The
stock market a casino for
communists By Jamil
Anderlini
SHANGHAI - There's a saying in China:
If you want to have a punt in this traditionally
gambling-crazy country, you have two options - either
head to Macao, the former Portuguese colony that is the
only place on the mainland where gambling is legal, or
invest in the stock market.
What faces China now
is the daunting challenge of converting its stock
exchanges from casinos designed by communists into true
capital markets.
To a much greater extent than
in other markets, investments in China's capital market
are a gamble. Insider trading, management manipulation,
massive speculation and decisions by political fiat are
the order of the day and make careful research into
annual reports and company backgrounds pretty much a
waste of time.
In the last five months, the
gambling public seems to have faced up to the fact that
the house always wins. In early April, the indices
reached a 20-month high on the back of the China hype
that was gripping the world and following the
government's announcement in February of a nine-point
plan on how the country's stock markets were to be
reformed. But by the end of the month the market began
to tumble.
By September 13, the Shanghai and
Shenzhen exchanges had declined to their lowest level in
five years, with the Shanghai composite index plunging
27% from early April. Partly this was because
macro-economic tightening introduced to guide China's
booming economy to a soft landing meant there was less
money sloshing round. But it was also because of the
fact that stock markets are the ultimate expression of
capitalism and these markets were set up by communists.
The capital markets in China are suffering from
structural aberrations that do not fit today's reality.
On September 14, Premier Wen Jiabao reiterated
the government's commitment to the nine-point plan for
reforming China's stock markets and media reports
indicated that Shang Fulin, the chairman of the China
Securities Regulatory Commission (CSRC), the entity that
governs China's stock markets, was to be replaced. Shang
is being moved to take over the China Banking Regulatory
Commission, replacing Liu Mingkang, who will become the
governor of Fujian province. Huang Qifan is expected to
take over the SCRC.
These actions had the
intended effect of boosting markets by their biggest
one-day gain in 20 months and illustrated how completely
the stock markets are at the mercy of Beijing. The
government followed up with a slew of announcements
intended to regain investor confidence - especially that
of the individual investors who traditionally have made
up an unusually high proportion of the market and who
have been the biggest losers in the continuous slide.
The new measures included a set of draft rules
on company-shareholder communication stipulating
majority shareholder approval must be sought for
decisions that might have "significant effects" on
shares - including buyouts, takeovers and major
acquisitions, significant company reorganization, debt
repayment schemes and international market listings. The
rules also give shareholders voting rights in top-level
hiring decisions and board member changes. If companies
do not meet the new requirements the CSRC may revoke
their listing approval or impose other, unspecified,
penalties.
The fact that requirements like
these, which are standard practice in more developed
markets, are only now being introduced in the rulebook
provides an indication of the relatively low stage of
development of the Chinese market.
Funding
state-owned enterprises Shanghai's stock exchange
is the biggest in the world, but only in terms of floor
space. The government basically conceived of the
Shanghai and Shenzhen bourses in the early 1990s as a
source of funding for state-owned enterprises (SOEs).
With a very high level of savings and few investment
outlets, China's newly rich urbanites were ripe for
initiation into the world of capital markets.
Only state-owned enterprises were allowed to
list and the state essentially retained two-thirds of
the shares in these new "public" entities. These shares
are divided into two groups known as "state shares" and
"legal person shares", the latter circulate to a certain
degree outside of the stock exchanges. Over the years,
these non-tradable shares have been slowly but steadily
introduced into the market in various ways but the
question of when and how the remaining state shares will
be sold off is a lingering and very pertinent one for
most investors. The problem is that if those shares are
all introduced into the open market, then logic dictates
that the existing tradable shares will suddenly be worth
a third of their current value.
"The major
reason for the continued slump in the markets this year
is the unresolved question of state shares," Stephen
Green, head of the Asia program at the international
affairs institute in Chatham House, London, told Asia
Times Online. Green is the man who, quite literally,
wrote the book on China's stock markets. He says until
that question is resolved, the markets will continue to
underperform as they have since 2001 when the prospect
of introducing non-tradable shares was first raised.
"The best scenario would probably be if the government
could just carry on privatizing these companies in a
slow and steady way. After 10 years, when these
companies are private and better run, selling the shares
in the open market would be much easier," he said.
This would avoid the necessary shock that would
follow if all non-tradable shares were suddenly
introduced in the market. But unfortunately, the country
needs a healthy capital market right now. The plan to
clean up the ailing banking sector centers around
listing three of the "big four" state-owned commercial
banks on domestic and overseas stock exchanges within
the next year or so. This means someone is going to have
to face up to the problem of state and legal person
shares soon if there is to be enough willing capital
available in the future to fund such large and important
listings. It also means there will have to be at least a
perception of a shift - from treating the stock market
just as the personal piggy bank of the state sector to
regarding it as a source of profits for institutional
and individual investors as well.
The year of
the cancelled IPO The China Securities Regulatory
Commission announced an official freeze on new domestic
initial public offerings (IPO) in late August while new
rules are being considered on the setting of share
prices. Prices for mainland-listed stocks are valued
considerably higher than the share price offered for the
same company on overseas exchanges.
As late as
April, this year was being heralded as the year of the
China IPO, but the initial flood of domestic and
offshore listings has ended up as little more than a
trickle. Since China Life's record US$3.5 billion
listing in New York and Hong Kong in December 2003, just
seven Chinese companies have listed in the US, instead
of the expected 40 or so.
"Within a matter of
weeks, investors went from maximum bullish to quite
bearish. The government's macro-tightening and questions
about Chinese accounting standards made it much more
difficult to sell the China dream," Green told Asia
Times Online. "From the lift we saw in the markets in
the last couple of weeks, it's obvious there is a lot of
money waiting for clarity and for the government to set
the direction, but unless the issue of state-owned
shares is clarified, there's always a limit," he said.
Qualifying for investment Another
limit on the amount of money that flows into the Chinese
share market is the continued exclusion of foreign
investors. Of course, outsiders can invest in Chinese
companies' overseas listings but on the Chinese
exchanges, there are two kinds of stocks -
foreign-denominated "B shares" that are available to
foreigners but are mostly worthless, and "A shares" that
are only open to Chinese and government-approved foreign
investors who come under the Qualified Foreign
Institutional Investor (QFII) scheme.
In a
further attempt to reinvigorate the ailing bourses, the
government announced in mid-September that it was
extending the QFII scheme and hinted it might become a
much more permanent and expanded feature of the markets.
Under QFII, large institutional investors like UBS,
Citigroup and Bill Gates' charity foundation are
allotted a quota by the government to invest in the
yuan-denominated A shares and bonds. So far, 22 overseas
institutions have been granted quotas worth a total of
about $2.8 billion. Since the scheme began in mid 2003,
it has been reasonably successful. While not all foreign
investors have filled their allotments, some, like UBS,
have requested and been granted higher quota levels.
The counterpart to Qualified foreign
Institutional Investor program is unimaginatively known
as the Qualified Domestic Institutional Investor scheme,
or QDII. The QDII scheme has been continuously delayed
because of fears that allowing Chinese institutions to
invest in overseas stocks will remove even more
liquidity from the market and further depress prices.
The government announced in mid-September that it would
begin to allow domestic insurance companies to invest
foreign exchange in overseas capital markets. This was
seen as an initial step toward implementing QDII but a
more comprehensive rollout of the scheme is not expected
this year.
There are signs that investors are
becoming increasingly cynical, and the bounce the
markets get from government cheerleading is becoming
smaller and shorter in duration. When the markets closed
before the National Day holiday, shares were down by
about 5% for the week.
The plans to reform the
inefficient state sector and struggling banking industry
rely to a large part on investor confidence in the
workings of the share markets. In the next week or two,
Huang Qifan is likely to take over the CSRC and with the
health of the entire economy at stake, he faces the
daunting task of transforming the stock exchanges from
casinos to true capital markets.
Jamil
Anderlini is the former editor of China Economic
Review. He can be reached at
Jamilanderlini@sinomedia.net.
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2004 Asia Times Online Ltd. All rights reserved. Please
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