China's toddler tycoons
By Catherine Jiang

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.

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