New dynamics faced by China following WTO accession

On 11 December 2001, China officially joined the WTO. This marked a new phase in the opening up of the securities industry.

The main elements of China's opening up of the securities industry are the following:

Foreign securities institutions may engage directly (without a Chinese intermediary) in B share business.
Upon accession, representative offices of foreign securities institutions in China may become Special Members of all Chinese stock exchanges.
Upon accession, foreign service suppliers will be permitted to establish joint ventures with foreign investment of up to 33 per cent participation to conduct domestic securities investment fund management business. Within three years of accession, the foreign investment participation limit will be increased to 49 per cent.
Within three years of accession, foreign securities institutions will be permitted to establish joint ventures, with foreign minority ownership not exceeding 1/3, to engage (without a Chinese intermediary) in underwriting A shares and in underwriting and trading of B and H shares as well as government and corporate debts and launching of funds.

Joining the WTO is necessary for the promotion of the sustained and healthy development of China's economy. It is an important milestone marking China's entry into a new phase of opening up and has also offered an opportunity of historic significance for the long- term and normal development of China's securities industry and market. Firstly, following WTO accession, China's economy will be integrated into the world economic system and WTO membership will provide new momentum for economic development, facilitating rapid economic growth which will in turn yield a better development of China's securities industry. Secondly, the opening up of insurance and banking industries will attract foreign investors to China, as a result of which there will be expanded sources of market funds and fund availability will be better than before. Thirdly, more intermediaries will come from mature markets to join China's securities industry. This will be conducive to adjusting the investor structure and elevating the professional level of securities agencies. Finally, participation in international competition will impel publicly listed companies to enhance the quality of their corporate performance and level of corporate governance.

While the securities industry has many opportunities, WTO accession has also brought great challenges. The first challenge is that the entry of foreign securities institutions will generate new tasks for China's securities regulation and supervision. International political and economic factors will have an increased impact on China's financial market, which will consequently increase the level of difficulty in regulating and supervising the securities market and therefore in handling possible crises .

The second challenge results from the great gap that has existed between Chinese securities institutions and their foreign counterparts in terms of size of capital, level of corporate governance and risk control. Although foreign securities institutions can only enter China's securities market in the form of joint ventures at present, their direct entry into the securities market will inevitably become a reality with the acceleration of the opening up process. If domestic securities institutions are not able to mature quickly, they will eventually be eliminated by the market.

The third challenge is that domestic listed companies will be subject to the ordeal of the law of the market “ survival of the fittest “ when competing with international giants on the same stage. The performances of the listed companies will polarise and there is likely to be large annual fluctuations. Last but not least, China's securities market needs to converge with international practices, which will require major reforms in an effort to improve market transparency and crack down on illegal conduct. The process of reform is in itself a great challenge for China's securities industry.