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Education and Service, Education and Service, Supervision and Protection: Supervision and Protection: Four-in-One to Vigorously Four-in-One to Vigorously Develop the Team of Qualified Develop the Team of Qualified InvestorsInvestors

President of Shanghai Stock Exchange

Zhang Yujun

July, 28th, 2008

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Introduction: Brief Analysis of the Characteristics of Investors

Conclusion

Contents

First, to enhance the investor education by innovating the approaches  Second, to develop the investor service based on the analysis of their demandsThird, to conduct the supervision over investors with fresh ideas  Fourth, to improve the investor protection by putting the system first

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Introduction: Brief Analysis of the Characteristics of Investors

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Characteristics of the structure and conducts of investors(1)

1. The number of individual investors’ accounts has increased, while their proportion in total cap has declined every year; The proportion of institutional investors’ accounts in total market cap has steadily increased year by year.

2. Individual investors especially small-sized ones prefer small cap stocks and ST stocks; Institutional investors prefer larger cap stocks.

3. Although equipped with less investment experience, individual investors prefer high-risk securities that may bring huge profits.

4. Individual investors prefer stocks with high P/E, neglecting the intrinsic value of stocks.

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5. Overall profitability of individual investors has increased with the enlargement of the investment scale, but is still lower than that of institutional investors at the same period.

6. The corresponding proportions of stocks with different up/down ratio in the portfolios of individual investors remain constant; For the institution investors, just the opposite. The institutional investors are capable of picking the right stocks in a bull market.

7. Individual investors trade actively with a turnover rate about 2-4 times that of institutional investors.

8. Individual investors and institutional investors trade adversely.

Characteristics of the structure and conducts of investors(2)

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Figure 1: Change of market cap held up by individual and institutional investors

66.7%

55.4%

46.6%

33.3%

44.6%

53.4%

49.6%

50.4%

30.0%

35.0%

40.0%

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

2005 2006 2007 2008 5前个月

个人投资者 机构投资者

Individual investors prefer stocks with high P/E, neglecting the intrinsic value of stocks.

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Figure 2: Percentage change of various periods of investment for the investment scale of less than 100,000 RMB

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 5年前 个月

10 年以上6 10 ～ 年2 6 ～ 年

2 小于 年

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-200

-100

0

100

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700

2005.1 2005.5 2005.9 2006.1 2006.5 2006.9 2007.1 2007.5 2007.9 2008.1 2008.5

0

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7000

10小于 万（亿） 10 100～ 万（亿） 上证指数

Figure 3: Cash amount for net purchase of individual investors with an investment of less than 100,000 RMB or between 100,000 to 1 million RMB

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-750

-500

-250

0

250

500

750

1000

1250

1500

2005.1 2005.5 2005.9 2006.1 2006.5 2006.9 2007.1 2007.5 2007.9 2008.1 2008.5

0

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7000

投资基金（亿） QFI I（亿） 上证指数

Figure 4: Cash amount for net purchase of investment funds or QFII members

Finding based on the comparison between Figure 3 and Figure 4:

Individual investors and institutional investors trade adversely.

In the year of 2007 and 2008, individual investors were the net seller,

while institutional investors were the net buyer in the market.

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Figure 5: Individual vs. Institutional: Change of proportions of stocks with different up/down ratio in the portfolio(2005-2008)

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005年 2006年 2007年 2008年前5个月

（个人投资者）低涨幅类 （个人投资者）高涨幅类（机构投资者）低涨幅类 （机构投资者）高涨幅类

Individual investors and institutional investors prefer stocks with different up/down ratio

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0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2005年 2006年 2007年 2008 5年前 个月

10小于 万元 10~100万元 100~500万元 500~1000万元 1000大于 万元（含）

Figure 6： Percentage change of stocks with low up/down ratio in the portfolios of individual investors

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Figure 7： Percentage change of stocks with high up/down ratio in the portfolios of individual investors

0%

10%

20%

30%

40%

50%

60%

70%

80%

2005年 2006年 2007年 2008 5年前 个月

10小于 万元 10~100万元 100~500万元 500~1000万元 1000大于 万元（含）

The corresponding proportions of stocks with different up/down ratio in the portfolios of individual investors remain constant; For the institution investors, just the opposite. The institutional investors are capable of picking the right stocks in a bull market.

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Four-in-One to Vigorously Develop the Team of Qualified Investors

Education

Service SupervisionInvestors

Protection

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•What’s the signification of investor education?

•How to conduct investor education?

•What are the role and focus of SSE in investor education?

First, to enhance the investor education by innovating the approaches

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Significance

Investors are the foundation of the marketThe maturing of investors is a driving force for the maturing of the market Investors’ maturity is an important indicator of the maturity of the market

•The cultivation of rational and mature investors relies on the relentless efforts of various market participants to effectively conduct investor education

•This work is long-term, basic and routine.

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How to do?

Target Content Approach

To improve the investors’ risk identification and decision making abilities; To strengthen their self-protection, so as to develop Rational, Mature, and Qualified investors.

To focus on the investors’ right to know. To define their rights and obligations in the securities investment activities.

To Make them know the legal system related to the securities market, trading rules, procedures and so on.

To inform them of the risks of securities products and financial derivatives.

Exploiting new forms and channels, such as the Internet, SMS, simulated training and so on to stimulate the investors’ enthusiasm.

To understand the educational needs of investors and conduct investor education based on the classification of investors

To popularize investor education

To include investor education into the national education system

To strengthen the assessment of the education results

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The Investor Education of SSE (1)

To sort out external relations, To understand market conditions, To perfect operational system, To integrate market resources, To make full use of our own advantages, to encourage members to conduct investor education, and start face-to-face education, in order to establish an information sharing mechanism to enhance cooperation with other market participants as well as leading media.

Combine Investor Education with

•Institution building

•Frontline regulation

•Market innovation

•Handling of investors’ complaints

Role The Four Combinations

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The Investor Education of SSE (2)

Integrating the current dispersed resources, establishing and perfecting the investor education platform, making full use of our own advantages.

With the launch of new products, conducting the investor education among ordinary investors, fully revealing the investment risks, making them fully aware of the principle of ‘Buyers Take the Risks’ .

Strengthening the institution building: Appointing the contact points of members for investor education.

Establishing the investor education messaging platform and urging members to remind the investors of the risks in a timely fashion.

Developing relevant guidelines to discipline individual investors. Developing and launching mock trading for ETFs, Warrants etc.

Developing and promoting the mock testing and qualification assurance.

The newly established Investor Education Department has launched investor education featuring qualified investors regime recently.

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•Why to promote investor service?

•How does SSE provide investor service?

Second, to develop the investor service based on the analysis of their demands

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The service philosophy of SSE

Regulation？ Service？

Service creates the core value of SSE

Service Objects： Members and

intermediaries Listed and pre-listed

companies Investors (Creating

values for them and protecting their interests)

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The Investor Service of SSE (1)

Tenet Principle Approach“Serving the market with our whole heart" To protect their interests using multi-level, multi-form investor services, make them aware of the investment risks and their legitimate rights so as to nurture quality investors.

Adopt the direct and indirect services. On the one hand, doing our own services well, on the other hand, encouraging members to serve better.

Making transparent and dynamic service: publicizing the information and update it timely.

Standardizing the service: Optimizing the service procedures and providing timely feedback for investors. Providing service with passion and sincerity.

Defining the service contents: Setting out the procedures, contents, FAQs, and exemption clauses.

Diversifying the service: Using both the electronic and non-electronic means to provide routine or targeted services.

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The Investor Service of SSE (2)

Quality criteria

Making service procedures scientific, standardized and enforceable and setting investors’ satisfaction as one important criterion for service quality assessment.Amending the service outline and formulating the service plan at the beginning of the year. Advocating the principle of ‘who answers first, who assumes the responsibility’.

Contents Guiding members in optimizing client management system and providing the service based on scientific classification.Formulating the Guidelines on the Securities Trading Activities of Investors based on the analysis of the current status of investors and their conducts. Providing information via our official website and investor education site. Optimizing the ‘public advisory service hotline’and properly handling the letters and visits.

Supervision Establishing investor service group with ‘group responsibility’ mechanism.Establishing regular meeting system.Implementing service quality assessment system and conducting surveys on investor satisfaction. Establishing the supervision mechanism and putting in place the hotline for complaints.

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•Why to supervise investors?

•How to supervise investors?

•How does SSE supervise the investors?

Third, to conduct the supervision over investors with fresh ideas

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Thinking

The logical support for investor supervisionMarket failure? Government failure?

Discrepancies among investors in funds, risk identification and investment decision-making.

Even an open market may fail to provide fairness and equitability when the investors are irrational.

To exercise supervision based on the classification of investors.

Pursuit of value ： order, efficiency and true fairness

Classification criteria: net asset, knowledge, experience, etc.

Dynamic Classification: Making adjustment according to specific circumstances and allowing certain exemptions from regulation in strict conditions.

Pay attention to the protection of investors’ property right, privacy, the right of equality, liberty and so on.

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Supervision methods

Special rules for products

According to different risks associated with products, setting up the specific entry requirements for investors as well as risk disclosure criteria accordingly.

Market entry

Product entry

Investor entry

To establish core teams of investors for related productsIndividual investor vs. institutional investorsDomestic investors vs. foreign investorsMarket participants: Senior, intermediate, ordinary Account

monitoring

‘Black list’

Banishment from the market

Monitoring the accounts with unusual trading.

Including the accounts with unusual trading into the ‘black list’, freezing their accounts and restricting their transactions. The record can be a reference for qualification assurance.

The accounts with serious violations are banished from the market.

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How does SSE supervise the investors?

• Lawfully conducting the front-line regulation over investors

• Introducing the entry system for investors based on accurate analysis of the characteristics of investors and the national conditions.

• Carrying out classified investor management based on keen observation of investors’ risk managements abilities.

• Strengthening the supervision over trading activities and the punishment mechanism. Adopting such measures as ‘Black List’ and ‘Banishment from market’.

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  Fourth, to improve the investor protection by putting the system first

•What are the investor’s rights and interests?

•How to build the institutions related to investor protection?

•How to protect the investor’s rights and interests?

•How does SSE protect its investors?

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Investor’s rights and Interests

role rights

Shareholder of listed companies

Right to know the disclosed information

Right to share the proceeds

Right to vote

Right to supervise the company

Securities Trading Participants

Right to trade fairly and voluntarily

Right to secure the assets

Clients Right to participate in the pricing in share offering

Civil subjects

Right to report something to related apartment and lodge complaints

Right to request mediation

Right to initiate arbitration

Right to sue and to win the lawsuit

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Institutional guarantee

Market entry mechanism for securities offering 

Fixed-price offering mechanism

Risk insulation mechanism of securities companies

Third-party depository mechanism

Information disclose system

Corporate Governance of listed companies

Credit rating of listed companies and intermediaries

Securities Investor Compensation Fund System

Shareholder derivative litigation, securities class action

Bankruptcy reconciliation, re-organization system

Social supervision

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Protection of rights

‘Rule of Law’—To improve the relevant legal system to protect the rights and interests of investors and to highlight INTEGRITY.

Methods

Effect

Public protection

Self-protection

Administrative decisions, litigation Increase the costs for violations of the law

Negotiation, mediation, appeals, arbitration, etc. Adopt legal means

The investor’s interests can be safeguarded when violations are punished. The execution of civil judgment of compensation helps to ensure justness in the market thus maintaining social order.

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How does SSE protect its investors?

Establishing SSE as the market organizer and front-line regulator. Effectively combining the education, service, supervision and protection of investors.

Further strengthening the information disclosure of listed companies.

Intensifying the management of members. Establishing the system of prudent qualified

investors. Promoting the mechanism of investors’ self-

protection. Providing related rules for products and transaction data, etc to help defend their rights.

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Conclusion:　 Education and Service, Supervision and Education and Service, Supervision and Protection: Four-in-one, to vigorously Protection: Four-in-one, to vigorously Develop the Team of Qualified InvestorsDevelop the Team of Qualified Investors

Thank you!