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BOOK
REVIEW
China's stock market
binge
Privatizing China
by Carl E Walter and Fraser J T
Howie
Reviewed by Gary LaMoshi
 Readers considering playing China's stock
markets will get more than their money's worth by page 4
of Privatizing China. In other stock markets, the
book explains, shares represent the holders' right to
ownership in the company and a portion of its profits,
as well as the company's obligation to stockowners in
these areas. That's not the case for equity with Chinese
characteristics, though.
In China, the stated objective of
securities markets, at the start at least, was to
promote operating efficiencies in SOEs [state-owned
enterprises] still controlled absolutely by the state.
It is, therefore, entirely unclear just what
securities did, in fact, represent, other than the
opportunity perhaps to profit from trading and to
receive a dividend. Ownership of the
company? Forget it. Protection of your investment
through an independent board of directors? Read on:
For the companies, there still seems to be
no sense of obligation to minority shareholders; only
to the state, if at all. In China, the markets are
operated by the state, regulated by the state,
legislated by the state, and raise funds for the
benefit of the state by selling shares in enterprises
owned by the state. In the entire system, the only
things that do not belong to the state are the actual
money, or capital, put up by presumably individual
investors, and the market itself. Investors
would be wise to recall the African proverb: "When
elephants romp, the grass gets trampled." Undoubtedly
there is a Chinese equivalent; luckily for the promoters
of China's stock markets, most investors in mainland
companies seem to have forgotten it.
Privatizing China is an intelligent,
devastating examination of, as its subtitle says,
China's stock markets and their role in corporate
reform, as well as a comprehensive reference on the
development of those markets. Investment banker Carl
Walter and market expert Fraser Howie point out that the
financial markets fall far short of that originally
stated government goal of reforming state enterprises.
Listing companies on stock markets has also failed,
despite folklore to the contrary, to transform China
into a nation of shareholders or create a financial
mechanism by which individuals or institutions, such as
insurers and newly private pension funds, can reliably
invest to support and profit from China's future
economic growth.
The book's clear-eyed analysis
of economic issues in China is as welcome and useful as
it is rare. China remains a difficult place to live and
work, so Westerners who stick around long enough to gain
expert knowledge are generally those who find China
charming or fascinating; for the most part, they drink
the Kool-Aid. As a result, the overwhelming majority of
experts tend to be enamored with China, see the bright
side of the story, and tell it sympathetically.
Walter and Howie, each with more than a decade
working in Chinese equities, may love China, but their
tough love isn't blind to the inconsistencies,
exaggerations, peculiarities and outright frauds that
are as much a part of Chinese stock markets - and most
aspects of China's so-called economic miracle - as the
annual gross domestic product (GDP) growth numbers.
China's stock markets evolved from grassroots
financing schemes, not a grand design from Beijing, and
grew largely because of promotion by local government
champions in Shanghai and especially Shenzhen. It wasn't
until 1996, 12 years after the first over-the-counter
market began, that the central government took control
of equity markets. Nevertheless, Beijing's political
winds dictated the limits of stock-market development
and, from the beginning, the state's roles as owner,
regulator and politician have often conflicted.
The fundamental, unresolved contradiction
between China's economic and political aspirations - the
state, as enterprise owner, wants foreign capital
without ceding control - remains at the heart of the
failure to create properly functioning equity markets.
Instead, China's stock markets, according to the
authors, are little more than funny-money casinos built
on foundations of sand and populated by manipulators.
The book explodes several myths about China's
stock markets that distort Western views. Analysis of
official claims of 66 million Chinese stockholders
reduces the actual number to between 500,000 and 2
million active investors. That figure matters, the
authors note, to indicate the extraordinarily limited
reach of the stock-market experiment, its susceptibility
to manipulation, and the (intentionally?) exaggerated
official fears of social unrest that secure government
complicity in keeping share prices inflated. The authors
document numerous cases of stock manipulation as well as
citing the Ministry of Finance's 1999 finding that 89
percent of listing companies cooked their books to
inflate performance.
Similarly, under close
scrutiny, the official US$503 billion combined
capitalization of the Shanghai and Shenzhen markets
tallies closer to Malaysia's $129 million market cap. En
route to that reduced figure, Walter and Howie
brilliantly dissect the seductively simple questions of
what stock prices in China measure and how they measure
it. As with various methods for hitting the knuckleball,
none of the China valuation formulas work.
Hong
Kong-traded H shares are generally priced 50-90 percent
less than their Shanghai or Shenzhen A share
counterparts, even though each of those different shares
represents the same stake in the same company. The price
difference is due, at least in part, to the lack of
alternatives for mainland investors, as well as various
trading quirks.
A controlling stake in every
publicly listed Chinese company is reserved to the
state, and those shares cannot be traded except through
private placement deals among state entities. At least
in theory, and generally in fact, there is no
possibility that shareholders can benefit from a
takeover, which in other markets would include a premium
for control. However, when Chinese state shares are
traded, the prices are far below the public counter
quotes, but those trades don't impact public share
prices. Generally, public shares are priced as if state
shares don't exist, leading to market crashes whenever
additional state shares hit the public market, or even
are rumored to.
Above all, the authors emphasize
that the stock market in the People's Republic of China
(and listings of Chinese companies on foreign markets),
a revolutionary idea in the PRC context, continues to
evolve as it has for nearly two decades. Walter and
Howie say they are optimistic about the potential
of Chinese equity. At this stage, Privatizing
China is the best investment you can make in Chinese
stocks, a sure bet to inform and entertain while saving
you from playing markets that are still just a gamble.
Privatizing China by Carl E Walter and
Fraser J T Howie, John Wiley & Sons, Singapore,
2003. ISBN: 0-470-82120-5 (paperback). Price: US$27.95,
296 pages.
(Copyright 2003 Asia Times Online Co,
Ltd. All rights reserved. Please contact content@atimes.com for
information on our sales and syndication policies.)
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