Zhang Chenghui

I. Economic restructuring should depend on the support of capital market.

Both domestic and foreign experience in economic restructuring indicates that the ultimate targets of economic restructuring aim at optimizing and upgrading the industrial structure, improving the market adaptability and competitiveness of enterprises, and raising the capability of self-generation and industrialization of new technologies. This is true for developed countries as well as posterior developing countries, whether the restructuring is done spontaneously or intentionally. In order to attain these targets, all countries have taken the industrial structure, regional structure, technological structure, enterprise structure, the structure of proprietary rights and the urban-rural structure as the objects of adjustment. The upgrading and optimization of the overall economic structure are realized through upgrading, integration and transformation in the above-mentioned areas. Although government policy guidance is necessary in structural adjustment in these areas, the support and help of the capital market are all the more indispensable.

1. Capital market and industrial restructuring: An industry is a congregation of enterprises with the same characteristics. Industrial restructuring is, in the final analysis, market entry and exit of different kinds of enterprises. Enterprises with good performance, competitiveness and a growing market share are able to obtain capital through the capital market and thus grow stronger, while those with bad performance and a gloomy prospect of market growth can’t get capital and therefore will be constrained or phased out. Such market forces will eventually bring about an optimized industrial structure, because profit-oriented investment of investors will naturally stimulate market resources to tilt toward enterprises in advantageous industries.

2. Capital market and technological innovation: To promote industrial upgrading with technological progress is an important part of economic restructuring. However, technological innovation and commercialization is full of uncertainty and great commercial risks. Innovation-bound enterprises are usually small in size, with an uncertain prospect of development and lacking credit accumulation and guarantee assets. It's very difficult for them to raise a large amount of fund from banks or other intermediary financial institutions. In this area, only the capital market can form an interactive relationship with innovations. The US NASDAQ has grown to such an extent today that no one can turn a blind eye to its tremendous stimulative role in innovation and venture investment.

3. Capital market and enterprise M&A: Economic restructuring will inevitably lead to large-scale M&A of enterprises. Since the 1990s, with the rapid development of economic globalization and information technology, various countries have accelerated economic restructuring. A large-scale restructuring of enterprise structure is under way worldwide and developing in depth. Mergers and acquisitions of various kinds have taken place constantly, and they are unprecedented in terms of the magnitude, both in quantity and in scale. The association between enterprises in the same category, which unite to seek lower costs and higher efficiency, has mostly been conducted through public or private capital market. It is also the case with M&A among upper and down stream enterprises or enterprises with different businesses in pursuit of diversified and scale operations.

4. Capital market and financial restructuring: The financial systems of many Asian countries have received a heavy blow since the eruption of the financial crisis in East Asia. In order to get out of the crisis and return to the track of normal operation, all countries concerned have set out to reform their seriously defective financial systems and promote financial restructuring. Such restructuring usually proceeds from the following two aspects: First, to accelerate the handling of non-performing assets. Specific measures include actively encouraging commercial banks to sell their bad assets; pouring public fund into financial institutions to replenish reserve fund for bad debts; establishing special firms to deal with bad claims and sell them to the public. Second, to rectify and consolidate financial institutions. The government will no longer provide shelter for financial institutions. For financial institutions with serious mismanagement and huge risks, the government will order them to close down for liquidation, or have them merged with well-performing institutions, or sell them to foreign financial institutions. As for financial institutions that fail to reach the required rate of capital sufficiency and have potential huge risks, the government will urge them to restructure their assets in accordance with the rectification policy outlined earlier.

Obviously, the above measures of adjustment all need the backing of the capital market in their implementation. For instance, the public funds to be poured by the government to deal with the huge amount of bad claims will have to be raised through the issuance of government bonds on the capital market. The selling of non-performing assets to the public and the banking reorganization will all the more need the capital market to provide necessary venues and means.

II. The existing capital market can hardly undertake the arduous tasks of supporting economic restructuring.

So far the adverse impacts of the Chinese capital market on economic restructuring are markedly reflected in the following aspects:

First, the structure of the capital market is badly shaped, which has affected the development of the capital market. As there existed an error in the guiding principle in the past ten years, and the constraint conditions of the specific economic and social environment in China, the capital market has become more and more a place of stock exchanges in the building of market systems. In terms of actions, importance was often given to the development of security market while non-security market was neglected. The development of stock exchanges was accorded with great importance, but the growth of the bonds market (particularly that of enterprise bonds) was neglected and restricted. While the development of stock exchanges received due attention, the over-the-counter market was prohibited. This has led to a badly shaped structure of the capital market. In 1998, the amount of corporate bonds was less than one-fifth of the stocks issued. The gap between the bond market and stock exchange is even more obvious on the secondary market. The bond transaction volume of listed enterprises was only around one-thousandth of government bonds and stocks. Take the proprietary right market as another example. The market of proprietary right conducted in non-security form is not only small in scale, but also far from standardized in operation. Other types of the capital markets, such as the long-term bill market and the long-term credit market, are even more insignificant.

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