China's developing securities markets.

• Author: Li, Meocre

Recognizing its own diminished ability to fund money-losing enterprises in perpetuity, the Chinese government is encouraging the development of capital markets as a means of accessing investment capital in order to meet its growth targets.

Certainly, there is plenty of capital available. Estimates of private savings in China range from $150 billion to $400 billion (U.S.). Much of this is apparently hidden "under the mattress," and must be enticed out of hiding by potentially attractive returns. These funds will otherwise go toward consumption, fueling inflation. Foreign investment, led by Hong Kong, Japan, Taiwan, and the U.S., has also poured in over the last decade or so.

To begin to attract this capital, two stock exchanges were opened in China in 1990 - the Shanghai Securities Exchange and the Shenzhen Stock Exchange. The response from Chinese investors has been remarkable. Both exchanges have experienced such huge demand that lottery systems have been introduced for new issues. Government measures to cool off the market have produced a more stable and orderly trading environment.

Initially, shares on the two exchanges could be bought only by People's Republic of China (PRC) citizens and institutions. More recently, so-called "B" shares have been made available to foreign individuals and/or institutions. The B shares carry the same rights and obligations as A shares but are settled in foreign currencies - either Hong Kong or U.S. dollars. As of September 1992, 18 companies listed on the two PRC exchanges had placed B shares with overseas investors either through public offerings or private placements. Interest from foreign investors has also been strong. Most B-share offerings have been oversubscribed.

In the next phase of expansion, some PRC companies are expected to seek listings on the Hong Kong Stock Exchange. It is expected that the first such listings will occur in the first half of 1993. In addition, B shares in Chinese companies, currently only available to Hong Kong institutions, should be available to the public in Hong Kong in early 1993. And other major international stock exchanges are studying the listing of B shares or PRC companies on their markets as well.

The concept of share...