Yujun ZhangPresident and CEOShenzhen Stock ExchangeTo be presented at the Conference onFinancial Sector Reform in ChinaTHE PRC SECURITIES MARKET: AN OVERVIEW OF ITS REGULATORY CAPABILITY AND EFFICIENCY Yujun Zhang President and CEO Shenzhen Stock Exchange To be presented at the Conference on Financial Sector Reform in China September 11-13, 2001 Hkg-1/316730/01 S5863-hk/00002-HKThe PRC Securities Market: An Overview of its Regulatory Capability and Efficiency By Yujun Zhang, Ph.D SUMMARY Over the past ten years, Chinese securities market has been developing at a rapid and steady pace. And, after repeated experiments, a relatively complete securities legal framework and securities regulatory framework have been established. However, how can one assess the regulatory capability and efficiency of the PRC securities market? What are the factors that affect the regulatory capability and efficiency of the PRC securities market? How do these factors affect the regulatory capability and efficiency of the PRC securities market? The author believes that the regulatory capability and efficiency of the PRC securities market depend not only on the establishment of market mechanism and regulatory framework, but to a large extent also on the social environment, cultural tradition, structure of property rights, policy objectives, regulatory mechanism, regulatory devices and other factors. The paper provides a detailed description of the factors affecting the regulatory capability and efficiency. The first factor affecting the regulatory capability and efficiency is the objective of regulation and policy. So far, the objective of regulation has never ceased to waver between development and regularity in the actual operation of the PRC securities market. As changes in policy are frequent and there is a lack of variation in regulatory means, if development is chosen as the objective of regulation, regulation will be ignored and relaxed and standardisation of market practices will be compromised. On the other hand, if regularity is set as objective, the foundation for normal development of the market will be hurt and stagnation and turmoil in the market will be the price to pay. The second factor is China’s regulatory mechanism techniques. In terms of the public law enforcement mechanism, the scope of investigatory authority of the CSRC is limited and it lacks the necessary means of investigation, which has seriously limited the capability and efficiency of regulatory and law enforcement authorities. Meanwhile, due to certain reasons, enforcement of criminal provisions of Securities Laws lagged far behind that in developed markets. Furthermore, civil compensation mechanism is basically non-existent in China, and therefore, the function of civil liability as a deterrent has not been put to good use. From the perspective of monitoring technique, the current transaction systems impose difficulties in identifying true offenders, the source of funds and the relationship between them. 2The third factor is property rights system, whose impact on regulation and practice of law can be assessed from the following angles: (1) the impact of property rights on social morals and social credibility; (2) the impact of property rights on efficiency; (3) the impact of property rights on acts of the government and regulatory bodies; (4) the impact of property rights on the management structures and acts of companies; and (5) the impact of property rights on the acts of investors. The fourth factor is cultural and social environment. Cultural factors have a restrictive impact on the implementation of law and the realisation of the social functions of law. In China, a 2000-year old history coloured by feudalism and dictatorship has contributed to the cultivation of a deep-rooted legal culture centred on the rule by people (or, in other words, rule by administration). The imprint and effects of tradition will stay for some time to come. In terms of regulation in the securities market, the culture of rule by administration makes it impossible to carry out regulation in accordance with law. The fifth factor is the self-regulation in the market. In the PRC securities market, awareness of self-regulation is thin and self-regulating mechanism is incomplete. As a result, the costs of market regulation are very high and the efficiency of regulation is low, which have in turn restrained the improvement of market regulation. The sixth factor is the quality and quantity of the law enforcement personnel. Although the number of securities regulatory personnel is increasing every year, and attempts are made to enhance the training programmes offered to regulatory personnel in order to improve their regulating standard, the quality and number of regulatory personnel at present cannot satisfy the requirements of the rapid expansion of the market and the increasing complexity of securities businesses. Based upon the above analysis, the author reached at the forllowing conclusion: First, regulatory capability and efficiency of the PRC securities market have been improving in the years of its development. Second, regulation of the PRC securities market has gone through a zigzagging path. Regulatory capability and efficiency of the PRC securities market are seriously affected by Chinese politics and policies at different periods of time. Third, most of the factors affecting the regulatory capability and efficiency of the PRC securities market are obstructive and negative. Some factors play a decisive role in affecting the regulatory capability and efficiency of the PRC securities market. This indicates that it will be a long time before rule of law is practised in the PRC securities market. Forth, intensification of law enforcement, rather than formulation of law, is the most important issue in the PRC securities market. Fifth, establishment and perfection of law enforcement mechanism and improvement in the skills and level of inspection are important ways to enhancing regulatory capability and efficiency. They are also issues demanding prompt solution. Sixth, improvement of the quality of regulatory personnel and a strengthening of the team of regulatory 3personnel are important means of increasing regulatory capability and standard of law enforcement. And, finally, further improvement of the legal system, plugging legal loopholes, improving the applicability of laws and