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Strict Separation Of Activities (1995-1999)

After the 1990s, the Chinese special purpose banking system was exposed to serious misappropriation problems. A large number of special purpose banks misappropriated credit funds or borrowed from the interbank lending market to invest in the securities or real estate market via their wholly owned or partially held securities firms and trust and investment companies. This exposed the banks to a bigger business risk, facilitated speculation and a bubble economy, and caused a series of adverse effects on the macro economy. It was in such a context that China enacted in 1995 the People's Bank Act, Commercial Banking Act, and Insurance Act, which established the basic landscape of the Chinese financial system on the principle of "separation of activities" in banking, securities, and insurance. After commercial banks withdrew, securities firms obtained an independent institutional positioning and adopted new management, having been brought to regulatory compliance in an overall improvement initiative. In terms of organization, after the enactment of the Companies Act of 1994 and Financial Institutions Regulations, most securities firms converted from wholly government-owned firms to companies of limited liability. After 1998, some firms began converting from companies of limited liability to corporations in order to increase capital and shares in a fast growing capital market (Zhanyu 2009).

Subject to the regulatory separation of activities and by means of separation of affiliations or shareholding structure makeover, firewalls were built among banking, securities, insurance, and trust activities. Firewalls serve many purposes, such as cutting off capital flows between banks and securities firms. Chinese securities firms therefore faced different competition, which required higher technical skills. As a result, competition grew more intense in the three main conventional activities. Faced with limited space for business growth in those activities, securities firms had to try something new. They adapted business and management models to the needs of emerging business, such as corporate finance advisory services.

Hoping to get more customers, securities firms attempted to integrate investment banking activities (e.g., securities issuance, corporate restructuring consulting services, and financial advisor services) while improving facilities in business offices, expanding consulting services to investors, and promoting the brokers' system. However, as the fund-related services, M&A services, and international activities became new growth points, securities firms further expanded the then popular line management. For example, securities firms turned investment banking divisions into one of the integral parts of business departments. They also attempted to build a sound management system based on hierarchical delegation and changed the undertaking division-based management model to adapt to the needs of international business and customers.

In line with such changes, Chinese securities firms broke down the previous one-dimensional organizational framework and management structure, and began conducting multiple business activities within existing offices. They established specific activity categories such as single-level or multilevel frameworks and structures that embraced diversity and relied on multidepartment collaboration. Management also focused on business risks. Securities firms at large established internal control mechanisms that included audit committees, risk control committees, and oversight departments. They also took back autonomy in business offices.

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