irrational exhuberance with chinese characteristics: origins of the 2007 a-share bubble

8/14/2019 Irrational Exhuberance With Chinese Characteristics: Origins of the 2007 A-Share Bubble

1/23

P a g e | 1

- Popular ringtone in Shanghai at the height of the bubble, a parody of Chinas national anthem

Irrational Exuberance with Chinese Characteristics: Origins of the 2007 A-Share Bubble

Arise! Ye who have not opened an account! Pour your gold and silver in the hot market! The Chinese

nation faces its most crucial time. The passionate roar of our people will be heard!

Money, again, has often been a cause of the delusion of the multitudes. Sober nations have all at once

become desperate gamblers, and risked almost their existence upon the turn of a piece of paper.

- Charles Mackay, Extraordinary Popular Delusions and the Madness of CrowdsIntroduction

In the fall of 2007, Chinese stock markets were roaring upward at what seemed to be an ever

accelerating pace. The exchanges, based in Shenzhen and Shanghai, had seen valuations grow by a

mind-numbing 140% in 2006 and a further 120% in 2007. All in all, over the course of about 22 months,

the value of Chinese stocks had grown almost five-fold. While it had been true that the profitability of

listed Chinese companies was indeed on the rise (growing by 70% over two years) 1

The stock market euphoria at the time was palpable. There was word of millions of new brokerage

accounts being created at Chinas securities companies as savers began seeking alternatives to low

yielding bank deposits. The rise in asset values was particularly prominent in Chinas red-hot IPOmarket, which in September of 2007 registered the two largest IPOs in the mainlands history with the

listing of China Construction Bank and Shenhua Energy

, the valuations had

been virtually detached from economic fundamentals at the height of the bull market, the average

Chinese company was trading at a ratio of fifty times earnings at a time when American companies were

trading at around sixteen times earnings. Due to the skyrocketing stock market, by late 2007 five of the

ten largest corporations (in terms of market capitalization) in the world were mainland Chinese

companies listed in Shanghai or Shenzhen.

2

And yet the mania to invest in Chinese equities was not solely limited to those in mainland China

international investors were similarly bullish. Baidu, regarded by many as Chinas Google, was trading

on NASDAQ at a price of $409, or at an unbelievable 250 times earnings. Jim Rogers, a renowned hedge

. The IPO market proved to be a quick and

profitable way for Chinas state owned enterprises to use their large cash reserves, who invested heavily

in newly listed companies. In particular in Shanghai and Shenzhen, financial news became ubiquitous as

Xinhua created Chinas first televised financial news network in 2006.

1PINR. "Economic Brief: China's Stock Market Bubble ." Power and Interest News Report 19 Februrary 2007.

2Dyer, Geoff. "Worries Surface about a Potential Bubble." Financial Times 9 October 2007.


2/23

P a g e | 2

fund manager and author ofA Bull in China (a pop-investing book directing American retail investors

how to buy Chinese stocks) in 2007 advised 3

:

Of course, not all analysts were similarly bullish. RateFinancials, a private accounting firm which

analyzes and rates financial statements for publically listed companies, investigated the SEC filings for

the ten largest Chinese firms listed on the New York Stock Exchange. They found that the Chinese firms

all had low quality earnings, aggressive accounting, low bad debt allowance, and insufficient cash

flow4. The vice-chairman of the China Securities and Regulatory Commission (Chinas primary

regulatory body overseeing securities markets, hereafter CSRC) warned Chinese investors of the risks

investing in the stock market, urging that [Chinese Investors] should think carefully before entering5

To this end, the stock market in China has often been characterized as a policy driven stock

market. While it is difficult to make an authoritative definition of what exactly a policy-driven stock

market is, Professor Sebastian Heilmann characterizes such a market as a market in which political

calculations, policy missions, and administrative interference are more important than the dynamics of

market competition for determining price fluctuations

.

Almost predictably, in late 2007 the soaring equity markets came back down to earth - the ShanghaiStock Exchange Composite Index lost almost two thirds of its value since the top in October. And while

speculative euphoria is certainly not unique to China, the rapid rise and subsequent crash exposed many

of the misperceptions that foreign investors have concerning Chinas bourses. This paper will argue that

the Chinese stock market has entirely different fundamentals than much of the worlds equity markets.

In most countries (even those with similarly underdeveloped capital markets), investing in stocks gives

the investor adequate exposure to the localitys economic growth. In China, however, the value of

equities can be and often are fundamentally detached from the underlying economic reality. To the

casual observer, it appears that many investors rushed to participate in Chinas stock market boom

without a firm understanding of exactly what the assets they purchased actually represented.

6

. It is precisely this political dimension that was

the origin of Chinas rapid and precipitous rise in stock prices as well as the basis for the subsequent fall.

3Rogers, Jim. Jim Rogers Continues to View China as the Worlds Best Long-Term Profit Play Keith Fitzgerald. 20

August 2007.

4RateFinancials. Government Controlled Entities Masquerading as Independent Public Companies. Financial

Survey. New York: RateFinancials, 2007.

5Dong, Zhixin. "Regulator Warns on Stock Market Risk." China Daily 29 April 2007.

6Heilmann, Sebastian. "The Chinese Stock Market: Pitfalls of a Policy-driven Market." China Analysis (2002)

I'm not selling my Chinese shares. As I said, I bought more of them last week. [I would sell only if] the

market tripled again in 2008. The Renminbi is going to be one of the strongest currencies in years to

come if you invest in equities, think about China.


3/23


4/23

P a g e | 4

(measured by return on assets) of private enterprises is on average double that of state controlled

companies11

The importance of this seemingly esoteric distinction was that as these SOEs restructured and were

spun off from government bodies, it made valuing these enterprises next to impossible. For example, if

the Bureau of Heavy Industry contributed a certain asset to a work unit, that specific asset would

technically belong to the Bureau of Heavy Industry, not the newly formed enterprise. As the stockmarkets in China developed and enterprises found that shares were an attractive way to raise capital,

the assumptions of fund accounting proved difficult to apply to total enterprises. Because fund

accounting is a rules-based rather than a principal-based system, accountants had no choice but to

assign ownership of based upon the source of funds: because shareholders contributed cash to the

.

Unfortunately for investors in Chinas stock market, the bourses are overwhelmingly dominated by

corporations coming from Chinas institutional economy. State-controlled enterprises make up 94% of

all stocks listed on Shanghai and Shenzhen of the remaining 6%, many are actually Hong Kong listedand domiciled (see: Exhibit 1). Indeed, in China equity listings have almost always been a vehicle for

SOEs, not than private companies, to raise financing. This dynamic may seem odd to Westerners, who

tend to perceive vibrant and active stock markets as epitomizing free market capitalism. However, as

China has privatized over the past three decades, the Shanghai and Shenzhen exchanges have served as

an intermediary of sorts for the gradual transformation of the countrys work units into enterprises

limited by shares. Therefore, to get an understanding of what Chinas A-shares actually represent, it is

crucial to understand the nature of these work units and their transition into Western-style businesses.

The Restructuring and Listing of Chinas State-Owned Enterprises

In Maoist China, work units used a Leninist style of accounting called fund accounting. In contrast

to Western style accounting whose focus is primarily to induce the economic value of an enterprise, the

purpose of fund accounting is ostensibly to prevent a work unit from embezzling capital from the state.

In fund accounting, the enterprises T-accounts comprise of Fund Use and Fund Source instead of

debits and credits. Fund Use refers to the use of designated funds to acquire property and supplies,

and Fund Source the specifically identified channel used to obtain the funds. At the end of every

period, the work unit had to prove to the government body that oversaw it that the total funds used

was equivalent to the total funds sourced.

To help with the accounting, funds were split into three separate types of funds: fixed funds (similar

to what Western accounting would refer to as investment in fixed assets), current funds (similar toworking capital), and special funds (derived from the enterprises cost of production, e.g. a product

development fund, an employee incentive fund, and a sinking fund for depreciation). Even into the mid-

to late- 1990s, many SOEs stuck with fund accounting rather than switch to total enterprise accounting

methods. The key difference of the accounting methods is this: if a company uses fund accounting, it

implies that the enterprise has no equity capital of their own.

11Chen Xiang Liu: p. 4.


5/23

P a g e | 5

enterprise, the shareholders were assigned ownership of the enterprises cash accounts. This implied

that if someone owned a share of an SOE anytime during the first sixteen years of reform, their legal

ownership was not a share of the company itself but rather a share of the companys cash balance. This

structure is, to put it bluntly, completely absurd. If an investor simply wants to own cash, putting it in a

bank is certainly a far superior option.

This legal peculiarity was finally addressed by Chinas reformers in the 1994 Company Law, which

outlined a system to structure SOEs called the promoter method. Reform had been delayed

throughout the early 1990s because the government bodies that historically contributed assets were

unwilling to surrender ownership, due to their resounding reluctance to giving up control of state

assets. The 1994 Company law was a compromise that gave the governmental body equity ownership

in proportion to the percentage of the SOEs assets that their contributed. Since 1994, most of Chinas

SOEs have restructured themselves using the promoter method12

Seeing this development, it is perhaps understandable that the government was worried about a

loss of state assets. To this end, in the 1994 company law, those shares promoted by government

entities were deemed non-tradable. These non-tradable shares were deemed legal person, or LP

shares. While during the process of restructuring the SOEs these LP shares are largely a non-issue, as

SOEs began to list on the exchanges the presence of a significant number of non-tradable shares for

listed stocks became much more of a problem. Because LP shares are non-tradable, in theory their

economic value is only a function of dividends and voting rights (of course, a large majority of ChinasSOEs never distribute dividends to LP shareholders)

.

This method is a process whereby the work unit splits itself in two separate pieces the Parent SOE

holdings group and the company to be limited by shares. As the work unit gets audited, those assets

deemed most profitable are carved into the shareholding company. The leftover assets (housing,

pensions, etc.) remain with the parent group, which maintains the Leninist fund accounting structure.

Because by legal definition the parent group supplied the assets to the shareholding company, the

group maintains the vast majority of the equity.

In is important to remember that at the time, the former U.S.S.R. was also in the process of

restructuring their work units, albeit under the guidance of Western economists. The restructuring

undertaken in the U.S.S.R. was different than Chinas in that the shares of the new company were given

to the employees of the work group rather than government ministries. While on the surface the

method used in the U.S.S.R. may seem more sensible, it proved disastrous in practice. Uneducated

about what shares actually meant, many workers were willing to sell their holdings for a few rubles. A

handful of enterprising individuals ended up buying up many of Russias largest companies, exacerbating

wealth inequality in the former Soviet state.

13

12

Howie, Fraser J.T. and Carl Walter. Privatizing China. Singapore: John Wiley & Sons, 2005, pp. 90-91

13World Bank Beijing Office. SOE Dividends: How Much and to Whom? Policy Brief. Beijing: World Bank, 2005.

. In practice, people found loopholes in the 1994

Company Law to trade LP shares anyway (LP shares could only be transferred to another legal person,


6/23

P a g e | 6

so dummy corporations would be set up to exchange shares). The presence of two separate markets for

the equities of Chinese SOEs the exchange-based A-share market and the over-the-counter LP-share

market added significant legal and regulatory uncertainty to the Chinese stock markets. This dynamic

contributes significantly to the policy-driven nature of the Chinese stock markets: if a large portion of

the uncertainty of holding a certain asset is due to legal risk rather than economic risk, is it any wonder

that the valuation of the asset will depend more on the political climate rather than the economic

climate?

Underscoring this uncertainty is the fact that even as Chinese SOEs list on exchanges and sell shares

to the public, most decide to do so while their promoters still hold the overwhelming majority of the

equity. Of the companies on the Shanghai Stock Exchange, 72% are still majority owned by government

entities. In sum, A-shares only make up 39% of the equity capital of the companies listed on the

Shanghai exchange14

The frenzied investment in the nations infrastructure is perhaps the Chinese governments most

oft-lauded policy during the reform era. It is true that developing useful and reliable physical

infrastructure can be a significant factor in increasing economic performance, but rarely is the question

asked how the government finances these massive infrastructure investments. Even odder still is that

this massive investment is undertaken by government entities, yet most of Chinas governmental bodies

remain of sound financial state (see: exhibit 2). Indeed, the track record is undeniably impressive: in the

reform era Chinas fiscal deficit has never exceeded 3% of GDP

.

Chinas Listed SOEs

As reform progressed, the market for tradable shares was rapidly developing, culminating in 1990

with the creation of the Shenzhen and Shanghai stock exchanges. The vast majority of SOEs that listed

on Chinas exchanges were work units spun off by city and provincial governments; these SOEs still

comprise a large majority of Chinas bourses to this day (so-called Red Chips). Yet as more and more

of Chinas most profitable SOEs were listed on the exchanges, by the 1996 deal flow in China slowed

down to a trickle. The problem appeared to be that China simply did not have enough profitable SOEs

to satiate market demand for equities. The primary obstacle in finding profitable SOEs for listing was

that during the restructuring process many SOEs came under significant political pressure from

provincial governments to leave enough cash generating assets in the holdings group to cover the

parents expenses (e.g. for pension funds, housing, etc.). Yet while the IPOs for standard SOEs

decelerated, the increasingly dormant primary market for A-shares was revitalized by a new, innovative

legal structure: the infrastructure company.

15

14

Howie, Fraser J.T. and Carl Walter: p. 124

15Shen, Chunli and Hengfu Zou. Fiscal Decentralization in China - Potential Next Steps. Washington D.C.: The World

Bank, 2005.

.


7/23

P a g e | 7

In China, just as it is in the United States, the vast majority of infrastructure projects come from local

governments (86% of projects in 2002)16

The structure of a typical infrastructure company involves spinning off an SOE that will be

responsible for managing whatever infrastructure the local government builds. The SOEs revenues are

made up of tariffs (e.g. tolls for highways, bill payments for power plants, etc.) which are projected by

the underwriter of the issuing government. Once the IPO is completed, the cash generated from theoffering is transferred to the provincial government and the SOE receives the infrastructure assets. It

should be noted, however, that these infrastructure companies were not really companies at all, but

rather a collection of assets backed by a tariff structure. Often the listed infrastructure companies

were not even independent accounting units from the provincial government and had no power to set

prices. Prices for all of the services the provincial governments provide are instead under the control of

the State Price Control Bureau. Of course, the fact that the company is not an independent accounting

unit

. Because local governments have hard budgetary constraints

(i.e. local governments cannot print money to make up for budgetary shortfalls), in the United States

local governments most often use revenue bonds to pay for infrastructure projects. In contrast to

general obligation bonds, interest and principal of the revenue bond are guaranteed by the projects

cash flows rather than the localitys tax receipts. This allows the local government to finance spending

without outwardly running at a fiscal deficit. Unfortunately, China cannot replicate this structure due to

the countrys nascent bond markets and the murky legality of project-based debt financing. However, in

conjunction with an increase in state-directed lending from the policy banks, the creation of

infrastructure company listings heavily mitigated the financial challenges faced by Chinas provincial

governments.

17

As the IPO market for infrastructure companies cooled down, another structure for listing SOEs

began to take form. A big problem facing many of Chinas newly restructured SOEs was that for the

most part, Chinas SOEs are fragmented not by industry but rather geographically. Because of this, most

and has no control over prices means that buying a share of an infrastructure company is,

economically, virtually identical to buying a revenue bond.

The boom in the listing of infrastructure companies from lasted until it became apparent that thetariff projections by the underwriters proved wildly unrealistic. The State Price Control Bureau was

heavy handed in their approach to pricing the tariffs received by the infrastructure companies, often

denying petitions to simply increase prices along with inflation. The Price Control Bureau ostensibly did

not want to see consumers getting gouged by the new market economy. Due to this political

wrangling, the profitability of the infrastructure companies languished. And while the popularity of

these listings has indeed diminished since the late 1990s, the infrastructure companies still make up a

large portion of the equity markets in China in sum, they still comprise almost 15% of Shanghais SSE

180 Index.

16Asian Development Bank. PRC: Strengthening Public Infrastructure Investment Policy in China. Manila: Asian

Development Bank, 2002.

17Howie, Fraser J.T. and Carl Walter: pp. 101-103


8/23

P a g e | 8

companies take the form of conglomerates that hold only loosely related assets, albeit dominated in one

province or locality. Since the new millennium, a much more common structure for a newly listed

company is Entire Industry Packaging. Entire Industry Packaging consists of taking related assets from

SOEs throughout the country and putting them together into one company to be limited by shares

(called by many to be Chinas National Champions). This creates the potential for synergy between

the assets and results in a more focused, well capitalized final company. The first IPOs in 2000 proved to

be successful in the market: the PetroChina, China Unicom, and Sinopec offerings netted $2.9, $5.1, and

$3.3 billion respectively. Ever since, entire industry packaging has proven to be extremely popular in

the subsequent five years after these trial IPOs, ten more national champions listed on Chinas bourses,

raising a total of $36.3 billion18

Unfortunately, due to their comprehensive nature, the National Champions make up only a small

percentage of the listed companies in Shanghai and Shenzhen; the vast majority is made up of Red Chips

and Infrastructure Companies of questionable profitability. Because many of these firms struggle to

meet earnings targets, aggressive accounting methods are rampant in China it is estimated that almost7% of Chinese firms engage in earnings manipulation

. Even more importantly however, the National Champions are perhaps

among Chinas first true companies derived from SOEs since the 1994 Company Law.

19

It is often reported that Chinas stock markets are dominated by millions of small retail investors

allegedly, there are 108 million retail accounts in China which hold upwards of 60% of the A-shares on

the Shanghai Stock Exchange. If true, this would be an astounding figure. In comparison, retail investors

hold roughly 20% of the capitalization of the NYSE and 30% of Hong Kongs Hang Seng

. Compounding these factors is still the fact that

tradable shares make up a minority of the equity capital of the listed companies on the exchanges. This

certainly begs the question: who exactly are the investors buying A-shares, and why do they choose to

invest in Chinas stock markets?

The Buy Side: Investors in Chinas Equity Markets

20. With the SSE

soaring to new heights in 2007, the number of account openings accelerated at an astonishing rate

measuring a year over year increase of about 55% from 200621

Regrettably, in China data is not always all that it first appears. To begin with, the reported figure

counts separately accounts on the Shanghai and Shenzhen exchanges. Because Chinese brokerages

automatically set up accounts on both exchanges when an investor opens with the broker, the 108

. This elicited some observers to wonder

if social instability could result if a large number of retail investors lost their savings if the market turned

south.

18 Howie, Fraser J.T. and Carl Walter: pp. 105-106

19Qiao, Yu, Du Bin and Sun Qian. "Earnings management at rights issues thresholds - Evidence from China." Journal

of Banking and Finance 10 January 2006: p. 3465.

20Lin, Li. "Chinese investors start to shun stock market amid volatility ." Xinhua Finance 7 July 2007.

21PINR. "Economic Brief: China's Stock Market Bubble."


9/23

P a g e | 9

million number implies double counting between the two exchanges. In addition, there is substantial

evidence that the vast majority of these accounts currently sit empty once adjusting for these two

factors, one finds that the maximum possible number of active investors in Chinas stock market is

13.345 million (see: Exhibit 3).

However, there exists a third factor that further whittles down the number of investors in Chinasstock market: many of Chinas major market players hold ghost accounts (i.e. some investors hold

more than two accounts). These accounts are opened illegally in the name of a person, often from a

rural inland province, that has sold or given the investor their ID card. Evidence regarding the existence

of ghost accounts is widespread, although aggregate data is difficult to come by. For example, in

February of 2001, Gansu province (hardly a financial hotbed) recorded an opening of 4332 new

accounts. While this is paltry compared to aggregate numbers of account openings in east coast

provinces, what is odd is that 99.93% of the accounts were opened on two days 2751 accounts on

February 15th and 1578 accounts on February 27th. Similar activity has been found throughout Chinas

impoverished West, with much of the activity dominated in Qinghai and Gansu provinces (further

supported by the fact that 35 of Gansu provinces 52 brokerages were closed down for fraudulentactivity in the CSRCs 2001 crackdown on Chinas securities companies)22. As explained by Hu Shili, the

chief editor ofCaijing magazine23

Ghost accounts can prove useful for many investors that, for whatever reason, need to hide their

investment on paper. Lu Liang, one of Chinas infamous market manipulators, was noted for opening

thousands of accounts in rural areas in order to disguise the nature of his transactions. For the

manipulators, ghost accounts help enable them to acquire majority control of a listed company

opaquely, without the knowledge of the other market participants (once an investor has majority

control, it is possible to execute a wide array of trading shenanigans). And while Chinas stock markets

have indeed struggled with market manipulation, the majority of ghost accounts appear to come from

investors that want to hide not the nature of their equity investment, but rather the fact that they have

invested at all.

:

22Howie, Fraser J.T. and Carl Walter: pp. 138-140

23The original statement Shili states that active accounts are estimated at 4 million and professional accounts

number 1 million. These figures are, however, from 2002. The figures were simply scaled up in proportion to the

number of total account to maintain congruency with the calculations presented in Exhibit 3: Hu, Shili.

"Disadvantages Groups Should Stay Far from the Stock Market." Caijing 20 October 2002: 6.

The true number of active investors in China is at most 3% of the number commonly cited in the

media. Experts estimate that truly active accounts trading at least once a week number no more

than [7 million], and those professional investors who operate every day no more than [2 million].

This figure doesnt even include ghost accounts, that is, those opened by one speculator who

purchases thousands of ID cards to open those accounts.


10/23

P a g e | 10

In 2001 the PBoC issued a survey reporting that these investors, coined by many as the grey

market, control an estimated 56% of the capitalization of Chinas stock markets (RMB 1900billion in

2007)24. Under the legal title of financial advisors, these companies nonetheless actively invest and

have an average of RMB150 million under management. Yet perhaps most shocking is not the scale of

the investment but rather the source of their funds: 80.8% of grey market funds are provided by SOEs or

subsidiaries of SOEs (by some estimates, this could be as high as 96.2% of funds if one includes dummy

corporations set up by SOEs to invest in the grey market) 25

Most IPOs in China allocate a large block of shares to strategic investors these investors comprise

of mostly other SOEs that are required by the CSRC to hold their shares for at least six months (although

these regulations are often skirted by going through a third party). It is estimated that these corporate

investors have on average consisted of 40-50% of the funds raised on Chinas primary markets

. This implies that gross SOE investment is

somewhere between RMB1540 billion and RMB1820 billion. This figure simply astounding it is double

that of the total investment of all of the pension funds, foreign investors, insurance companies, mutual

funds, and brokerages in China combined. And yet, even these numbers do not completely account for

SOE funds invested in the stock market SOEs also dominate subscriptions in Chinas IPO market.

Ever since the exchanges inception, IPOs in China have followed a fixed pricing rule the price of

the offering was based on a formula that applied a P/E ratio of 15 times the average of the companys

earnings over the previous three years (while other pricing mechanisms have been legalized by the

CSRC, the subscription price still hovers around the fixed rule). While the rule was put in place toprotect against overvaluation based on the often overly optimistic earnings projections provided by

securities underwriters, the fixed rule resulted in precisely the opposite: on average, IPOs in China are

massively undervalued. The chronic undervaluation of the offering is bad for issuers (which receives

fewer funds from the IPO), but good for whoever may be lucky enough to subscribe to the IPO, as the

share price rockets upwards in the first few days of trading.

26

Therefore, in a final analysis, the entire stock market mechanism in China appears to above all be a

massive circular flow of funds from Chinas SOEs to Chinas SOEs. Because an SOE in China has very little

equity capital of their own (owned primarily by the enterprises promoter), managers see very little

downside to a public offering, perceiving an IPO to be a source of free capital rather than a sale of

ownership. Due to this dynamic, a manager often is less concerned about pricing and more concerned

about finding a means to participate in the primary market. The securities companies face similar

. Thisnumber does not even include the possibility of grey market funds entering the IPO market, of which

there are assuredly some. For SOEs, participating in IPOs has been an almost fail-safe way to book a

profit often; securities underwriters in China actually guarantee the SOE a minimum amount of

proceeds from their investment.

24Business Week. "China's Illusionary Retail Investor Class." Business Week 7 June 2007.

25Howie, Fraser J.T. and Carl Walter: pp. 142-144.

26Howie, Fraser J.T. and Carl Walter: p. 145.


11/23

P a g e | 11

incentives while the underwriter receives less of a fee in an underpriced IPO, the power these

companies have in assigning out subscriptions can more than make up for the loss of potential profit.

And yet while the primary market is structured to provide a riskless profit for Chinas SOEs, the

secondary market offers no such guarantee. The fact that so much SOE funds are invested via the grey

market into the exchanges certainly begs the question: what happens if there is a significant, enduringdecline in stock prices? Chinas bear market of 2001-2005 and the governments subsequent response

gives ample evidence and illustrates the policy-driven nature of Chinas bourses.

The bear market and the fight over Chinas securities companies

These dynamics imply that the prices on Chinas stock exchange depend not on the fundamentals of

the listed companies but rather total funds flowing into the market. It should be understood that in

theory, a large amount of capital moving into or out of capital markets need not necessarily dramatically

affect the price level of the assets: the stock would still be worth what its purchaser would pay for it, in

accordance to the fundamentals of the security (although one would probably observe higher bid-ask

spreads due to a decrease in liquidity). Of course, while reality rarely so neatly conforms to the

assumptions of the Efficient Market Hypothesis, one can use such a model to make a qualitative

assessment of the relative efficiency of various capital markets. From this perspective, it is practically an

indisputable fact that the efficiency of Chinas stock market lags significantly behind its OECD

counterparts. For literature concerning the inefficiency of Chinas exchanges, refer to Balsara, Chen,

and Zeng (2007), Ma (2000), and Chung (2006)27. Other evidence supports this view: it is estimated

that only 20% of Chinas investors understand what a price-to-earnings ratio is (the most basic market

industry standard for determining valuation)28

Against this backdrop, Zhou Xiaochuan, protg of the infamous reformer Zhao Ziyang, was named

head of the CSRC in 2000. Upon his arrival, Zhou Xiaochuan overhauled the CSRCs personnel, hiring

foreign-educated economists and dismissing those who he deemed to have too close of an affiliation

with the securities companies (which he felt were corrupt). During the first year of his tenor, Zhou

earned the nickname Zhou Bapi (loosely translated as Zhou the Flayer) for his frequent probes into

corruption inside the securities companies and some of Chinas listed SOEs. And yet, to Zhou Xiaochuan,

the fundamental problem with the Chinese stock markets was not corruption but the fact that the SOEs

which dominated the exchanges were still majority held by government entities. This led to the CSRC to

propose a reform in 2001 whereby at least 10% of all new shares issues consist of state shares, with the

. Furthermore, the stock prices of companies that list A-

shares as well as H-shares (that is, shares of SOEs listed in Hong Kong) can and frequently do diverge,

violating the law of one price.

27All of these papers test the weak-form efficiency of Chinas stock markets. If a market is weak-form efficient, it

means that all past prices are reflected in the price of a stock today. It implies that an investor still cannot earn

more than the market return using trading rules, but it is theoretically possible to do so using sound fundamental

analysis. All of the papers reference determined that Chinas bourses are weak-form inefficient.

28Mitchelson, Laura. "Profile of A-share investors." Australia China Business Connections June 2008.


12/23

P a g e | 12

intention of eventually moving to a 100% float. Even to this modest proposal, however, stock prices

plummeted: the Shanghai composite dropped 5.3% the day of the announcement and a further 13.3%

over the course of the next two weeks.

If Chinas stock market was driven by company fundamentals, the extra shares going to market

would not have materially affected valuations. After all, if a stock price reflects the discounted value ofa companys future dividends, it should not make altogether too much of a difference what the

ownership structure of the equity is. Yet it was the grey-market funds flowing into Chinas bourses that

were the primary driver of the bull market of 1997-2001; consequently, the escalation in prices

represented the mismatch between massive SOE purchases of securities and the relatively smaller rise

of stocks supplied by Chinas IPO market. As lending to SOEs slowed due to the restructuring of Chinas

banks (which were pressured to decrease their level of NPLs) in preparation for WTO entry, a large

increase of the supply of stocks would have the potential to rapidly deflate stock prices29

The CSRC was forced to stop the sale of state shares in late 2001 amidst concern over the stability

over Chinas securities companies, most of which held large proprietary trading books and were

struggling with the CSRC-induced rapid decline of stock prices. As valuations deflated, the head of the

Peoples Insurance Company of China ominously predicted

. This dynamic

was not lost on the investors in the Shanghai and Shenzhen exchanges: the prospect of the State selling

its holdings, thereby flooding Shanghai and Shenzhen with A-shares, terrified Chinas investors.

30

:

Indeed, the securities industry over the next few years witnessed widespread bankruptcies. By theend of 2004, total losses were counted to be in excess of RMB 19 billion. Starting with the bankruptcy of

Anshan securities in 2002, the securities industry saw a steady stream of closures. The true size of the

problem became apparent when Caijing reported that Shenzhen-based Southern Securities (one of

Chinas big three securities companies) was collapsing under USD 4 billion in bank loans and other

liabilities. The securities companies, not lacking in political clout, forced the CSRCs hand and Zhou

Xiaochuan was reassigned to the PBoC31

As the crisis in Chinas securities companies worsened over 2003 and 2004, the CSRC found itself

completely depleted of funds. The Ministry of Finance, who could normally serve as the role of lender

of last resort in such a crisis, was under similar liquidity constraints due to their capitalization of Chinas

.

29Yao, Shujie and Dan Luo. Chinese Stock Market Bubble: Inevitable or Incidental? China Briefing. Nottingham:

University of Nottingham, 2008: p. 9.

30Howie, Fraser J.T. and Carl Walter: p. 219.

31Naughton, Barry. "The Politics of the Stock Market." China Leadership Monitor 26 May 2002.

If the market falls to 1300, the securities companies, funds, the entire market will be completely

bankrupt. The financial links between the securities companies and the banks will be broken

leading to systemic risk in Chinas financial sector.


13/23

P a g e | 13

Asset Management Companies (the AMCs were created in the 1998 bank reorganization, and was

responsible for managing the banking sector huge portfolio of NPLs).

However, the securities industry ended up staving off disaster, albeit from an unlikely source. Zhou

Xiaochuan resurfaced with his ascension to governor of the PBoC with his new leadership, the PBoC

refocused their attention on the securities companies, who still desperately needed recapitalization andZhou still desperately wanted to reform. The PBoC, unlike the MoF and the CSRC, was awash in cash

and could afford to extend loans to or inject equity into the securities companies. To finance the

bailout, the PBoC created two investment vehicles, Huijin Investments Ltd. and China Jianyin

Investments Ltd, bankrolled directly by funds sourced to SAFEs foreign exchange holdings. These

investment vehicles proceeded to buy up large allotments of equity in Chinas securities companies,

achieving a majority holding in nine of Chinas largest brokerages. At last, even if only via ownership

rights, Zhou Xiaochuan was able to start his restructuring of Chinas securities companies a process

that had seen little progress while he was working at the CSRC.

Unfortunately, the recapitalization and restructuring of the securities companies proved to be a

political misstep for the PBoC. After all, the regulation of the securities companies was the jurisdiction

of the CSRC. Further complicating the situation, the PBoC decided to act unilaterally to pay for losses

that retail investors incurred from the activities of fraudulent securities companies a plan which was

supposed to be financed multilaterally by not only the PBoC but also the MoF, the CSRC, and the CBRC

(China Banking Regulatory Commission). At the same time, the PBoC was pushing a policy proposal to

allow foreign firms to acquire majority ownership in securities companies a controversial proposal.

The State council has historically only allowed majority foreign ownership in industries that it deemed

underdeveloped and in need of foreign expertise; conversely, it has heavily restricted foreign ownership

in industries it deemed strategic. Predictabily, the securities industry was considered by the PBoC as

underdeveloped and the CSRC as strategic.

The bureaucratic struggle that ensued widened the schism between the CSRC and the PBoC. And

while at first it appeared that the State council would side with the PBoC, their tone reversed as the

PBoC came under significant fire from other Ministries and, eventually, the media. The director of the

National Development and Reform Commission lambasted the PBoC for encroaching on the jurisdiction

of other Ministries. The political environment grew exponentially uglier as Zhou Xiaochuan came under

direct personal attack from the Hong Kong press. The issue was finally settled as the State council sided

with the CSRC: the PBoC was forced to transfer oversight of the securities companies to the CSRC. This

was the best possible result for the securities companies, as they had been recapitalized by the PBoC but

with minimal operational changes due to the lax supervision from the new regulators at the CSRC.

The origins of the bubble

When Zhou Xiaochuan was dismissed from the CSRC, he was replaced with Shang Fulin, a much less

controversial figure who have off the impression that he had no desire to continue with Zhous reforms.

His priorities could not have been more different: Fraser Howie, author of the book Privatizing China,


14/23

P a g e | 14

characterized Shang as a career politician with deep industry connections and a lack of understanding

of capital markets32

The NSSF was organized in 2001 as an aggregation of all SOE pension funds (most of which were still

held by parent SOE groups, much of whom faced significant funding gaps). The fund was given RMB190

billion under management and allowed a 25% allocation to invest in Chinas equity markets. Of course,

an allotment of RMB45 billion pales in comparison to the gross amount invested in the Chinese stockmarket, but the NSSF used their allotment to strategically prop up the markets. Whenever the index

would approach 1000, the NSSR would purchase a block of A-shares moving the index up past the 1000

threshold (e.g. when the market was spiraling downwards in late 2004, the NSSF increased their equity

.

Shangs primary focus was not to restructure the industry, as had been Zhou Xiaochuans, but rather

to simply increase the prices of stocks (thereby staving off industry criticism). His efforts were lauded by

many in the financial sector, as the new policies were congruent with the concerns of many of theentrenched interest groups. As the Shanghai composite approached 1000, the CSRC introduced a wide

array of reforms in an effort to incentivize investment in the bourses. In 2002, the CSRC announced a

program to allow institutional investors to purchase A-shares, dubbed QFII (Qualified Foreign

Institutional Investors), introducing a large new potential source of funds into the market. In the same

week, the State council announced that it would allow foreigners to make strategic investments in

SOEs by way of purchasing non-tradable LP shares, a reversal of a ten year ban. Furthermore, the CSRC

issued a regulation changing the nature of the voting rights of A-shares, allowing them to vote on certain

issues such as rights offerings and company restructurings.

Yet all of these actions had only a marginal affect on market prices there simply was not enough

funds flowing into the stock market as SOEs shied away from investment in equities during the bear

market. In a desperate effort to stop the selloff, in 2005 the CSRC declared a two year moratorium on

IPOs and decided to come up with a final solution for the non-tradable share problem. While the reform

was less than comprehensive, it proved to be an adequate compromise for both the LP share holders

and the A share holders. In essence, the reform (dubbed G-company reform) allowed a medium for

direct negotiation between LP and A shareholders as to the adequate compensation for A-shareholders

in exchange for the states LP shares to become fully tradable. It is important to note that even as the

shares became tradable, they would only do so slowly, over the course of three years.

In sum, the program was received as well as it could be by the market. Above all, Shang Fulins fix

diminished the uncertainty A-shareholders had concerning the possible future float of state shares: the

A-shareholders finally knew that the SOE could not issue their promoter shares without the explicit

approval of those holding the tradable shares. And yet while the moratorium on IPOs stopped the

growth in the stocks supplied to the market and the G-company reform mitigated much of the

uncertainty with regards to the states LP shares, the market may not have rebounded without one final

impetus: massive purchases of securities by the state-run pension fund, the NSSF.

32Howie, Fraser J.T. and Carl Walter: pp. 222-223.


15/23

P a g e | 15

investment by a factor of three)33. More importantly however, the NSSF legitimized Shang Fulins G-

company scheme by making large investment in stocks that had undertaken the reform: the NSSF

(lauded as the national team by Chinas press) boasted that it had actively intervened in the 3rd and 4th

quarters to buy newly created G-companies, increasing their investing in the Shanghai 50 and Shenzhen

100 indices by 50% and 30% respectively34

With all of these actions governmental bodies stepping in to stabilize the market above the 1000

level, massive purchases by the NSSF, a moratorium on new issues, and an adequate reform in place for

LP-shares the groundwork had been laid for Chinas A-share bubble. The actions undertaken by the

CSRC and the State council sufficiently assuaged Shanghai and Shenzhens investors that the

government simply would not let the prices on the bourses fall. A quote from one of CITIC Securitys

equity analysts sums up this predisposition perfectly, tellingJingji Guanchabao : We just calmly wait for

the governments next step to see if there will be any more policy incentives to invest

.

35

In late 2005, the SOEs which once shied away from the market began to reinvest heavily, eliciting a

rapid rise in stock prices. In 2006 and 2007, at least RMB 585.37 billion of SOE funds poured into the

stock market as prices soared higher and higher

.

36. Further complicating the economic reality, in early

2007 the Chinese government quietly changed their accounting regulations to allow an increase in asset

values to count as net income. Because of this change in accounting standards, in 2007 SOEs reported

above average earnings growth, although on average 31% of SOE profits came from investments in

securities and not from operations37. It is estimated that 66% of listed companies invested in China

bourses38

Of course, stock valuations cannot stay at such high levels forever. Due to concerns about inflation,

the PBoC raised the reserved requirements for Chinese banks ten times over the course of 2007

. All in all, the same dynamics that dominated the exchanges in the late 90s were similarly

present in 2006 and 2007.

39

33

Yao, Shujie and Dan Luo: p. 5.

34Howie, Fraser J.T. and Carl Walter. Privatizing China. Singapore: John Wiley & Sons, 2005, p. 239.

35Sebastian Heilmann: p. 7.

36Caijing. "Beijing Clamps Down on SOE Expansion." Caijing Magazine 23 July 2008.

37Business Week. "China's Illusionary Retail Investor Class." Business Week 7 June 2007.

38This dynamic could be compared to the massive cross-holdings that listed Japanese companies held in

eachothers equity, and the role this played in the rapid escalation of stock prices on the TSE in the late 1980s:

Yang, Qian and Don Durfee. "Losing Their Grip." CFO Magazine 1 February 2008.

39Xinhua. "China to Raise Reserve Requirement for 10th Time This Year." Xinhua 9 December 2007.

,

predictably elicited far fewer loans extended to SOEs. Because Chinese SOEs had on average very low

cash flows from operations, with the drying up of credit there was minimal cash left to invest in


16/23

P a g e | 16

securities40. In conjunction with the leveling off in demand, three factors rapidly pushed up the supply

of stocks available to Chinese investors: first, Chinas primary markets once again began issuing a large

number of SOE IPOs, recording some of the mainlands largest; second, the G-companies continued their

gradual conversion of LP shares into A shares; third, many Hong Kong domiciled mainland Chinese

companies decided switch their listing from Hong Kong to the mainland, tapping into the abundant

liquidity of the Shanghai and Shenzhen exchanges. It is the third factor that is speculated to be the final

impetus of the collapse PetroChina, China Mobile, and China Life all issued jumbo IPOs in late 2007,

absorbing a significant amount of the markets liquidity 41

When analyzing Chinas institutional sector, it is at times difficult to remain optimistic. Chinas SOEs

are intricately intertwined, often susceptible to political motivations, and at times outright corrupt.

While the reform of Chinas institutions is steadily progressing, periodic regression is common. For

example, in response to the current economic slowdown, the State council has enacted a stimulus

program whereby it has directed the banks to aggressively expand their loan portfolio. With this

blessing from the central government, the banking industry in China extended RMB 1.6 trillion of loans

to SOEs in January alone

.

Conclusion

42

The short answer is, of course, the private sector. In excess of 80% of Chinas workers are employed

in the dynamic and rapidly growing private sector

. This figure is more than Chinese banks have ever lent in a monthly period

and one third of the aggregate amount of loans extended in 2008. Predictably, the stock market has

been one of the primary beneficiaries of this lending: the Shanghai composite has increased 33% since

the start of the year (or 213% annualized). Of course, unless the institutional sector rapidly increases its

productivity, the 2009 stimulus package will most likely prove to be nothing except a large package of

NPLs by 2015. This certainly begs the question: who pays for the staggering misuse of capital employed

in Chinas institutional sector?

43

40

RateFinancials. Government Controlled Entities Masquerading as Independent Public Companies. Financial

Survey. New York: RateFinancials, 2007.

41

Shujie Yao and Dan Luo: pp. 9-10.

42Pettis, Michael. "China Financial Markets." 9 February 2009. Will China have to choose between social stability

and long-term growth? .

43Jia, Chen. "Development of Chinese Small to Medium-sized enterprises." Journal of Small Business and

Enterprise Development (2006).

, and it is the savings of these workers that indirectly

capitalize the entire formal financial system, from the banking establishment to the securities

companies. The 2007 Chinese stock market bubble was not a onetime occurrence; it was not the result

of intangible factors such as investor euphoria or changes in social norms. The historic rise in stock

prices from 2006 to the end of 2007 happened simply because of the way Chinas institutional economy

is structured. The nature of the bubble was not altogether different than the bull market of 1997-2001,


17/23

P a g e | 17

only the scale. When analyzing the price fluctuations in the Shanghai and Shenzhen exchanges, I am

reminded of the thoughts of one of the participants in Great Britains South Sea Bubble of 1720 (a

bubble whose structure was eerily similar to that of Chinas equity markets)44

:

And so, as more debt capital from Chinas recent stimulus package gets siphoned into equities, it

should be remembered that none of the increase in value will be real in an economic sense. Once the

cycle comes full circle and all of the imaginary wealth has disappeared, the private sector will be forced

to once recapitalize the formal sector, yet again being obliged to take the hindmost at the behest of

Chinas institutions45

44

The south sea bubble of 1720 was a speculative bubble in the price of shares in the South Sea Company, a

company who received monopoly rights from the crown to develop in South America. The South Sea Companybought up large portions of government debt, debt that was indirectly siphoned back to the South Sea Company to

fund their expansions. To buy the debt, which at the time was not tradable, the South Sea Company issued large

equity offerings portions of which were allocated to well-connected government officials. The similarity lies in

the debt-financed nature of the South Sea Companys expansion, as well as the fact that the massive purchases of

debt increased the lending capacity of the Bank of England, which fueled debt-financed speculation in the South

Sea Companys stock.

45A note on Chinas financial troubles in contrast to the OECDs current situation: this paper was not meant to be a

thorough comparative analysis between the financial systems in the United States and China. Perhaps to a Chinese

citizen, it may seem rich to read an American criticizing the structure of Chinas financial system when the United

States is currently in crisis. Yet it is my personal opinion that while the United States financial system has

certainly overextended itself, there does not exist in the United States the staggering circular misuse of capital that

is characteristic of Chinas formal financial system. It has often been noted that 40% of the market capitalization of

the NYSE in 2006 consisted of financials (certainly a hefty percentage) contrast with the fact that 96% of the SSE

consists of SOEs. Fortunately, China still has much room to grow simply by expanding their economic inputs; the

vastly more developed OECD must rely more heavily on increases in total factor productivity (i.e. economic

efficiency), which is largely derivative of the effectiveness of the financial system. As reform continues to progress,

it is imperative that China restructures its formal financial sector.

.

The additional rise above the true capital will only be imaginary; one added to one, by any stretch of

vulgar arithmetic will never make three and a half, consequently all fictitious value may be a loss tosome person or other first or last. The only way to prevent it to oneself is to sell out betimes, and let

the devil take the hindmost.


18/23

P a g e | 18

Exhibit 1: The Financial History of Chinas Most Profitable Companies

Lenovo

: Incorporated in Hong Kong in 1984 as a spinoff of part of the Chinese Academy of the

Sciences. Financed in Hong Kong; Corporate HQ in Hong Kong. Legend Holdings Limited, a

mainland investment vehicle, owns a large chunk of the equity.

Huawei

: Founded in 1988 by CCP member and former PLA officer Ren Zhengfei. Vast majorityof sales consisted of equipment to provincial governments or state-owned infrastructure

companies. Has been given over US $10.5 billion in subsidized credit from Chinas Policy Banks

to fund overseas expansion Huawei passes along the cheap loans to their customers, offering

vendor financed sales of in excess of 70% (a program very popular in developing countries in

Latin America and Africa). Still not publicly traded despite Asias buoyant equity markets over

the past decade ownership structure murky and kept secret.

Baidu

: Founded by Robin Li, a Chinese-American working in Silicon Valley in the mid 90s. Raised

about US $11 million from four American venture capital firms and incorporated in the Caymen

Islands in 1999. Headquarted in Beijing, went public on NASDAQ in 2005 (yet to be listed on any

Asian Exchanges).Haier:

Formed from a joint venture between Germanys Liebherr Group and Qingdao

Refrigerator Co, a Shandong SOE run by the charismatic, Hong Kong-educated Zhang Ruimin.

First listed in Hong Kong via a backdoor listing in 2004, with a follow-on offering on the NYSE.

Alibaba Group:

Incorporated in Hong Kong in 1999 by Silicon Valley-based entrepreneur Jack

Ma. Received start-up capital from Goldman Sachs VC arm; later received a direct equity

injection from Yahoo. Listed on Hong Kongs exchange in 2007.

Wahaha:

Joint venture between Hangzhou-based red-chip, the Hangzhou Wahaha Group, and

French conglomerate Danone. Slight majority of company held by Danone. Not listed on any

exchanges (Danone is listed on Euronext).

Gome:

Chinas largest electronics retailer, GOME was self financed with US $500 of seed capital

and relied on the informal financial sector to finance its growth. In 2004, the company was

incorporated in Bermuda and listed on the Hong Kong stock exchange.


19/23

P a g e | 19

Exhibit 2: Expenses of the Chinese Government

Source: The World Bank, Fiscal Decentralization in ChinaPotential Next Steps


20/23

P a g e | 20

Exhibit 3: The Calculation of the True Number of Chinas Investors

Total Number of Accounts: 108,000,000

Inactive Accounts: 81,310,000

Total Active Accounts: 26,690,000

Double Counting of Accounts 13,345,000

Maximum Number of

Accounts 13,345,000

Ghost Account Factor 4.12

Total Active Investors 3,240,000

Based on calculations performed in Privatizing China, albeit with updated statistics to reflect the2007 equity boom

46

46

Howie, Fraser J.T. and Carl Walter. Privatizing China. Singapore: John Wiley & Sons, 2005, pp. 132-141.

.


21/23

P a g e | 21

Works Cited

Areddy, James. "China seeks to curtail lending to prevent inflation." Wall Street Journal 19 June 2007.

Arouri, Mohamed and Chen Xiang Liu. "Stock craze: an empirical analysis of PER in Chinese Equity

Market." Economics Bulletin (2008): 1-17.

Asian Development Bank. PRC: Strengthening Public Infrastructure Investment Policy in China. Manila:

Asian Development Bank, 2002.

Business Week. "China's Illusionary Retail Investor Class." Business Week 7 June 2007.

Caijing. "Beijing Clamps Down on SOE Expansion." Caijing Magazine 23 July 2008.

Chung, Hin. Testing Weak-Form Efficiency of the Chinese Stock Market. Thesis. Helsinki: Lappeenranta

University of Technology, 2006.

Dong, Zhixin. "Regulator Warns on Stock Market Risk." China Daily 29 April 2007.

Dullien, Sebastian. "Measuring China's Fiscal Policy Stance." EconWPA (2006).

Dyer, Geoff. "Worries Surface about a Potential Bubble." Financial Times 9 October 2007.

Green, Stephen. "The Road to Maturity." China Economic Review January 2004.

Groenewold, Nicolaas, Yanrui Wu and Sam Hakkan Tang. "The efficiency of the Chinese stock market

and the role of the banks ." Journal of Asian Economics (2003): 593-609.

Heilmann, Sebastian. "The Chinese Stock Market: Pitfalls of a Policy-driven Market." China Analysis

(2002).

Howie, Fraser J.T. and Carl Walter. Privatizing China. Singapore: John Wiley & Sons, 2005.

Hu, Shili. "Disadvantages Groups Should Stay Far from the Stock Market." Caijing 20 October 2002: 6.

Jia, Chen. "Development of Chinese Small to Medium-sized enterprises." Journal of Small Business and

Enterprise Development (2006).

Lei, Feng and Mark C. Seasholes. "Individual investors and gender similarities in China." Pacific Basin

Finance Journal (2007): 44-60.

Lin, Li. "Chinese investors start to shun stock market amid volatility ." Xinhua Finance 7 July 2007.

Liu, Chen Xiang. "SME Financing in China." Economics Working Papers, University of Paris (2007): 1-32.

Ma, Frederick. "Hong Kong as a preferred platform for accessing the business and investment

opportunities in Mainland China." Conference of the Investment Industry Association of Canada.

Toronto: HKMA, 2006.


22/23

P a g e | 22

Ma, Shiguang. Tests of Informational Efficiency of China's Stock Markets. PhD Thesis. Adelaide:

University of Adelaide School of Economics, 2000.

Mitchelson, Laura. "Profile of A-share investors." Australia China Business Connections June 2008.

Naughton, Barry. "The Politics of the Stock Market." China Leadership Monitor 26 May 2002.

Pettis, Michael. "China Financial Markets." 9 February 2009. Will China have to choose between social

stability and long-term growth? .

PINR. "Economic Brief: China's Stock Market Bubble ." Power and Interest News Report 19 Februrary

2007.

Qiao, Yu, Du Bin and Sun Qian. "Earnings management at rights issues thresholds - Evidence from

China." Journal of Banking and Finance 10 January 2006: pp. 3453-3468.

RateFinancials. Government Controlled Entities Masquerading as Independent Public Companies.

Financial Survey. New York: RateFinancials, 2007.

Rogers, Jim. Jim Rogers Continues to View China as the Worlds Best Long-Term Profit Play Keith

Fitzgerald. 20 August 2007.

Shen, Chunli and Hengfu Zou. Fiscal Decentralization in China - Potential Next Steps. Washington D.C.:

The World Bank, 2005.

Tsai, Kellee S. "Congressional Testimony on China's Financial System." US-China Economic and Security

Review Commission. Washington D.C.: USCC, 2006.

Tsai, Kelly S. Back Alley Banking. Ithica: Cornell University Press, 2002.

Wen, Xiu, et al. "Untangling the Hedging Morass at SOEs." Caijing Magazine 25 March 2009.

World Bank Beijing Office. SOE Dividends: How Much and to Whom? Policy Brief. Beijing: World Bank,

2005.

Xinhua. "China to Raise Reserve Requirement for 10th Time This Year." Xinhua 9 December 2007.

Yang, Qian and Don Durfee. "Losing Their Grip." CFO Magazine 1 February 2008.

Yao, Shujie and Dan Luo. Chinese Stock Market Bubble: Inevitable or Incidental? China Briefing.

Nottingham: University of Nottingham, 2008.

Zhang, Weijiong. "On Top of Their Game: Chinas Top 100 Listed Private Companies." China Europe

International Business School Website. 8 March 2008

.


23/23

P a g e | 23

irrational exhuberance with chinese characteristics: origins of the 2007 a-share bubble

Documents