A strong, stable private-equity market is critical to the economic growth of China as well as to global markets. How are China 's young capital markets developing?
Furthermore, despite China 's continued efforts to develop the capital market and expand direct financing, what are the barriers, both procedural and cultural, that investors from home and abroad need to understand?
A number of chief executive officers and top officials from the Chinese government shared their opinions on these and other matters at the 2005 Beijing Fortune Global Forum, which concluded in May.
In early March, Premier Wen Jiabao outlined specific measures to develop the capital market, including enhancing efforts to improve the quality of listed firms, which he called "fundamental" to the country's endeavours in developing the securities market.
China would also build an open, fair and transparent securities market, intensify supervision and crack down on any behaviour that violated the laws and regulations, the premier said.
Wen said China would also regulate the securities market with rules and regulations and better protect the interests of investors, particularly those of public investors.
With respect to these issues, China has been moving in the right direction in solving the major problems facing its stock market, which has been at a six-year low despite the booming economy, Kevan Watts, chairman of Merrill Lynch International Inc said.
Speaking on the theme of "Understanding China's Capital Markets," a general session of the 2005 Beijing Fortune Global Forum, Watts said the Chinese government has been addressing these problems very directly.
China has established six ministerial committees in the past two years to work on overcoming the stock market's main obstacles, focusing on listed companies, intermediaries and investors, he said.
China has also moved to improve the legal structure of the securities system and, earlier this month, began experimenting with ways to solve the non-tradable share issue.
The Chinese economy has been growing at an annual average of 9.4 per cent since 1978, but this has had little effect on the struggling stock market.
Stuart T Gulliver, chief executive of corporate investment banking and markets for HSBC, said the performance of the Chinese stock market had been very "puzzling" as it did not reflect the business cycle of the economy.
"Overseas, we generally expect the stock market to be the leading indicator of the economy; here, it is not necessarily the leading indicator at all.
"Most shares listed domestically are shares that perform quite badly. The SOEs (State-owned enterprises) are not the best SOE's, and the danger China faces is that the very best ones get listed in Hong Kong and New York , leaving the domestic market with less better ones. That causes enormous weight on the stock market," he explained.
Asked whether the Chinese government is moving in the right direction and at the right speed, Watts said the direction was correct.
"You can always debate about speed. But I am a gradualist, I would be in favour of doing more, but gradually," he added.
He then pointed out that the Chinese capital market was less than 15 years old and had undergone a remarkable revolution.
Zhou Xiaochuan, governor of China 's central bank, concurred with Watts .
"I agree that people should be gradualists on (that matter). However, Chinese capital market reform has been accelerated recently," he said.
He was referring to the experiments being conducted to find a solution to the non-tradable State or legal private individuals owning shares, which account for two-thirds of the total shares of China 's 1,400 listed firms.
According to Watts , China needs to educate its investors, intermediaries and companies. In the case of the countryˇs long-term health, the authorities need to develop institutionally based investors domestically.
Part of that effort includes strengthening brokerage firms and intermediaries. That process is underway, as indicated by the involvement of foreign firms through joint ventures.
"The beauty of joint ventures is that they ensure technology transfer. All of us in our joint ventures in the securities market will be working with local Chinese individuals and securities firms, and they will be learning very, very fast from how we run our trading business, and how we manage our relationships with institutional investors," said Watts .
He said the QFII (qualified foreign institutional investors) had similar price leadership, noting that foreign qualified investors would provide price leadership in stock selection as well.
Foreign companies, such as Merill Lynch and Morgan Stanley, can now operate joint ventures locally. "These are welcome developments (that are) very much focused on specific issues," Watts said.
On the immediate and short-term measures the country should take, he recommended that China move its B shares to its H share markets, and then allow the non-tradable shares, double the QFII quota and give the green light to QDII (qualified domestic institutional investors).
A number of international economists at the forum also urged China to step up development of its capital market, which they said was still in the early stages compared with those of developed countries.
Henry Paulson, chairman and CEO of Goldman Sachs Group, Inc, said that China needed to strengthen domestic securities firms, put priority on developing institutional markets rather than retail markets and have more high quality listings.
Paulson pointed out that Japan 's equity market equalled 3.6 trillion US dollars and Hong Kongˇs was worth US$600 billion, while that of the Chinese mainland was only US$400 billion.
China 's securities market includes 1,400 listed companies, 90 per cent of which are SOEs. "One of the huge problems in the market is the structural flaw," Paulson said.
One critical move for China , he said, was to move the economy from low-cost manufacturing to high-tech, value-added products and develop a strong private economy. Another crucial step would be to take pressure off the banks.
In some countries, such as the United States , two-thirds of the capital comes from capital markets, but in China the capital market generates only 4 per cent of all capital, Paulson added.
But Paulson said he was very optimistic about China , as its policy makers had so many bright ideas regarding the capital market.
In another development, China 's interbank foreign exchange market started trading eight overseas currency pairs on May 18, opening a new platform for the trading of foreign currencies and boosting China 's capital market development.
The new trading platform, based in the China Foreign Exchange Trade System in Shanghai , is an important step toward building a more mature foreign exchange (forex) market and will help meet the growing needs for funding and risk hedging among Chinese enterprises, analysts say.
Previously, the market only allowed trading between Renminbi and the US dollar, the Japanese yen, the euro and the Hong Kong dollar.
The trading of overseas currencies "will help develop China's interbank foreign exchange market, diversify products, activate trading and enlarge trade volumes," the People's Bank of China, China's central bank, said in a statement.
The move will also provide China 's smaller financial institutions with access to international financial markets, which they generally have been unable to enter, and help improve the risk management capacity of domestic financial institutions, particularly in forex transactions, it said.
"The globalization of trade means Chinese companies are no longer only dealing in US dollars. They also deal in the Japanese yen and the euro and need diversified trading opportunities," said Tan Yaling, a senior manager with the Global Markets Department of the Bank of China, the nation's largest forex bank.
The Chinese government has reiterated that, instead of resorting to a simple revaluation of the currency, it will improve the exchange rate mechanism itself, a move that requires a more mature forex market.