Since the financial crisis in 2008, the Chinese securities market turns out to be bleak. Specifically, the Shanghai Composite Index declines from over 6000 to 2200, which makes the medium and small investors suffer heavy losses. Consequently, people from all walks of life criticize the current securities market and claim perfection of the protection mechanism of vulnerable investors, which will lead the market to develop on a sound track. With the establishment of the Shanghai Stock exchange taking the example of America on 19th December 1990, China started to make great efforts to build a legal system for regulating the securities market(Yan Gao,2003).However, the illegal behaviors in the securities market continue to be a severe issue. For example, insider trading and market manipulation. Compared to the Chinese securities market, the vulnerable investors' rights and interests are protected effectively in the US securities. Thus, this essay will firstly analyze the definition of vulnerable investors in securities market and the significance of protecting them. Secondly, it will show the current status of the mechanism of protection vulnerable investors in securities market in China. Lastly, based on the USA securities market, the essay conducts an analysis of education and legislation in securities market of China.
Mechanism of vulnerable investors protection
Definition of vulnerable investors Relative to institutional investors, the vulnerable investors are more vulnerable to the capital, the information, effect of psychological biases and grab essential events, for example, market return shocks (Kaniel et al., 2008; Barber and Odean, 2008).However, it doesn't means that every vulnerable investor is vulnerable to all fields. One may be vulnerable to one or more parts. In summary, our vulnerable investors are vulnerable to main three points, as follows.
2.1.1 Asymmetric information Vulnerable investors are poor indicators of future stock returns because of limited information, at least in the short-run (Brown & Cliff, 2011), while some institutional investors or large shareholders possess any superior or above-average information to indicate future market developments.
2.1.2 Lack of capital On 8th February 2012, Chinese Stock Paper and Sina Finance and Economics jointly promulgated the result of investors survey in Chinese securities market (http://survey.finance.sina.com.cn/result/64210.html),which shows that the percentages of individual investors' lunar income which are under 2000 RMB and 2000-5000 RMB are 15.8% and 50.3%, respectively, that the percentages of investors' capital scale in securities market are under 100000 RMB and 100000-300000 RMB account for 36.9% and 31.7% respectively. Therefore, both income level and capital scale of some individual investors are significantly lower than that of institutional investors or large shareholders.
2.1.3 Lack of knowledge of securities Some individual investors lack the knowledge of securities, which mainly presents the ability of risk analysis and acquiring information from financial statement. Specifically, the percentage of our vulnerable investors who make decisions based on the recommendation of stock analysts, introduction of relatives and friends and grapevine shows 62.3% (Yin Haiyuan & Li Zhongmin,2011).Compared to individual investors, institutional investors invest a great amount of human, financial and material resources in the securities market.
2.2 The significance of protecting our vulnerable investors Referring to the USA, it is an economically developed country. However, why do people think that? This is because the country obtains sustainable economy development, to some degree, which benefits from steady development in securities market in several decades. As for the stable development of the securities market, it profits from vulnerable investor protection. As for China, on 14th February 2011, Japan government claimed that Japanese nominal GDP for 5.4742 trillion dollars in 2010, which is less than China (http://finance.sina.com.cn/j/20110214/08519369574.shtml).Therefore, China became the second largest economy in the world, to some degree, which may benefit from the prosperity of securities market from 1990 to 2008.Moreover, in 2011, China Securities Regulatory Commission Investor Protection Agency claimed that it is essential and necessary to protect vulnerable investors in order to stabilize the securities and boost the development of economy. Therefore, referring to historical experience, perfecting the mechanism of protection vulnerable investors could prevent vulnerable investors' interests and rights from violating to a great extent, maintain the stability of the securities market and boost steady development of national economy.
The current mechanism of vulnerable investors protection With the development of securities market within 21 years in China, vulnerable investor protection is beneficial from three aspects, as follows.
3.1 The supervision of China government to securities market At present, China Securities Regulatory Commission is responsible for supervising securities market, which includes the work of investor protection, organizational guidance, supervision and inspection, establishing and improving regulatory policy system of investor protection, coordination of various sectors, education services. Although China government makes an effort to protect vulnerable investors, the result is not positive as it thought. Specifically, on the one hand, some regulators don't perform their duties, while on the other hand, there is the rent-seeking space makes some offenders implement bribery successfully. Thus, vulnerable investors' rights and interests are violated.
3.2 Vulnerable investors protection in legislation aspect Since the establishment of securities market in China, the legal system construction has made great efforts to protect vulnerable investors, such as Company Act and Securities Act. However, some drawbacks exist in the securities market. For instance, rules are not fine, penalty is too low and the execution is inefficient, which is equivalent to encourage potentially illegal behaviors. So, China should make more efforts to perfect its law system.
3.3 Protecting vulnerable investors from some agencies In 2005, in order to protect vulnerable investors, China government established a wholly state-owned protection fund company. Furthermore, in the end of 2011, China Securities Regulatory Commission Investor Protection Agency was established, which claims its next direction is to establish investors' dispute regulation and arbitration mechanism. It can be seen that relative to institutional investors vulnerable investors have a significant number of disadvantages so that we should perfect investor protection mechanism to give all investors fair trade opportunities.
Analyzing both educational and legal aspects of mechanism of vulnerable investors protection As above analyzed, vulnerable investor protection mechanism is insufficient. However, some drawbacks could not be improved because they are inborn issues. For example, asymmetric information caused by impersonal reasons which are channels of acquiring information and busy jobs. Therefore, this essay analyzes two aspects, including investor education and legislation, in order to improve the quality of vulnerable investors, the efficiency of law enforcement and the punishment level of illegal behaviors.
4.1 Analyzing educational aspect There is a survey about investors' culture in 2011 (Yin Haiyuan and Li Zhongmin, 2011). See the Figure 1. Figure 1 the distribution of investor culture by research According to the above figure 1, it shows that the percentage of investors with bachelor degree or above is the least one of the total, accounting for only 11.7%, the percentage of investors with junior college degree represents 21.9%, the percentage of investors with below junior high school degree makes up 16.6% and the percentage of investors with junior high school degree presents almost 50%.Furthermore, In China, individuals who are little understanding of financial knowledge, represent 60% to 80% of trading in the securities market (James, 2007). Therefore, the percentage of individuals who are with junior high school or lack financial knowledge is very large, which suggests that it is urgent to improve investor education. At present, Chinese investor education led by Securities Association of China is a top-down leading education mode. Although this kind of mode plays an essential role in early, with the development of securities market and an increasing number of individual investor there are various problems, which are caused by the activities of securities agencies' investor education related to economic benefits that reduce the activities' objectivity, accuracy and fairness and finally reduce the effect of the investor education (Zhang Yi, 2010). Therefore, we need a new way to make up the deficiency of the dominant mode. China could take an example from the USA securities market. It is the third party education that is an organization which is not related to securities regulatory, transaction settlement department, securities business institutions and investors so that the organization is not related to the interests of investors (Zhang Yi, 2010). The third party education may be education institutions, research institutions or professional third party educational agencies so that it is able to teach vulnerable investors actual and beneficial knowledge. Importantly, investor education may be dominated freely by market in the future (Zhang Yi, 2010). See the Figure 2. Supervision Agency Securities Third Agency Party Investors Securities Third Agency Party Investors Supervision Agency Securities Agency Investors The Future The Current The Improved Figure 2 the changes of investor education
4.2 Analyzing legislation aspect Although investor education could improve the securities knowledge of vulnerable investors in personal aspect, we ought to perfect the impersonal environment of securities market, especially legislation in the securities market. Because if we don't build a rational and specific regulatory framework in order to ensure good governance and prudent management of the institutions that will serve investor, both microeconomic and macroeconomic objectives could not be achieved (Yongbeom, 2003). Therefore, the following part will analyze the legislation in securities from the four aspects in order to improve the legal system to ensure that the securities market gets a healthy and long development.
4.2.1 The influence of government China is the public ownership playing a dominant role and diverse forms of ownership developing side by side country so that the proportion of the state-controlled enterprises in the stock market is high. But numerous state-owned listed enterprises' largest shareholders are market regulators (Zhang Yi, 2010). Moreover, the level of securities market supervision system in an enterprise closing to the government in China is weak while the supervision level in a company which is not close to government presents effectively (Berkman et al., 2008).Therefore, China government ought to perfect the law to separate government functions from enterprise management to protect vulnerable investors.
4.2.2 The relationship between securities market and law Perfecting legislation ought to follow the changes of the securities market. In China, the reason why numerous securities market cases could not be accepted directly is incomplete law, including unspecific content of law in securities market and unable to keep up with the changes of the market. For example, listed and delisted supervision. On March 3, 2012Â¼Å’according to the "Jiu San Society" central datum(http://www.93.gov.cn/news/index.shtml), it shows that the percentage of listed companies in the NASDAQ stock market in the USA reduced by 13.08% within three years while the percentage of delisted company within 21 years in China accounted for only 1.82% of the total number of listed companies. However, people may question why financial crisis happened in the USA where the legal system for protecting investors is effective? Because it is difficult for the lawmakers of a country to foresee all possible events in the future so that current law may not be accurate and detailed to prevent investors from potentially illegal behaviors, to fully reflect the social and economic changes in the environment (Berkowitz, 2003). Therefore, China government ought to perfect in time its law in securities market when the new illegal behaviors happen.
4.2.3 The punishment level for illegal behaviors In 2003, the case of "YinGuangXia" erupted, the result of the case was major parties were imprisoned for three years and fined up to 100000 RMB. On July 3, 2010, the case of "Zijin mining" pollution exposed, the punishment result was the listed company was fined up to 9.56313 million RMB. It is obvious that violated investors didn't get compensation instead of paying for the enterprise pollution. Therefore, such punishment to the parties of illegal cases is not important, but to the vulnerable investors is really hurting. As for the USA securities market, the punishment for illegal behaviors is strong. In 2005, the SEC opened $1.8 billion tickets to the market illegal offenders (Liu Bailan, 2011). Therefore, relying on such a strict supervision, the USA securities market is active. Learning experience from the USA securities market, China government may reinforce the punishment level of illegal behaviors in order to deter the potentially illegal criminals to commit crimes.
4.2.4 The efficiency and strength of law enforcement personnel China's law enforcement level is far lower than the world level (Ball, 2005). Importantly, China is in the economic transformation period so that enhancing the efficiency and strength of law enforcement for protecting vulnerable investors is particularly essential. At present, the law enforcement level in China is inefficient. For example, the case of "PT Red" about listed fraud was ultimately rejected by the court because of the pressure from local government. In the United States, although "ENRON" has a strong relationship with the Bush administration, it still cannot escape the fate of the legal sanction. Moreover, on July 16, 2010, the United States Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, one part of which sets a time limit in order to improve the efficiency and strength of law enforcement personnel. More precisely, once the SEC law enforcement officials announce to implement a law enforcement action, execution should be implemented in 180 days. Besides that, once the SEC inspectors and law enforcement personnel complete the assessment and examination, the executive law personnel will correct action or release processing results in 180 days (Public Law 111-203, 2010). Therefore, China government could limit the time of law enforcement personnel dealing with cases for protecting vulnerable investors to be successful.
In conclusion Based on the above analysis, we can come to the conclusion that the vulnerable investors actually exist in the securities market in China and the percentage of them is very high. Particularly important, relative to institutional investors and large shareholders, vulnerable investors are so weak in impersonal and personal reasons. Then, based on analyzing investor education and legislation in securities market ,although illegal cases in securities market in China still emerge after financial crisis, we believe that investor protection mechanism could be enhanced by strengthening investors' investment ideas, setting up correct investment attitude, pushing to reduce administrative intervention, making legislation keep up with market and strengthening the law punishment and law enforcement efficiency so as to establish to the effective mechanism of vulnerable investor protection. Surely, further research into the mechanism of vulnerable investor protection is needed. (Words count: 2376)