Libmonster ID: SE-348
Author(s) of the publication: A. S. BELOVA


Post-graduate student of IDV RAS

In parallel with the rapid development of the securities market in China, the Chinese "black" stock market is showing great activity. Shares of more than 1,000 companies are traded in this market, and many investors participate in corporate equity markets organized outside the two official stock markets - Shanghai and Shenzhen, which opened in 1990.

The informal stock market was born spontaneously in China in the mid-1980s, even before the first stock market platforms appeared, thereby essentially pushing the authorities to organize official exchanges*. Thousands of shares of various Chinese companies began to circulate freely on the streets of the country, without falling under the control of the central government or any laws.

The preservation and further development of the unregistered securities market after the opening of official stock exchanges was facilitated by the introduction of restrictions by the Chinese government on the types of securities and companies that can participate in such exchanges.

The spontaneous or" black " market has actually become an important part of the infrastructure of the Chinese securities market. Although the Government is trying to shut down these informal markets, they continue to develop: joint-stock companies seek to raise capital if not on the official market, then on the "black" one. In theory, the authorities could move to formalize "black" markets, recognizing the emerging demand for securities, and establish the basis of the regulatory framework for the functioning of the market. Some attempts have been made by the government in this direction, but it has not yet been possible to switch completely to the official market and get rid of the "black" market due to financial and organizational difficulties.

A primitive ban on the spontaneous market could damage thousands of companies and, to a certain extent, the entire economy of the country.

In the mid-1980s, hundreds of companies began to conduct an initial public offering (Institute Public Offering - IPO) in Shenzhen and other cities.

However, there was no organized place for corporate securities trading in China until August 1986, when with the permission of the People's Bank of China (the Central Bank) Liaoning Trust and Investment Company (Liaoning Trust and Investment Company) opened a platform for operations with corporate bonds**.

The Jinan Securities Office of the Industrial and Commercial Bank of China's investment Trust Company began trading shares on the OTC market in 1986 as well.

The Liaoning company and its Jinan office initiated the development of China's OTC market, a market where securities were traded with the permission of the People's Bank of China (PBOC).

Within one year of its opening, more than 15 financial companies and institutions appeared on this market, which were involved in securities trading in Shanghai and Shenzhen.

In January 1987, the Shanghai branch of the PBOC issues the "Provisional Rules for OTC Securities Trading". According to these rules, all trading in securities had to pass through OTC market dealers approved by Halyk Bank. Over-the-counter trading was allowed only in Shanghai and Shenzhen, and other cities were not allowed to do it.

Due to the opening of the OTC market, stock turnover increased from 0.58 million yuan in 1986 to 7.77 million yuan (approximately $1.16 million at the current exchange rate) in 1989 in the Shanghai market.1.

At the same time, a spontaneous or "black" market for buying and selling shares was also gaining momentum in a number of cities. It grew especially rapidly in 1990-1991. Back then, in Shanghai, the daily turnover of stocks could reach several thousand shares, which was much more than in the OTC market.

The government's attempts to limit the growth of the "black" market proved ineffective.

The situation changed dramatically only in December 1990, when the OTC and black markets were replaced by the Shanghai and then Shenzhen Stock Exchanges. This meant that all transactions with securities had to be registered on these stock exchanges.

As a result, the officially sanctioned OTC market has taken a long time to live.

But the Chinese "black" securities market proved to be indestructible. He only became, like a chameleon, even more skillfully change its color, shape, fi-

* For more information, see: Vakhrushin I. V. China: Stock exchanges on the rise / / Asia and Africa Today, 2010, N 9.

** Corporate bond - a corporate debt security that gives the owner the right to receive its face value within the stipulated period, as well as interest, discount, etc. (Note: ed.).

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financial instruments*. And it became the only platform for OTC securities trading.


After the official market appeared, the first major financial product, i.e. the subject of trade, on the "black" OTC market was certificates for the right to subscribe to shares of the initial public offering - IPO- promotions.

It turned out that there is quite a high demand for such stocks in China. To balance supply and demand, the authorities introduced certificates for the right to subscribe to their purchase.

Before you buy IPO-shares, it was necessary to purchase a certificate that allowed the owner to participate in the lottery for them. And since the price of the certificate, as well as the price of the initial public offering share, was usually lower than the share price on the first day of trading, such certificates became profitable and, accordingly, very popular (in the PRC there was and still is a large shortage of profitable financial instruments).

The "black" market for trading certificates went up sharply in 1992. For example, a certificate with a nominal value of 30 yuan could be traded on the" black " market at a price of 1.5 thousand yuan2. However, the hype did not last long. In 1993, due to an increase in the number of companies that started issuing shares, the demand for initial public offering shares fell sharply. In the future, certificates went out of circulation with the introduction of a subscription system for IPO via bank accounts.

From 1993 to the present, the main financial instrument of the "black" market remains shares of unregistered companies. That is, in fact, everything returned to normal - to spontaneous trading in "unrecognized" shares.

During 1993-1999, hundreds of companies that could not qualify for share issue quotas began to issue shares to the general public unofficially. Dozens of local securities trading centers have been set up in central provincial cities to facilitate the trading of these stocks3.

Since 1993, shares of employees of joint-stock companies have been illegally traded on a massive scale, although according to the law, employees had to keep their shares for 3 years from the moment they received them, and even after that, shares were supposed to be traded only among employees of the same company4.

But the thirst for profit prevailed.

In March 1998, the State Council, concerned about the lack of control of the unauthorized OTC market, banned it and instructed the Securities Management and Control Committee (SEC) to strengthen control over local securities trading centers, which partially provided the infrastructure of the "black" market.

Despite the best efforts of the government, unofficial trading in shares of companies that were not listed (registered on stock exchanges) continued to develop, its next surge began in 2001.

There were two main reasons for the revival of the "black" OTC market.

First, there was an increased demand for speculative purchases of shares of companies that could potentially enter the second official securities market in Shenzhen, originally conceived by the Securities Management and Control Committee as a market for shares of high-tech companies, and then as a market for small and medium-sized companies in various sectors of the economy. Speculators were attracted by the opportunity to profit from stocks that could soon enter the official market.

However, in 2001 - 2002, a cooling of interest in high-tech companies and a decrease in the likelihood of creating a secondary market led to a drop in this speculative demand.

The State Council also called on listed companies to acquire shares traded on unofficial trading platforms, either through their purchase or through an operation. swap (mutual exchange) - for example, a listed company could offer one of its shares for five shares of a company participating in operations on the unofficial stock market.

Secondly, around the same time, in 2000-2001, there was an increase in the number of auctions of shares of legal entities. Auctions of such shares were generated by speculative transactions made by investors manipulating the securities market. At the beginning of 2000, many of them expected that soon the State Council should allow the conversion of shares of legal entities into ordinary shares that would be allowed to be listed (registered on official exchanges). As a result, a massive purchase of shares of legal entities across the country began, the value of which could be no more than 10% of the shares listed on the stock exchange.

Then auctions of these shares were held, mainly in Shanghai, Beijing and Shenzhen. Initially, the shares traded at prices close to their nominal price, but gradually rose in price, but remained much lower than the market price. According to some sources, in the first 5 months of 2001, the volume of trading at the Shanghai auction was about 500 million yuan5. However, volumes soon plummeted as it became apparent that the government was not going to convert these shares to marketable shares. ___

* Financial instrument - a financial document (security, monetary obligation, futures, option, etc.), the sale or transfer of which ensures the receipt of funds (Note: ed.).

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official securities exchanges.

Moreover, at the end of 2001, the ECB, concerned about the growth of the market beyond its control, banned the transfer of shares of legal entities, the amount of which was less than 5% of the total share capital. As a result of such actions, the market for auctions of shares of legal entities ceased to exist.

Shortly after the decline of the corporate stock market, trading in shares of unlisted companies resumed. According to research by the Shanghai Stock Exchange, by 1998 there were more than 100 OTC "black" markets, of which 30 were extremely active. 17 of them are such as the markets in Zibo (prov. Shandong), Chengdu, Shenzhen, Xi'an, Fuzhou, Haikou (Hainan Island), became nationwide6.

One of the most popular markets in China was the market that opened in the early 1990s. Hong Miao to Chengdu7. In 2000 - 2002, its daily turnover reached 300 thousand transactions with shares, the number of participating companies reached 100.

Another active OTC market is located in Zibo. From the date of issue of shares by the company Shandong Bohai Company In 1984, about 40 Shandong companies listed their shares on the Shanghai and Shenzhen Stock Exchanges, and more than 140 companies traded their shares on other stock markets, including more than 120 on the city's trading floor.

The Zibo automatic quotation system was opened in 1993, and after its closure by the regulator-the ECB-in 1998, the "black" market was revived again. One of the reasons for its revival was that several dozen companies that previously participated in the unofficial market were allowed to officially list. The "black" market was revived, as investors naively believed that all unofficially traded shares could be allowed to officially trade.

Shares traded on the spontaneous market are characterized by a small capitalization and low price. Prices for such shares usually range from 1 to 2 yuan (approximately $0.15 - 0.3), which is not comparable to the prices of officially listed shares, which average about 10 yuan. Investors often speculate on this difference in price. For example, the company's share price Small Commodity City on the OTC market in Zhejiang, it was 4-5 yuan. The price of its shares on the first day of opening trading on the exchange was 27 yuan. And this example was not the only one. Undoubtedly, there were also significant risks: the shares could simply not be listed on the official stock exchange8.


There are three ways in which a company can publicly issue shares to the general public on the OTC market.

First, the company can issue shares directly. However, more often the sale of shares is carried out through professional marketing companies or through a broker. The main business of a broker is to execute the client's orders at the latter's expense. However, in China, there is a practice where some brokers buy back all shares and then sell them publicly at a premium for an extended period of time.

Second, the company's shareholders can sell a limited number of shares to the general public. In practice, this can happen as follows. Founders issue their shares for public sale. Individuals who have already decided to contribute their capital to the company, but have not yet done so, can sell their "virtual" shares after they are recognized as shareholders of the company. For example, a drug manufacturer Baolai Biologic from prov. Shanxi has applied to transform its enterprise into a joint-stock company with a single shareholder holding 19% of the shares and intending to invest RMB7. 3 million. However, the money was not physically transferred to the company's account, and after the government had already approved the creation of a joint-stock company, the investor sold the "virtual" shares9.

Third, the sale of shares to the general public can take place through intermediaries. Some intermediaries, including commercial banks, financial companies, and securities companies, buy up shares of companies in their initial public offerings and then sell them on the unofficial market. Sometimes companies offer their shares as bonuses to intermediaries for their work in promoting shares in the market, and intermediaries also put these shares on open sale.

To get an actual listing on the "black" market, usually either one of its participants already recommends shares of a certain company, or the owners of companies agree with the leading firm that puts up a quote for this security (like a brokerage firm), or with the organizers of the trade. The company enters into an agreement with the market organizers, who also determine the amount of the issue fee. Then the shares are allowed to trade.

Investors can enter the "black" market in different ways.

Through leading companies. In more organized informal markets, investors can trade with leading firms. For example, at the beginning of 2003 in Chengdu market (Chengdu Techology and Property Rights ExchangeOne of the most popular companies in the country, there were about 20 participating companies. Each of them had two people on the trading floor of the market, who took part in the auction on behalf of their companies. They calculated the price of their companies ' shares and bid at auctions. Market participants, broker-dealers (usually investment or consulting companies), must meet certain requirements:

page 33

requirements set by the market organizers. For example, the Shenzhen High-tech Exchange (Shenzhen High Technology Exchange) established deposit requirements of 500 thousand yuan.

In less developed markets, investors usually trade with as a broker, which plays an important role here. Brokers usually gather on trading platforms, place ads on their tables, where they indicate the names and prices of 10-40 stocks that they represent.

Basically, brokers are divided into two types. Some work in accordance with their status - they buy and sell securities on behalf of their clients, but they do not own shares themselves. They set a commission, usually of at least 0.1% of the share price. Other brokers are engaged not only in intermediary services, but also participate in securities trading at their own expense.

The purchase of securities is also made through public auctions. Initially, auctions were held to sell non-tradable shares of listed companies, and then began to offer shares of unregistered companies. Auctions usually take place in the province where the company is located, although there are exceptions.

Some investors prefer to trade without any intermediaries, directly with friends or mutual friends. Sometimes investors trade online and then complete the transaction face-to-face.


Registration, settlement, and clearing (a cashless settlement system) of securities are essential parts of the stock trading process.

While trading in securities on the official market takes place electronically with all share certificates held by clearing and settlement and depository companies, trading on the unofficial market is carried out in the old-fashioned way.

Transactions on the black market in China are always settled in cash, so there is no need for clearing. Most transactions are registered and executed at local registration and depository authorities. For example, in Xi'an, there are 3 securities registration centers that provide custody and registration services for companies and investors in the OTC market.

In general, such centers register all shares of those companies that have signed a registration and depository agreement with the shopping center. If the shareholder agrees to sell their shares, then the seller and buyer go together to the center with identification cards, stock certificates and the amount of money required for the transaction. Then, the center enters the owner's name in the computer system and issues a new certificate to the buyer. The seller and buyer are charged an average fee of RMB 0.015 per share. Sometimes the centers do not enter changes in the name of the certificate holder, but simply record brief information about the transaction (for example, if the transaction occurs with shares of companies that entered the securities market less than 3 years after the company was formed).

In cities where there are no registration and depository centers, the transfer of shares is carried out through an endorsement*. Usually, the company name and number of shares are indicated on one side of such share certificates (for example, one certificate can be issued for 5 thousand shares). The seller signs on the back of the certificate and then transfers the shares to the buyer, who becomes their owner.


Several factors contributing to the prosperity of the informal market in China are now clearly visible.

First of all, it is an imbalance of supply and demand.

At the beginning of April 2010, despite the fact that the number of joint-stock companies was more than 9 thousand, only slightly more than 1.8 thousand companies were registered on official exchanges10. In addition, listing locations are reserved only for large companies.

Due to the limited capacity of the two stock exchanges and the huge demand for financing different industries, it is not surprising that many companies turn to the "black" market in order to attract additional capital.

Second, interest rates in China have declined markedly recently, encouraging capital outflows from the banking sector to the securities market.

Third, the difference in prices in the primary and secondary markets and the informal market, as well as the profit that can be made when the company's shares can officially be listed, attract investors to the informal market.

The black market is used by thousands of companies and tens of thousands of investors.

But it's practically out of control. Neither the ECB nor any other government agency controls this market. Most informal market companies do not disclose relevant information, pay dividends, or call annual general meetings, as required by the Companies Act. As a result, investors in the OTC market are not protected, are deprived of the right to vote, and cannot fully qualify

Endorsement form (from lat. in - on and lat. dorsum-back) - a transfer inscription on the back of a bill of exchange to certify its transfer to another person.

page 34

they do not have the right to receive full information about the companies ' activities.

According to Chinese experts, there are several ways to further develop the informal market:

Maintaining the status quo. However, this is unlikely: the supply of shares issued by medium and small enterprises is growing, as well as the demand of local investors for them.

Market closure and ban over-the-counter trading in accordance with the current legislation. This scenario is also unlikely, since the ban on OTC trading has been in place for a long time, and the government has repeatedly attempted to close unofficial markets. And since markets are generated by the demand for capital from participants, this problem is likely to continue until this demand is met.

Reorganization of informal markets into a secondary securities market organized by one or two existing stock exchanges. This is quite a possible and favorable option, given that exchanges already have the necessary trading systems and regulatory structure. This is also the most cost-effective option, since the existing and established infrastructure will be used.

Several informal markets could be transformed into a local trading center or even one or more stock exchanges with different listing requirements than the existing ones.

In the 1990s, the authorities abandoned the idea of establishing any exchange trading centers outside of Shanghai and Shenzhen. But then the stock exchanges just opened, and the securities trading system itself began to revive.

At the moment, the regulatory infrastructure of the market is mostly already in place, the ECB is already functioning, and a third or fourth securities trading center under the control of the Committee would be quite reasonable. Moreover, the creation of a new trading center would serve to further develop the financial market.

Creation of a national over-the-counter market similar to the American one NASDAQ*.

This option is already reflected in the recently created version. ChiNext. The first day of the site's operation was held on October 30, 2009 ChiNext, which became the first proprietary electronic system in China, created on the model of NASDAQ based on the Shenzhen Stock Exchange.

This is the first separate stock exchange for medium and small high-tech and rapidly developing enterprises. Its opening caused a stir among Chinese companies - on the first day of accepting applications for listing on ChiNext The Securities Management and Control Committee has accepted more than 100 applications.

Small and medium-sized enterprises specializing mainly in such innovative industries as the development of alternative energy sources, computer science, medicine, and environmental protection are allowed to register.

ChiNext It does not set requirements for the form of ownership of companies, i.e. private and foreign companies can also apply for listing on an equal basis with state-owned companies.

The financial capacity requirements of listed companies are also much simpler than those of the Shanghai and Shenzhen Stock Exchanges. So, the company's profit requirements are reduced to two main points, namely: first, the company's net income for the last two years, subject to constant growth, must reach at least 10 million yuan, second, the company's net income for the last year must be at least 5 million yuan, and the total income from commercial activity during this period must exceed 50 million yuan11.

By the beginning of July 2010, 94 companies were listed on ChiNext in such industries as information technology, electronics, agriculture, pharmaceuticals, biotechnology, telecommunications, etc.12

This was a big step towards modernizing and developing both the capital market and the economy as a whole. Opening an electronic system ChiNext China has confirmed its desire to move from the traditional model of the economy towards innovation and new technologies.

However, in general, the question remains open about the future fate of the" black " securities market with its inherent danger of financial pyramids, manipulation, deception of shareholders and other fraudulent and corrupt schemes.

NASDAQ - american over-the-counter market that specializes in shares of high-tech companies (electronics, software, etc.), with an automatic quotation system (Note: ed.).

1 Ma Shiguang. The Emergence, Development and Persective of China's Stock Market, Ashgate Publishing, 2004, p. 10 - 11.

2 China's Informal Stock Market // The Royal Institute of International Affairs. Asia Program Working Paper, No 8, 2003, p. 3.

3 Green, S. China's Stock Market, 1984 - 2002: Equity Politics and Market Institutions. Rutledge Curzon, London, 2004, p. 118 - 34.

4 Chinese Companies Act, 1993

5 China's Informal Stock Market. Op. cit., P. 5.

6 Liu Ti and Lu Xiaonan. Xi'an Tijiban Shichang Diaocha Baogao (the off-exchange stock market in Xf'an city), Shanghai stock exchange working paper, February, 2003.

7 Zhongguo ziben shichang fazhan baogao, No. 6, p 159.

8 Zhengquan Shibao, 06.08.2001.

9 Liu Ti and Lu Xiaonan. Op. cit.

10 Websites of the Shanghai and Shenzhen Stock Exchanges -,

11 Website Chinext -

12 Ibidem.


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