The capital market-related clauses in China's World Trade Organization (WTO) commitments require "low-level opening up" and the government could well move faster, said Long Yongtu, secretary-general of the Bo'au Forum for Asia.

"The opening up of the capital market is the direction for the future," Long, also China's former chief WTO negotiator, told a seminar co-sponsored by the Securities Daily and China Daily newspapers on Saturday.

"But the limited WTO commitments related to the capital market are already affecting the opening up process of the capital market," he said.

China's capital market-related commitments largely center on permitting the establishment of Sino-foreign joint venture securities companies and fund management firms, with ceilings controlling foreign stakes. The market opening up in other financial industries, like banking and insurance, is generally faster.

"The significance of entering WTO is to boost reform by opening up," Long said, "that should also be true with the capital market."

Fred Hu, managing director of Goldman Sachs (Asia) L.L.C., said the policy of shielding domestic industries before the market is fully opened up to foreign competition, a procedure adopted by many developing countries, has not been effective.

"If we shut the door completely and start from scratch in darkness, it's going to be very slow, and we are very likely to repeat the countless frustrations and mistakes experienced by the European and American markets in their hundreds of years of history," he said.

China has a long way to go in integrating its capital market with the rest of the world. Total market capitalization now stands at around US$490 billion, second in the Asia-Pacific region but less than one-10th of that in the United States, financial derivatives are still scarce, transparency and service levels are still low and supervisory efficiency needs to be improved.

But in developing the capital market, Hu said: "We have chosen what is the slowest, and likely to be the most risky road."

The Chinese Government has been gradually loosening capital controls in the past few years, and went beyond its WTO commitments last year to launch a Qualified Foreign Institutional Investor (QFII) scheme to allow foreign investors to trade its shares and Treasury bonds.

But it has so far refrained from letting its renminbi float freely or making it fully convertible, as many researchers are calling for.

Hu endorsed the significance of the QFII move in liberalizing international capital flows. Goldman Sachs expects to be among the first QFIIs to arrive, he said, and the initial investment would be US$50 million.

Still, Hu called for bigger steps in opening up sectors like investment banking, personal finance and asset management. China has allowed foreign companies to set up joint venture securities firms with the foreign stake not exceeding 33 per cent, which Hu said was a "rare investment model" and the success ratio is "not very high" judging by similar experiences in other countries.

Greater market access for foreign financial institutions will result in more intense competitive pressure on domestic companies, even resulting in some being elbowed out of the market, he said, but "the final survivors will all be internationally competitive companies."

Recognizing the inevitability of opening up the capital market, Long stressed the importance of caution, discreet planning and a gradual approach.

"We are not afraid of opening up," he said. "What we are afraid of is inadequate preparation and slack supervision."

"We must act in line with market rules. Listed companies should be of high quality, transparent and accurate (in disclosing information), and participate with an active conscience," he said. "And individual investors should have the ability to withstand market risks."

The new mindset following China's WTO accession, including the principles of national treatment, transparency and free trade, will "have a profound influence on the opening up of the capital market," he said.

"What foreign investors care most about is not favourable policies, but a fair, transparent and consistent legal framework," Long said.

The key to attracting foreign investors, said Cao Heping, deputy dean of the College of Economics under Beijing University, is to foster a market that generates capital returns at similar levels to the international market.

"Only with that can we get people to invest," he said.

To achieve that, Cao said a broader variety of financial products should be developed to provide investment opportunities. He called for the establishment of a special committee that promotes and regulates financial derivatives, including stock options.

China's bourses are still suffering the effects of a lingering bear market after rampant irregularities led to a toughened government crackdown and traumatized investor sentiment. Major indices are hovering at levels about one-third off their highs recorded nearly two years ago.

Cheng Siwei, vice-chairman of Standing Committee of the National People's Congress, China's parliament, said the most urgent task currently facing the government is to restore investor confidence.

Regulators should improve their work by establishing clear regulatory responsibilities and upgrading regulatory methodology, while refraining from proping up indices by announcing market-boosting policies, the legislator said.

"The regulators should not be responsible for the ups and downs of the market, nor underpin the market from the perspective of the owner of State assets," Cheng told the forum.

"But under special and necessary circumstances, through certain legal procedures, they should still be able to step in temporarily," he added.

Other key measures include improving corporate governance of listed companies, urging companies to pay more dividends than they do now to encourage investors, preventing intervention from protectionist local governments and diversifying the companies' stock structures, Cheng said.

Before opening up the capital market to foreign investors, the fundamental problem that holds two-thirds of shares as nontradable should be solved first, said Wu Xiaoqiu, a professor with the prestigious Renmin University of China.

(China Daily March 24, 2003)