The Quick Startup Phase—1990 to 1995

As stocks and bonds issuance escalated, OTC trading surged as well, albeit with a number of restrictions. Trading became very active as investors' demands for stocks inflated. However, trading at this time was primitive, unregulated, and brimming with disputes, making it necessary to establish specialized stock exchanges. The Shanghai Stock Exchange was therefore inaugurated per the People's Bank of China's approval on November 28,1990. This was followed by the Shenzhen Stock Exchange in February 1991. Together they symbolized the official formation of the Chinese securities market. Three major features of this startup phase were as follows:

1. Rapidly expanding stock market

2. Sharp rise of securities companies and assets under management

3. Preliminary formation of a separated regulation model

Rapidly Expanding Stock Market

Deng Xiaoping recognized in his famous "Speech of the South Tour" in 1992 the correctness of the stock system reform and the securities market trial in China's economic reforms. The Securities Trading Automated Quotations System (STAQ) was green-lighted in 1990 by the People's Bank of China (PBC), kicking off automated trading in China.^[1] In 1992, the B-share market of Shanghai was officially established with the launch of the Management Regulations for Special RMB Shares (B Shares) as the symbol. Thanks to this, the Chinese stock market quickly expanded. According to Wind Information statistics, only 13 companies were listed in 1990, with 1.3 billion shares valued at CNY 12 billion. However, 323 companies were listed by the end of 1995, with 38.1 billion shares valued at CNY 79.7 billion. The number of listed companies, shares, and market values skyrocketed by 9.42 times, 2.18 times, and 5.64 times during that five-year window.

Sharply Rising Number and Assets of Securities Companies The securities companies in China gained swift growth following the establishment of the Shanghai and Shenzhen stock exchanges in 1990. By the end of that year, the number of securities firms and trust investment firms jumped to 44 and 339, respectively. By the end of 1991, the numbers increased to 66 and 376, respectively, with 913 securities units and 5,384 securities trading outlets. There were also 14 companies especially engaged in government bonds, 661 government bonds service providers, and 868 outlets set up by the finance system. Table 1.1 shows the changes in the number of securities institutions (securities firms and

TABLE 1.1 Changes of Number of Chinese Securities Institutions and Assets (1990-1995) (RMB in billions)

Source: Yang (2000).

trust and investment companies) and their assets from 1990 through 1995. As the firms gained in number, their assets scale also ballooned, from CNY 7.22 billion held by 44 securities firms nationwide in 1990 to CNY 83.1 billion held by 87 securities firms in 1992, an increase of 10.5 times.

Among them, a large number of specialized large securities firms emerged, such as the Junan Securities Co., Ltd., green-lighted by the PBC and founded in Shenzhen in August 1992. In October 1992, the three securities companies— Huaxia, Guotai, and Nanfang—were formed with registered capital totaling CNY 1 billion. The three firms were stewarded by the government and supported by the Industrial and Commercial Bank of China, China Construction Bank, and the Agricultural Bank of China, respectively. In 1994, Hongyuan Securities became the first listed securities company in China. The first joint-venture investment bank in China, China International Capital Corp., was officially founded in 1995. Securities firms incorporated by powerful trust and investment businesses such as China Everbright and CITIC also emerged. China Guangfa Bank, Junan, Dapeng, Hubei Securities, and Beijing Securities also saw their capital strength markedly improve with capital gain and share expansion. The business scope of these firms diversified from brokerage service to brokerage, underwriting, and proprietary services.

Preliminary Formation of a Separated Regulation Model in the Securities Industry

The State Council Securities Committee and the China Securities Regulatory Commission were established in October 1992, signifying the shaping of a specialized securities market regulation and management system5 in China. However, the official implementation of the Commercial Banking Law and Insurance Law in 1995 laid down the legal groundwork for separated financial regulation over Chinese banking, insurance, trust, and securities industries, respectively. The founding of the China Securities Regulatory Commission (CSRC) and the confirmed regulatory responsibilities of PBC and CSRC helped improve the previous status of securities market regulations mired in excessive administration, scattered forces, and weak management. Government administration of the securities market and securities institutions was thus strengthened. The Chinese securities industry has since then been developing in a regulated way. (Table 1.2 highlights these regulatory milestones.)

TABLE 1.2 Main Regulations and Management Measures in the Securities Industry^[2]

• [1] After that, there was constant improvement of the automatic order matching (AOM) trading system for the Chinese securities market. In July 1991, the Shanghai Stock Market put into use the automatic transfer system, which allowed for computer-based transfer in sync with transaction and greatly improved trading efficiency. In February 1992, the Shenzhen Stock Exchange introduced the AOM bidding system and completed the transition from manual bidding to automatic matching.
• [2] See the following sections for the CSRC's measures and sanctions in the overall improvement initiative for the securities industry.