held accountable for the outrageous deterioration of newly listed companies' performance.

More finger-pointing at the crunch moment will not lift the market out of the quagmire it is bogged down in.

In this sense, the CSRC was right to try bond issuance as an incentive, not a bailout, for the increased transparency and accountability of securities companies.

According to a commission spokesman, allowing qualified securities companies to issue bonds will help them upgrade their financing structure and fund application efficiency and prevent liquidity risks.

As brokerage firms' other financing channels including equity financing, treasure bond repurchasing, interbank loans and stock-pledged loans all failed to meet their urgent funding needs at present, the CSRC's new regulation looks almost like a windfall.

Despite the strict requirements for bond issuing, some 20 bigger domestic brokerage companies are positioned to make use of the chance.

The apparent logic behind the CSRC' regulation is that more financing will entice and enable securities companies to better behave themselves.

The unspoken goal of the securities authority is to strengthen the regulation of brokerage firms in order to encourage them to play a more aggressive watchdog role in guaranteeing the quality of newly floated shares.

However, such an assumption can only work following an overall improvement of the quality of listed companies.

Otherwise, the securities authorities may risk rewarding offenders to exacerbate the underlying problems facing the stock market.

As long as the Chinese stock market has to take the role of pooling funds for the reform of State-owned enterprises which accounted for about 80 per cent of listed companies, the market cannot properly fulfil its prime function of pricing and allocating capital to raise the efficiency of listed companies and the economy at large.

The alarmingly poor performance of newly listed companies this year shows that a fundamental change in the quality of listed companies has yet to take place.

Under such circumstances, securities companies are still unlikely to resist the temptation of underwriting revenue from unqualified IPO candidates.

And tolerance of any such old practice will strike a heavy blow at those brokers who try to be more responsible for their work.

Therefore, the securities authorities need to go much further than open a financing channel in order to rebuild the accountability of brokerage companies.

As the regulator, the CSRC should take the lead in aggressively supervising the stock market.

One weapon at hand for the commission to encourage responsible securities firms while warning unqualified IPO candidates is to deliver due harsh punishment to those wrongdoers in the stock market -- to delist them.

In spite of the low efficiency of the stock market, only about 1 per cent of the around 1,200 listed companies have been delisted so far.

Given the interwoven interests of many listed companies with local governments or departments, the challenge the CSRC faces in cleaning up the stock market is understandably enormous.

But what is at stake for the commission is a make or break choice for the domestic stock market.

It is time for the regulator to show both guts and teeth to curb malpractice and restore investors' confidence in the market.

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