VZCZCXRO5778
RR RUEHCN RUEHVC
DE RUEHGH #0679/01 2951213
ZNR UUUUU ZZH
R 221213Z OCT 07
FM AMCONSUL SHANGHAI
TO RUEHC/SECSTATE WASHDC 6379
INFO RUEHOO/CHINA POSTS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/WHITE HOUSE NATIONAL SECURITY COUNCIL WASH DC
RUEHGH/AMCONSUL SHANGHAI 6862

UNCLAS SECTION 01 OF 03 SHANGHAI 000679 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD FOR JOHNSON/SCHINDLER; SAN 
FRANCISCO FRB FOR CURRAN/LUNG; NEW YORK FRB FOR DAGES/CLARK 
STATE PASS CEA FOR BLOCK 
STATE PASS USTR FOR STRATFORD/WINTER/MCCARTIN/LOI/READE 
USDOC FOR 4420 
USDOC FOR ITA/MAC DAS KASOFF, MELCHER AND MCQUEEN 
TREASURY FOR EXEC - TSMITH, OASIA/ISA -DOHNER/BAKER/CUSHMAN 
TREASURY FOR WRIGHT AND AMB HOLMER 
TREASURY FOR SOBEL AND MOGHTADER 
NSC FOR MCCORMICK AND TONG 
 
E.O. 12958: N/A 
TAGS: EFIN EINV PGOV CH
SUBJECT: SHANGHAI STOCK EXCHANGE UP 300 PERCENT IN TWO YEARS 
 
REF: A. SHANGHAI 534 
 
     ¶B. SHANGHAI 133 
     ¶C. SHANGHAI 325 
     ¶D. SHANGHAI 251 
 
SHANGHAI 00000679  001.2 OF 003 
 
 
(U) This cable is sensitive but unclassified and for official 
use only.  Not for distribution outside of USG channels or via 
the internet. 
 
¶1. (SBU) Summary: The Shanghai Stock Exchange Composite Index 
topped 6,000 points on October 15 bringing gains over the past 
two years up to 300 percent.  This growth is "good" according to 
a Shanghai Stock Exchange (SSE) official and the government 
should not attempt to set limits on where the index should be. 
Instead, the government should promote new products, laws and 
regulatory oversight that protect the interests of investors. 
Legal protections for investors are weak.  Concerns about how to 
protect retail investors from losses mean that the Tianjin-Hong 
Kong "Fast Train" investment plan is on hold, but short selling, 
margin trading, and a stock index futures product will be 
introduced soon.  The SSE will not be interested in swapping 
equity with the Hong Kong exchange until it is privatized, but 
it is also being courted by other international exchanges. 
Non-Chinese companies that might want to issue a primary or 
secondary listing on the SSE will need to wait until competing 
Chinese agencies agree on a legal framework and China's foreign 
exchange controls are lifted.  End summary. 
 
¶2. (SBU) Shanghai Stock Exchange (SSE) Assistant to the 
President Dr. Que Bo, noting that the Shanghai Composite Index 
closed over 6,000 points for the first time on October 15, told 
Econoff on October 19 that the SSE's management has been 
"surprised" at the 300 percent increase in the market over the 
last two years (ref A).  "Over the past two years many things 
have been unexpected.  We expect more unexpected things to 
happen in the future," he said.  According to Que, all this 
growth is "good" and the government should be happy to see the 
markets going up.  While there have been official government 
media stories talking down the markets, as happened in February 
and June (refs B & C), the SSE thinks that the government should 
not interfere with the market to maintain a certain index level. 
 Instead, the government should focus on promoting better legal 
and regulatory infrastructure and encourage new products such as 
futures, short selling and margin trading in order to better 
protect investors. 
 
--------------------- 
A Share-H Share Swap? 
--------------------- 
 
¶3. (SBU) Que said that China Security Regulatory Commission 
(CSRC) Vice Chairman Tu Guangshao's widely-reported October 17 
remarks that CSRC was considering permitting the exchange of 
mainland-listed A shares and Hong Kong-listed H shares had been 
"completely misunderstood" by reporters.  Que clarified that 
CSRC's Tu had been referring to a swap of equity between the 
Hong Kong and Shanghai Stock Exchanges.  This swap of equity was 
an "unilateral wish" on behalf of the Hong Kong stock exchange 
since the SSE has neither the ability nor the desire to swap 
equity with any stock exchange at this point.  The Hong Kong 
government is afraid that with international exchanges buying 
each other up, the same thing might happen to their exchange. 
As a result, they are trying to "pre-empt" this from happening 
by buying up enough of the Hong Kong exchange so that "the 
Japanese Stock Exchange couldn't own it." 
 
------------------------ 
SSE's Dance Card is Full 
------------------------ 
 
¶4. (SBU) While the SSE was ignored by the world's exchanges for 
its first 15 years, in the past year it has been heavily courted 
by stock exchanges from around the world, including NYSE, 
NASDAQ, London, Nikkei.  They are all interested in partnering 
with and acquiring some of the SSE.  The SSE, however, is still 
government-owned.  While most SSE staff would like to see it 
privatized, it will be "5-15 years" before the regulators feel 
comfortable enough to let this happen.  The SSE needs to improve 
its own management capabilities, human resources, and bring 
 
SHANGHAI 00000679  002.2 OF 003 
 
 
itself up to international standards before this will take place. 
 
--------------------------------------------- ---- 
Tianjin-Hong Kong 'Fast Train' -- Off the Tracks? 
--------------------------------------------- ---- 
 
¶5. (SBU) Que said that the much-ballyhooed Tianjin Bank of China 
- Hong Kong "Fast Train" proposal to allow Mainland investors to 
purchase stocks on their own accounts on the Hong Kong stock 
exchange is not likely to happen anytime soon.  Recent success 
of new Qualified Domestic Institutional Investor (QDII) 
products that invest in Hong Kong and elsewhere have 
accomplished the goal of starting to move money out of China in 
a way that looks safer to the regulators than letting retail 
investors make their own decisions about stocks in Hong Kong. 
Que expects more delays and backtracking on this issue before it 
is finally derailed over regulatory discomfort with the risks 
involved to individual investors. 
 
------------------------------ 
Short selling -- In Place Soon 
------------------------------ 
 
¶6. (SBU) Regulatory approval to allow Chinese investors to 
engage in short selling of stocks "will definitely be in place 
soon, possibly by the end of this year."  Que said that both the 
SSE and stock brokerages are "technically ready" to handle short 
selling.  The decision on timing will be made by the CSRC who 
are apparently concerned that they do not understand the effects 
that short selling will have on the market.  The CSRC hopes to 
time their decision so that it would "not destabilize the 
markets."  Que added that margin selling is another innovation 
that will be introduced after the markets have adjusted to the 
expected launch of the stock index futures product. 
 
-------------------------- 
The Futures Is Also "Soon" 
-------------------------- 
 
¶7. (SBU) Que dismissed rumors that the stock index futures 
product could be launched as early as November, saying State 
Council approval is necessary and they are not ready to give it. 
 He said that while the China Financial Futures Exchange (CFFEX) 
is ready to launch its first product -- a stock index future -- 
it is not likely to happen until the beginning of next year (Ref 
D).   (Note:  Mutual fund managers tell Econoff that not having 
this index fund hurts their ability to hedge risks and keep up 
with the market.  The Chinese government is concerned that a 
stock index future product would destabilize the markets 
further.  End note. ) 
 
--------------------------------------------- ------- 
Regulatory & Legal Framework: Implementation is Weak 
--------------------------------------------- ------- 
 
¶8. (SBU) Protecting investors continues to be one of the SSE's 
major goals.  Que said that the SSE's Surveillance Department is 
"incredibly busy" with daily reports about insider trading and 
other irregularities.  While all of these tips and complaints 
are sent to the CSRC for further investigation, most are not 
investigated since the CSRC lacks the staff to follow through. 
China has lots of laws and regulations designed to protect 
investors, but its implementation of these laws is weak. 
China's legal structure contributes to this weakness since it 
does not depend on case law for precedents.  Each case is 
decided by the courts based on their own interpretation of the 
law.  The markets have grown and changed too rapidly for judges 
to keep up with those changes, said Que.  Last year some 
investors tried to sue a company for violating their rights -- 
the case was not accepted by a judge on the basis that investors 
had never sued a company in China before. 
 
----------------------------------- 
Overseas Companies Listing in China 
----------------------------------- 
 
¶9. (SBU) There is currently only one non-Chinese company listed 
on the SSE -- a Japanese company.  The SSE would be very pleased 
 
SHANGHAI 00000679  003.2 OF 003 
 
 
to have other non-Chinese companies list and in fact has been 
talking with Mercedes-Benz about listing since 1993.  Que said 
that recently both HSBC and Siemens have expressed interest in a 
secondary-listing on the SSE.  However there are significant 
regulatory and legal hurdles that need to be overcome by the 
CSRC, the Ministry of Commerce, and the State Administration of 
Foreign Exchange.  Que did not think it likely that these 
problems could be overcome in the near future -- especially 
given the context of China's capital controls. 
JARRETT