Thanks to the fillip provided by the 16th part congress, China has accelerated the pace of its capital markets reforms. Most notable are the Qualified Foreign Institutional Investors Scheme and regulations allowing foreign investors buy into previously off-limits state shares.
But none of these would be good reasons for feeling optimistic if the domestic markets had not been experiencing improvements in corporate governance thanks to action by the China Securities and Regulatory Commission.
This year, the CSRC has been clamping down on what have been an alarmingly free-wheeling markets, thereby contributing to a collapse in the bourses, down 30% from their peaks last year.
"The CSRC has probably been one of the most aggressive regulators in the world this year," comments Andy Rothman, China country head for investment bank CLSA.
One sign is the record number of companies that have been delisted so far this year. Seven companies have been given their marching orders, an increase on the three that were delisted last year. On the back of new regulations passed by the CSRC last year, Chinese companies must delist if they do not show a profit in the past three and a half years. In the bad old days, they commonly got away with poor profitability by faking accounts.
"The number of firms being delisted shows that the CSRC has undoubtedly improved its supervision of listed companies," says Wei Yen, senior credit rating officer at Moodys, Hong Kong.
Another benchmark this year was the levying of the first RMB 1 million fine by the CSRC, on the Sichuan Jinlu Group.
But not everyone is satisfied.
One analyst at a leading investment bank is less impressed by the CSRC's efforts.
"The CSRC is blighted by the same problem as the rest of the country. There is no accountability, and no system of checks and balances," he says.
The CSRC has ministerial rank and answers to the state council, the country's cabinet, with the National Party Congress acting as a parliament. The council, led by the premier, is theoretically nominated by the NPC. In practice, it ultimately answers, like the rest of the country, to the Party.
The same analyst goes on to ask why, despite the increase in the number of delisted companies, there are not many times more.
"Given the number of rotten companies, the number of delisted companies should number in the dozens," he argues.
He might have a point. The number of poor listed companies is an indictment of the government's efforts to reform state-owned companies via stock market listings. According to official state newspapers, one in eight companies posted losses at the end of last year. In the first half of this year, earnings dropped 20% and 170 companies out of 1204 announced a loss.
And for the sake of comparison, it is worth pointing out that the SFC in the US is considering levying fines of a total of $1billion on investment banks which have abused their research department. One bank could get fined $500 million on its own.
You could also argue that the CSRC's enormous power in determining which companies are able to list could be abused. That is because traditionally, smaller, cash-strapped companies were encouraged by their local governments to list. That meant getting a cash transfusion from the up to 60 million highly speculative individual stock market investors.
All these desperate companies have to get approval from the CSRC. There are currently over 1000 companies waiting to list, almost as many as the 1200 already listed. It is a long and arduous process tidying up the companies before they are considered fit for a listing by the CSRC. Yet that does not stop many of these same companies reporting losses year after year once they have made it. That obviously raises questions as to how impartial the CSRC's selection process is.
"Hong Kong's regulators are getting a lot of criticism concerning the poor quality of the companies listed on the Growth Enterprise Market and on the main board," syas Hu Haifeng, a finance consultant in Beijing. "It's fair that the CSRC be exposed to the same kind of criticism."
Other, more sympathetic observers, say that the CSRC is exposed, if not to formal checks and balances, at least to enormous and contradictory pressures. "The CSRC's reforms depress the stock market, which upsets the retail investors, and limits the fierceness of the crackdown," says one.
Indeed, the government is desperate to maintain urban, middle class support, the background of most those dabbling in the bourses. This is because it is already alienating many workers and farmers through its restructuring programme.
Nor does the CSRC regulate all aspects of the market. The ministry of finance is responsible for ensuring that accounting standards are up to scratch when they get reported to the CSRC. Yet only 71 of China's 4000 accounting firms have licenses and their level of competence and honesty is a national scandal. Until the MOF makes accounting standards improve, it is going to be difficult for the CSRC to delist companies when profit figures can so easily be manipulated.
Compared to the other regulators, the CSRC performs creditably, says Henry Ho, the China economist at Merrill Lynch. That is because the CSRC has one advantage as a regulator, in that it does not have close ties to any of the players in the securities market.
"In contrast, the commercial banks regulated by the PBOC could suffer from rising loan defaults since many of the loans to brokerages and SOES were used to speculate in the A-share market. That means the PBOC will have mixed feelings about not stemming the stock market slide since it worsens the already precarious state of the banking sector.
And one of the biggest securities firms, Galaxy Securities, is a composite of the investment trust companies owned by the top four state banks. Securities companies like Galaxy depend on a booming stock market for their main source of profit, brokerage fees.
Turf battles will not be easy to solve, since the MOF, PBOC, CSRC and the insurance regulator, the CIRC all share the same rank. The CIRC-regulated insurance companies also have a stake in a fizzing stock market, since they a portion, albeit small, is invested in stocks.
It looks as if the CSRC will have its work out cut out, at least for while yet.
