residual assets of the failed enterprise can be claimed. but in china, the reality is many enterprises ’ residual assets disappeared without a trace and some enterprise issuers disappeared without going through any legal procedures. 11. underwriter ’ s role was not properly defined. in the past, underwriting and redeeming was planned and thus became the target of administrative intervention. an underwriter, which was expected to provide redemption, was liable when the enterprise failed to do so. in fact, the roles of the underwriter, sales agent, redemption agent and that of the redemption body are different and have different legal implications. these definitions were not clearly provided for, giving rise to many difficult problems later on. 12. when a default case was handled, the approach was more about administrative intervention. more often than not, default of an issuing enterprise was not dealt with according to market principle. rather, through administrative intervention, the underwriter was requested to make a follow on offering. thus, default obligations of the issuing enterprise were transferred to the underwriter and bogged the latter down. recently, some securities companies have incurred problems and undergone liquidation or restructuring. the causes of these cases can be traced back to historical burden of defaulted enterprises. ii. an analysis of the past mistakes the above mistakes are inter - related. we should look at them in a comprehensive manner, and identify major themes of analysis. to me, there are three major themes : the first is people ’ s mindset. when the economy was in transition, command economy mentality was at play in our economic sphere. we tended to follow the planned economy approach to deal with any problems. thus, when first emerged, some problems did not get proper attention. some elements of our previous approach, such as administrative allocation of quota, price control, mis - definition of roles, lack of information, and handling of default, were products of command economy mindset. people did not know enough about how a market economy would operate or the environment it would need. more study and efforts should have been made then. today, when looking at issues, we should try our best not to simplify them and avoid a repetition of command economy approach. the second is about logic. ultimately, a series of mistakes related to enterprise bond was caused by lack of institutional design in market operation. normally, the intended buyer of corporate bond is qibs ( qualified institutional buyers ), who are strong in market analysis and risk taking. corporate bond issue usually follows a simple procedure and

allocation of issue quota usually followed a principle of helping the poor. enterprises in difficulties or poorly managed were more likely to get quota. 3. the absence of a bond rating system made it impossible for investors to get a clear idea of risks. 4. information was not disclosed to the investors. on the one hand, accounting standards in china were not up to the international standards. neither accounting practice by the enterprises nor external audit was proper and provided little information. one the other hand, information disclosure was not emphasized. thorough analysis of the disclosed information was part of the decision making process. 5. price was set administratively and price ceiling was controlled. such pricing did not factor in risks and made effective risk management by issuers and buyers impossible. 6. administrative rules required bank guarantee for enterprise bond issue. this is closely related to the problems mentioned just now. since bond issue quota was administratively allocated and price controlled, and neither information disclosure nor credit rating was available, bank guarantee seemed to be the natural solution. however, once guaranteed by a bank, the product was no longer a standard enterprise debt. 7. bond was issued to individual investors, whereas the international practice is to institutional investors with analyzing capability, i. e. qualified institutional investors. individual investors usually do not have sufficient market analysis ability or risk bearing capability. 8. effective constraint by market was not established. market mechanism can constrain the issue and transaction of corporate bond because investors form a judgment on and choose from products. that is, it is up to the market to determine what enterprise debts fare well and what don ’ t, prices of products and consequences of default. if the market does not exercise effective constraint, we will have to use administrative and supervisory means for constraint, ensuing a series of problems. alongside market constraint, a transaction mode should be established for otc to play a dominant role, to enable measuring of counter party risks and flexibilities in price judgment. 9. investor education was not sufficient. to a large extent, many investors at that time treated enterprise bond as a variation of savings product. whenever default occurred, they would bring the problem to government agencies and request redemption from underwriters. 10. a proper bankruptcy law was absent. in case of default, the existing bankruptcy law cannot use bankruptcy as the last resort of deterrence to restrain the enterprise in question. as a result, creditors ’ rights and interests as provided for by the bankruptcy law usually cannot be protected. in case of bankruptcy, at least the