SHENZHEN - Like its economy, China's stock
market has unique Chinese characteristics.
Allowing children to hold shares in enterprises
and trade in publicly-listed stocks is one of
these and this policy has exposed a gray area in
China's legal system which is now drawing
increasing public attention.
In the past
couple of years, a lot of Chinese have been able
to make money in its booming stock market. The new
tycoons are not only adults, but include children
as young as five years old.
The Bank of
Beijing, the largest city commercial bank in China,
attracted a lot of attention
after it went public recently. Not only because
its September A-share initial public offering in
Shanghai saw the price doubled on the first day of
trading, but also because the list of its major
shareholders, released as required when it went
public, showed that 84 of them were minors under
the age of 18.
The top shareholder, with 5
million shares, was identified as Wu Zhengpeng who
was born in 1984 and was just 13 years old when
the private shares were issued in 1997. The 13th
on the list was Zheng Yu Xuan, who was born in
1997. Zheng holds 1.3 million shares that were
issued in 1998. Their parents (or legal guardians)
were not identified.
The share price of
the Bank of Beijing was 1.9 yuan (US$0.27) a share
in 1997 and is now about 20 yuan per share.
Together the two underage own more than 100
million yuan worth of shares.
A lawsuit
settled this summer in Shanghai drew national
media attention when two sisters, a five-year-old
named Fangfang and a six-year-old named Tingting,
were each granted a 22% stake of the Shanghai La
Ye Fa Investment Company following the divorce of
their parents and a subsequent disagreement
between the two ex-spouses, identified only as Ms
Su and Mr Li in national Chinese media, over the
distribution of the shares.
Shanghai La Ye
Fa was founded in 2003 with a registered capital
value of 30 million yuan and the parents, along
with their Wenzhou La Fa Ye Company, owned a 100%
stake in the Shanghai firm at the time.
In
China, where it is also legal for minors over the
age of 10 to own properties in their own names,
the regulations are hazy and sometimes not
uniformly enforced when it comes to stock trading.
For instance, if stocks are bought in a minor's
name, there are no uniform regulations saying that
the adult's must completely identify themselves.
Liu Jipeng, a professor with the Law and
Economy Research Center under the China University
of Political Science and Law, said the law
stipulates a person under 18 cannot open a stock
account and trade in stocks without the consent
and guidance of a parent or a legal guardian. In
the case of the Bank of Beijing underage tycoons,
there are irregularities in some of the records
which fail to clarify clear who the guardians
might be. In some cases only surnames were
provided, Liu said.
"If the Bank of
Beijing has underaged shareholders, the guardians'
information should be disclosed," he said. "It is
not a normal phenomenon to have underaged
shareholders. Children are not capable of
intelligently evaluating stock market risks. It is
a risky action for even adult investors."
According to the Legal Daily newspaper Ma
Hongman, an economic commentator for Shanghai TV
said that "the children shareholder" phenomenon is
a challenge to the Chinese stock market management
system and it is important for a public company
such as the Bank of Beijing to be transparent and
meet international standards when it goes public,
especially when it has a large number of underage
shareholders.
Ma said that these underage
holders must have identified adult parents or
guardians behind them.
"The basic rule is
that a person who is over 18 years old is
considered an adult capable of making adult
decisions, such as trading in stocks or buying
real estate," Ma said. "Anyone aged between 10 and
18 is considered a minor who can engage in certain
civil activities suitable for his age and
intelligence. For example, if a baby inherited a
house from his grandparents and if he has a stable
income when he is 16, he then has the rights for
the disposal of the housing. Anyone under 10 years
old has no such civil rights."
Guo Danze,
general manager of Shenzhen Jia Xin Da Holding
company, told Asia Times Online that he bought
10,000 A shares of China Southern Airlines stocks
in his 16-year-old son's name three months ago to
teach him how to play with the stock market.
"We trade online together," Guo said. "I have
some experience dealing with stocks, so I am not
very afraid of the China stock market's bubble
bursting. It has gone up 39% since this
September."
Tan Xiaojian, a lawyer who
specializes in economic law for the Shenzhen
branch of the Shanghai Jian Wei law firm, told
Asia Times Online, "There are two different
circumstances: One is where guardians or parents
use their own money to buy stocks for the minors.
The other is where the guardians use a minor's
personal assets to buy stocks in the name of the
minors.
"In the first circumstance, the
minor is accepting the stocks [as gifts]. It is a
pure beneficiary contract. It is effective and
legal. The second circumstance involves guardians
controlling the minor's assets. In order to
protect the minor's rights, general provisions of
the civil law say that guardians cannot process a
minor's assets unless it is for the minor's
benefit.
"But no matter which way it goes,
though, the minors must be able to receive the
stocks, as long as their guardians can prove that
it is for the benefit of the minors. To do so, you
need to reveal the guardians' full information and
identity, but unfortunately, under Chinese law
there are no specific regulations."
Some
people are worried that the gray area in the
current legal system might be abused by some
adults making use of their children to engage in
some illegal activities such as money laundering
or tax evasion.
Tan said the lack of
transparency when it comes to the adults behind
the child investors indeed leaves the system open
to abuse. "It is possible that some adults might
commit illegal activities in the names of minors.
China's legal system is still under construction.
There is a lot we still need to do to improve it.
We should suggest that to the National People's
Congress."
Zhong Hongxuan, senior manager
of China Merchant's Securities Firm, told Asia
Times Online that the current system has already
suffered from abuses such as some individuals
trading in stocks in another person's name -
sometimes a child's - without the person's
knowledge.
"It was happening frequently
that people were using other people's identities
to trade in stocks without letting them know.
However, since we imposed a triple-identification
system, in which the investor's ID number, his
stock account number and his bank account number
must be confirmed, things have improved," Zhong
said.
"People who are 18 or older can
trade in stocks through our firm. I haven't seen
any problems yet. But I think we should improve
the Securities Law to avoid unnecessary problems
in advance," Zhong said.
Catherine
Jiang is a freelance writer based in Shenzhen,
China.
(Copyright 2007 Asia Times
Online Ltd. All rights reserved. Please contact us
about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
