China's securities regulator convenes top level meeting

Does the Wang Xiaoshi case damage the CSRC''s most precious asset: its integrity?

Local media reported this week that the country's security regulator has convened a high level meeting to discuss the fall out of the Wang Xiaoshi case. The case concerns the eponymous CSRC official who sold the names of committee members who vote on share issuance applications to a textile company last year.

The official, who has already been arrested, is also suspected of taking bribes in the case of a company wanting to issue a convertible bond. Despite the controversy surrounding the CSRC's efforts to reform the securities market, the latest scandal is a first and could thus be uniquely damaging according to some market observers.

Never before has a CSRC official been accused of corruption. Indeed, the regulator has carefully built up a reputation of spotless integrity in its war against the corruption and fraud endemic in the Chinese securities market.

Yet this reputation, crucial for obtaining support from investors and senior government figures is now under attack. That could be a serious blow for a regulator already bedeviled by criticism for overseeing a stock market touching a five-year low. Many observers have also accused its staff, a number of whom were trained at elite institutions in the US, of being arrogant and out of touch.

The picture of the CSRC committee targeted by Wang is of a group of lawyers, accountants and bankers acting in an un-transparent and unaccountable way.

The company is made up of 25 members, some full time but most part time, of which five come from the CSRC. They are appointed for one year, renewable, but not to be extended beyond three years.

The body's regulations suggest that members should be drawn from industry, education, the stock market, as well as from intermediary companies, such as lawyers, accountants and bankers. Executives complain that industry experts are too few, compared to government bureaucrats and services providers.

With the committee under the spotlight after the Wang case, other allegations have emerged. The most serious is that the financial public relations companies, working on behalf of listings candidates, obtain information from committee members in return for introducing customers to their respective accounting, legal or securities firms.

Insiders report that even good companies with excellent listings prospects would part with Rmb 3-4 million in order to facilitate their IPO approval.

Indeed, the operations of the committee seem to have led it to becoming part of the very problems the CSRC want to solve, that of opaque decision making.

"If a company is rejected, there is no explanation given and no recommendations on how to improve ones chances the next time," one company executive complained to local media.

He added that when it came to pitching one's case, company managers were only given 15 minutes time to convince members of the committee. Since the selling of the list of names last year, the system has been reformed so that the examiners' identities are in the public domain.

But many observers do not believe this is effective given the many links in the decision making process which remain arbitrary and opaque.

Executives complain of a common problem when dealing with Chinese bureaucracies - the quasi impossibility of obtaining information by going through the designated channels.

To get around these obstacles, observers report that almost every company that has put in an application for an IPO will consult with a financial public relations company, although the degree of cooperation may vary from a simple consultation to the transfer of money. Rmb 4 million is the figure often quoted as the amount needed for a guaranteed pass. The size of the sum is said to reflect the number of people it has to be spread around. The financial public relations company reportedly ends up with only a fraction of the amount.

The case casts another shadow over the CSRC. It was set up in an atmosphere of optimism and under an experienced and credible leader, Zhou Xiaochuan, now heading the country's central bank.

But despite boasting of its free market credentials, the CSRC has instituted a series of onerous bureaucratic obstacles for companies listing, including making the sponsoring investment bank liable for a company's performance.

None of these measures have improved the performance of the bulk of China's listed firms. Observers highlight a raft of often government-owned companies, which boast promising prospects only to see their profits collapse, although usually only after the company has milked the stock market through numerous secondary issues.

The obvious solution would be to let the market decide which companies should be listed. Investment banks, which consistently brought turkeys to the market, would eventually be discredited. Abandoning the practice of setting IPO p/e levels low relative to the secondary market would also prevent the large profits routinely made by all IPOs investors, irrespective of the company's quality.

Forcing companies to put a greater portion of their enlarged share capital into freefloat would force companies to pay more for their capital in terms of decreased ownership. That would raise their costs and pressurize them to work on increasing returns.

It is not clear whether the CSRC is simply too weak to push through these reforms, as some observers suggest. It could simply be that those complaining about the regulator's radical foreign ideas are out of date if it has already become indistinguishable from all the other mainland rent-seeking bureaucracies.

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