REVIEW OF CHINA SECURITIES MARKET IN 2001 AND PROSPECT FOR 2002

Review of China Securities Market in 2001

General Situation of China Securities Market in 2001

With an estimated issuing volume of no more than 110 billion RMB yuan, which is 100.3 billion less than that of last year, China's primary stock market has been shrinking. The secondary market also fluctuates rather severely. From the beginning of the year to the end of November 2001, the composite indices of Shanghai Stock Exchange decreased 21.4 percent from 2224.59 to 1748 points. This year has seen four enterprises issuing their corporate bonds, with a total amount of 10.4 billion yuan, 1.5 billion more than that of the same period of last year. Government bonds have been issued 16 times, a total of 422 billion yuan. Three policy banks have issued 226.5 billion of financial bonds.

Analysis on Features of China Securities Market Performance in 2001

* Great progress in market institution, including guidance towards listed companies' governance structure, improvement of the approving system for company listing, debuting of "exit" system, and measures to protect investors' legal rights and interests.

* Achievements in market innovation. The innovations include open-ended fund, issuing bonds with floating rates, government bonds auction without pre-fixed price range, B-share market opened to domestic households, and M & A (merger and acquisition) of listed companies by foreign funds.

* Greater degree of influence from the international financial circumstance. The obvious example is that China's stock market descended 18 percent under the impact of "9.11" attacks in the United States and its following financial turbulence, though this decrease should be ascribed mainly to the obscurity and changes in domestic rules and policies.

* Stock market has exerted greater influence on national economy. The production operations of listed companies, which represent the optimum productivity in the industry, are directly influenced by the stock market. Their performances influence the assets quality of capital input by banks; and the running of securities market has been closely related to the realization of state owned economy's strategic reorganization and the optimization of economic structure.

* Innovation of Government bonds types, issuing manners, and trade system. However, China securities market is in want of a hedge mechanism whose absence results in a lack of balancing system.

* Enhanced government supervision. For example, the government no longer administratively prescribes the issuing price and issuer directly; instead, more importance is attached to strengthening information revealing system, etc.

Prospect of China Securities Market in 2002

Analysis on Performance Environment of China Securities Market in 2002

The world economy will not improve significantly and the economy of the USA, even by optimistic prediction, will not bounce up until the later half of 2002. Presently, the central government has defined clearly that the macro economy policy of stimulating domestic demand will be continued in order to maintain an attractive growth in international economies.

Possible Changes in China Securities Market in 2002

* As a result of continued fiscal policy of stimulating domestic demand, the amount of government bonds to be issued will be no less than 2001, credit input from three policy banks, especially China Development Bank, will continue to grow. The corporate bond market will be activated in some degree with the revision of bond issuing system.

* Larger shares for institutional investors. Several foreign and some domestic financial institutions have reached an agreement of cooperation on setting up joint securities companies, funds management companies and assets management corporations.

* One of our bottom lines in the agreements on entering the WTO is that A-share is not going to be opened up. However, such trends are unavoidable:

* The construction of China securities market will be promoted, and brought in line with international practices; there will be more listed companies with foreign investment, which will improve the quality of domestic listed companies in general; securities intermediary institutions will undergo more restructuring and expansion in scale.

* The structure of securities market will be more rationalized. The rationalization of capital market will benefit specially from the building-up of pioneering board for medium/small-sized enterprise market board -- also known as small-sized capital market.

* Further innovations in securities trading mechanism and more trading varieties and methods. The market-maker system in securities market will be further constructed and spread; there will be more varieties of bonds; ABS will first appear in China; stock index futures will enter a stage of substantial preparation. The recovery of bond futures will be scheduled again.

* The correlation among securities market, reform of state-owned enterprises, and social security system will be further tightened up. Based on existing theories and practices, a feasible and detailed scheme about the circulation of state-owned enterprise shares would be published next year, which is expected to meet the demands of different aspects.

* The increase of the issuing volume of long and mid-term government bonds and the people's awareness of government bonds' risk-free characteristic. The curve of government bonds yield will gradually take shape, thus making it feasible for the establishment of the pricing basis of securities assets.

(by Yuan Dong)