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Change of Activities and in Organization and Management in the Chinese Securities Firms

From an objective point of view, institutional change over more than 20 years after 1987 has resulted in profound changeover in the system structure of the Chinese securities firms. A system has taken shape that consists of market-oriented financial institutions offering securities services. And there is a tendency for diversified ownership as a result of the general company to corporation conversion and the influxes of private capital and foreign funds. During this process, Chinese securities firms have been expanding their business activities, changing their institutional positioning, and adjusting organization and management through the following three stages:

1. Primary crossover

2. Strict separation of activities

3. Concurrence of separation and crossover

Primary Crossover (1987-1994)

The Chinese securities industry started to take off in September 1987, when Shenzhen SEZ Securities Co. was incorporated with the permission of the People's Bank of China and with the investment of 12 local financial institutions. After the landmark incorporation of Wanguo, Shenyin, and Haitonog securities companies in Shanghai in the following year, securities firms emerged around the country and shortly thereafter grouped together, playing an important role in China's nascent securities market.

During this period, most Chinese securities firms were wholly owned by the government. In fact, they lacked any independent institutional positioning and could be simply regarded as subsidiary financial institutions affiliated to their charter members (most were special-purpose banks). Most Chinese securities firms were part of the planned economy and were deeply affected by the "fragmentation in administration" due to the dual leadership of the central and local authorities. As a result, regional and nationwide securities firms were "all-inclusive" in business territory, organizational structure, and business activities and had similar HR management policies. However, the Chinese capital market was still in its infancy and the securities business was small and relatively simple. As a result, Chinese securities firms were less concerned about development strategies and corporate culture and had a loose organizational structure and inefficient management. A securities firm of that time had extensive organization and management. The firm would set up and manage business offices that focused on counter-based activities. And as an affiliate of a special-purpose bank, the firm was also an extension of the bank's activities and management.

In terms of change in management, the period can be further divided into the following two phases according to difference in business focus:

1. Brokerage phase (1987-1990)

2. Brokerage, issuance, and proprietary trading (1990-1994)

Brokerage Phase (1987-1990) Between 1987 and 1990, government bonds and corporate debentures were mostly traded in the Chinese securities market, and securities firms did not participate in the issuance of such bonds and debentures. In addition to the rare services in the issuance and sales of bonds (after 1988) and stocks in the primary market, securities firms were mostly engaged in securities brokerage. This included securities trading, registration and custody, dividend payment, principal repayment and interest payment, and other rather simple services as per instructions.

Consequently, management was extremely simple. The location of business offices and the financial strength of charter members had direct bearing on a securities firm's competitive edge. Securities firms were hence highly dependent on their charter members (mainly special-purpose banks).

Brokerage, Issuance, and Proprietary Trading (1990-1994) In the 1990s, after the establishment of the Shanghai and Shenzhen stock exchanges, stocks replaced government bonds and corporate debentures as the most commonly traded products in the Chinese securities market. Back then, high speculation and turnover in the stock market attracted a large number of retail investors. Obviously, as high turnover resulted in huge trading volume, securities brokerage remained a business focus in securities firms at that time and for a long period after. Due to limitations of trading technologies at the time, the number and location of business offices were the most important factors for business growth. Therefore, large securities firms rapidly increased the number of their business offices and adopted flat management.

Chinese securities firms kept their focus on brokerage. They discovered that in the Chinese securities market, demand exceeded supply. There was a tendency toward a seller's market with the possibility of huge speculation and even price manipulation. The spread between primary and secondary markets was huge, and the number of publicly tradable shares was relatively limited in the secondary market. Chinese securities firms were also making a concentrated effort to promote securities issuance services and proprietary trading. From an objective perspective, this helped securities firms out of overreliance on brokerage and on the right track to balanced growth.

Thanks to business diversification and improvement of competitiveness, Chinese securities firms became more independent and started to adopt line or line-function management along with business expansion, increase in business income, and increase in number of business offices. However, they were still highly dependent on the charter members' financial support.

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