Meddling in the markets
China's two domestic securities markets, in Shanghai and Shenzhen, were originally established by the central government in 1990 and 1991 respectively to replace unofficial local exchanges that had emerged across China largely unnoticed and wholly unregulated by the authorities. The overriding rationale for summoning them into existence was to fund the government's bail-out of sick state-owned enterprises (SOEs): not the healthiest, but the least healthy.
"The purpose in the beginning of China's capital markets," says Bao Fangzhou, attorney at law at AllBright Law Offices in Shanghai, "was largely the need for the state to raise capital – unlike in a mature market, where good companies get listed. Many of the companies listed in the early days listed because the government believed there was no other way to finance them."
Regulations stipulating the need for new listings to sport a track record of profitability did not deter companies and their advisers. Track records were artificially created by piecing together good assets that were then restructured into a new holding company: hardly the sort of process that creates viable, quality companies.
To start with, this did not appear to be a problem.