Speech by SEC Chairman:
Remarks before the Securities Industries Association/Tsinghua University Conference
Chairman Christopher Cox
U.S. Securities and Exchange Commission
October 18, 2005
Good afternoon. It is a pleasure to once again be here in China.
For most Americans who visit China, on business or as tourists, the dramatic changes in this country can be measured even within the time frame of our own experience. For me, it has been 20 years since my first visit. And now, on my fourth trip, it's more clear than ever how rapidly things are modernizing.
It's a striking feature of this city that China's imperial past and its modern present exist side by side. As you glance across Tiananmen Square to the entrance of the Forbidden City, it is amazing to think that it was less than 100 years ago that the Qing still clung to power inside that compound.
It wasn't until the 20th century that their dynasty collapsed-because it remained impervious to events in the outside world-and China had yet to live through World War II and the Cultural Revolution that would take their toll.
But the last quarter century has been a completely different story. Thanks to the economic policies that have been implemented over the past 25 years, China is now an integral part of the world of trade and finance. Today, the Treasuries held by the PBOC are worth more than all the gold in Fort Knox. Much more.
And when, as we all hope, China directs its newfound investing power to help its domestic economy expand, it will increase the purchasing power of this vast population by orders of magnitude. This will benefit China and the global economy.
China's vast population, and its very name-the People's Republic of China-serve as constant reminders of the importance of placing people first. From America's earliest days, our Founding Fathers understood the value of thinking of the people first. That's why they announced their intentions to the world by starting the Preamble of our Constitution with the words "We the People."
It is for this very reason that the first responsibility of our government's capital markets regulators is to the people. We are charged with protecting investors. The investor is at the heart of what we do. The SEC and the CSRC have a strong interest in working together to protect investors in our capital markets. That is why I am particularly pleased that Chairman Shang and I have agreed to establish a formal framework for our dialogue and a timetable to execute this agreement by early next year.
I think everyone here today would agree that China's emergence as a participant in the global economy is transforming international finance. Chinese companies have begun tapping U.S. securities markets, the most sophisticated, liquid and deep in the world. And China's initial interest in Treasuries is now turning to equity stakes in American companies.
The CSRC and the SEC have a key role in facilitating this evolution, through rules that promote high quality disclosure, fair and orderly markets, and efficient capital formation. Together with vigilant enforcement, this will help insure that investors get the information they need to make sound decisions.
China's equity markets are new-barely 15 years old. There has been remarkable progress, and there is still much to do. As China focuses on the establishment of improved corporate governance, strengthened accounting standards, and the broader issues of investor confidence, America and the SEC stand ready to help.
Already, we have trained hundreds of Chinese securities regulators and other officials in Beijing and in Washington, in subjects ranging from money laundering to insider trading to market manipulation.
And there is much more to do. In particular, as Chinese companies prepare to issue securities to American investors and in markets around the world, there are three key areas on which we need to focus. These three areas, which are critical to a well-functioning capital market, are shareholder democracy; access to material information; and tough, independent regulation.
Let me briefly address each of these.
First, shareholder democracy. The reason that this ingredient is so important is that it goes to the core of investor confidence, which is the underpinning of a healthy capital market. Genuine shareholder democracy insures that the rights of every individual investor are protected.
Every shareholder has to know that his or her economic interests will be protected both by corporate management and by the legal system.
When shareholders seek to promote reforms, and to improve efficiency and corporate accountability, their efforts must be respected, not thwarted. That has to be true whether or not those owners have minority interests, or controlling stakes.
China's progress in transforming state-controlled or state-affiliated companies into genuinely private enterprises will be key to determining whether Chinese companies ever have genuine shareholder democracy.
But today, the Chinese government's ownership and control of the vast majority of the 1,400 companies traded on China's markets means that we have a long way to go before investors will be able to vindicate their rights through shareholder democracy.
There is a simple reason that direct or indirect state control undermines shareholder democracy and makes investors wary. So long as a supposedly commercial enterprise is controlled by the state, the investor has to ask: "Will the behavior of this company be motivated strictly by economic considerations of profit and loss? Or will it instead be driven by political considerations?"
The same thing is true in the case of proposed acquisitions by state-controlled companies. The question naturally arises: will the state-owned company direct its affairs according to market motives, or in furtherance of the government's foreign policy objectives?
I should add that this is not a special consideration that applies uniquely to China, but also to other governments around the world.
Let me state emphatically that we welcome foreign investment in America. That's why China's Lenovo Group now owns IBM's personal computer business. And it's why Chrysler, once considered a jewel in the crown of American industry, is now a German company.
But I needn't remind you of the opposition that partially state-owned Deutsche Telekom received in the U.S. Senate only a few years back when it sought to buy U.S. long-distance giant Sprint, and mobile telephone company Voicestream.
And when the French government-controlled Thomson-CSF tried to snap up LTV's missile unit, opposition came from the Pentagon, Congress, and the media on national security grounds-even though France is a member of NATO and even though LTV was in Chapter 11.
The list goes on. This is not a China problem, but rather a question of genuine market actors versus state-controlled entities.
Markets function best if the participants have market motives. And the existence of shareholder democracy helps insure that this is so.
In China's case, the best way to address this problem is head-on. We have to acknowledge that government control is an impediment to genuine shareholder democracy. And without shareholder democracy, China will be missing one of the key ingredients for a successful capital market.
The second ingredient of efficient capital markets-access to material information-is closely related to shareholder democracy. Investors need as much information as possible about the firms in which they invest.
Private companies, unlike national governments, can be forced by regulators to disclose key information to shareholders. This is not necessarily true of state-owned companies. As a result, investors in state-controlled companies are reasonably concerned that they may lack the necessary material information to make informed decisions.
In China's case, its broadly applied limitations on access to information in the media serve to amplify these concerns. Perhaps no other single issue puts such a serious crimp in the ability to do business with China. Restrictions on news and information-including information about the very government that controls the companies in which investors are being asked to put their money-obstruct the transparency that investors and efficient markets demand.
Today's highly competitive global capital markets require that information travel freely and instantaneously. Any restrictions on access to information-in the press, in the electronic media, and on the Internet-are a serious obstacle to our shared mission of investor protection.
Eliminating restrictions on access to material information is essential for the success of Chinese issuers and markets, and for the protection of investors. We've got to work together to address this challenge, lest we all find ourselves facing the same destiny as the Qing.
The third ingredient-tough, independent regulation-is what we do at the Securities and Exchange Commission. And it is absolutely essential to the maintenance of investor confidence.
Here again, the issue of state-owned versus private companies is of central importance. For regulation to be truly effective, it must be arm's length. It must be independent. If the regulator and the regulated are one and the same, there is an inherent conflict of interest.
China has everything to gain from the establishment of tough, independent securities and market regulation at home, and compliance with tough and effective standards abroad. China's company directors should recognize that their willingness and ability to meet America's high regulatory standards will inspire investor confidence.
Our requirements have always been tough, and it's true that we have raised the bar even higher since Enron and WorldCom.
I know that Sarbanes-Oxley, and its heightened requirements and increased liability for executives and directors, has gotten the attention of people here. Believe me, it's gotten the attention of people on the other side of the Pacific, too-which is of course the reason we added these requirement in the first place.
Despite these concerns, we have already had dozens of Chinese securities offerings in the United States, including China Life Insurance, Petrochina, and China Telecom. But it would appear that many other Chinese companies are seeking to avoid higher regulatory standards by not listing in the U.S.
This year, there has been a significant drop in the amount of money Chinese companies have raised in the United States as compared to last year.
The truth is, no honest company need worry that the bar is too high to list in America. It is precisely because our markets are the gold standard that listing in the U.S. remains the benchmark of investor confidence for companies around the world.
Going through the listing process in the U.S. will improve Chinese company disclosure practices. And this will serve to achieve China's objective of upgrading the governance of its firms. That, in turn, will benefit every investor, saver, and worker in China.
Chinese technology companies, in particular, will benefit from listing on U.S. exchanges that focus on technology issues. This will expose them to a remarkably broad range of expert research coverage, and bring their game up to a different level. It will help make them more competitive worldwide.
Listing on American exchanges can provide the same benefits to China's banks. As they prepare to list on foreign exchanges, it's interesting to see that many of them are selecting American firms to be their lead underwriters and financial advisers.
I know from my conversations with Chairman Liu of the CBRC this morning that China is even now considering whether its bank IPO's will come to market. As I made clear in that discussion, we welcome these listings on our exchanges.
Tough, independent regulation-in China and in the United States-is the bedrock of investor protection, and the sine qua non of an efficient capital market.
In my view, our two nations have but one wise course, and that is to work together to ensure that these three ingredients are present in both of our markets. We can learn from each other, and help each other.
The 19th century French liberal thinker Frederic Bastiat observed that commerce between nations is the best assurance that their relations will be harmonious. Bastiat was clear that while tariffs and protectionism foster poverty and international jealousy, trade encourages both prosperity, and friendship.
Nowhere is this more true than in the case of our capital markets.
Millions of Chinese who have adopted the United States as their home have contributed mightily to the growth of America. Today, many Americans-and many of the people in this room-are here helping to build the New China. Each of you is a better ambassador than any government official in either of our countries. We are all benefiting from your commitment.
The Qing rulers who closeted themselves in the Forbidden City and ignored events outside their self imposed borders have shown us what happens when we view one another as lao wai.
We've got to keep our sights on the well being of the people - and if we do, there's no question we'll succeed. Every Chinese and every American has a stake in our working together.
The answers to all of the challenges we face can be found right here in this room, with all of you. Thank you for your leadership in building this friendship.
Every one of you is already working to make certain that our future is one of cooperation, growth, and mutual understanding.
Your example is an inspiration-and because of your dedication to the Sino-American relationship, our two countries, and the world, will be a far better place.