In only 14 years, China's stock market has developed into Asia's
third biggest market, with more than 1,300 listed companies, 4
trillion yuan (US$483 billion) of market capitalization and more
than 70 million stock traders.
It has been estimated that the market might even become the
world's second biggest, after the United States, in the next
decade.
The pace of growth looks rosy, and the momentum of the Chinese
economy seems to be able to drive that growth even further.
Yet growth rate is not all that we care about.
The quality and sustainability of the growth count for more for
the future of the market.
Dreams of getting rich
For over a decade, listed companies have been the biggest
beneficiaries from the fast expansion of the bourses, raising all
together more than 800 billion yuan (US$96.6 billion) of funds.
Investors are certainly more concerned about another issue: Can
they make money out of the investments?
The answer is not a simple "yes" or "no."
Among the 70 million traders, there have been some like Yang
Huaiding, a former warehouse keeper in Shanghai who became a
millionaire after making fortunes out of trading bonds and stocks
in late 80s and early 90s.
Yang, later called Yang Million, harvested his first fortune one
day in April 1988 by buying 20,000 yuan (US$2,415.5) treasury bonds
and selling them a few hours later at a price that earned him 800
yuan (US$96.60).
At the time, most Chinese people were still not familiar with
terms such as investment and trade, more willing to cling to their
"iron ice-bowls," stable jobs and incomes in State-owned
institutions.
Yang recalled that his decision to quit his job and become a
professional trader was a surprise to many.
But the surprise soon turned into envy as Yang struck gold on
the stock market, which was launched two years later.
After the Shanghai and Shenzhen stock exchanges started
operations at the end of 1990 and the first batch of A share
companies was listed that year, more people got to know the "magic"
of stocks and more nouveau riche like Yang came into being during
the stock trading boom in the next few years.
But many were disillusioned. Soon bad times arrived, as heavy
speculation piled up bubbles and quickly pierced them. A slew of
profit-taking scandals and frauds made the market a highly
speculative and risky one and forced the authorities to take
cleaning-up measures.
Similar ups and downs have repeated several times in the stock
market over the past decade.
Today, traders have become more rational than before and more
mature too, knowing that the stock market is not a place where they
may just earn money but where they may sustain losses too.
Meanwhile, an increasing number of institutional investors is
gradually changing the investor structure in China, which used to
be dominated by retailers, and making value-oriented investment
ideology more accepted.
Market repositioning
But weak fundamentals of the listed companies and the systematic
flaws in the market do not change much. Minority investors are
still calling for more transparency, fairness and chances of
attaining returns in the bourses.
Often, the market is like an automatic teller machine for listed
firms, many of which are controlled by the State, while many
private companies are blocked out.
Statistics indicate that the stock market helped raise more than
800 billion yuan (US$96.6 billion) in funds for listed companies
over the past 14 years and generated 173 billion yuan (US$20.9
billion) of stamp tax.
But the overall dividends the companies have paid their
investors total only about 72.2 billion yuan (US$8.7 billion).
If investors cannot get returns, why should they stay?
As the market turned bearish a few years ago, there has never
been sufficient energy for a strong recovery.
The Shanghai composite index fell below the psychologically
important 1,300 level and touched a five-year low on September 9
this year.
And the chance for a magic recovery, such as the strong rebound
on May 19, 1999, which was lit by warm State media remarks and a
boom in tech stocks, is small.
This time, investor confidence is at the core of the issue.
Wu Xiaoqiu, director of the Finance and Securities Institute of
the Renmin University of China, said that the wrong positioning of
the stock market in China was a major trigger for the confidence
crisis, though the problem can still be cured.
The fundamental problem for the bourses is lack of common
interest between the major shareholders of the listed companies and
the small shareholders, said Wu.
The present system, which allows a large ratio of untradable
State and legal person shares, enables big shareholders to take
their own profit and erode the interest of the minor shareholders
easily. And that has hampered the investment initiative of new
investors.
Weak corporate governance in many companies and low dividend
payment further hurt investor confidence.
Experts urged that the authorities should take iron-fisted
measures to fix the listed firms, improve their quality and put
them in a market mechanism where they have to face competition.
It is not the first time that these questions have been raised.
They had been put forward several years ago, when the market was
still bullish, but speculation was already too strong.
In a debate fuelled by critical remarks of economist Wu Jinglian
at the end of 2000, scholars, regulators and securities
practitioners in China have been trying to find the answer to the
questions: What is the function of the stock market? Is it to
support State-owned enterprise reform? Is it just a place where
listed companies can get endless funding? Or is it a casino where
anyone can try their luck?
Wu made the criticism that speculation had been too strong in
the bourses, which had become casinos and people had lost
rationality.
Who said that everybody should learn to trade stocks? he
asked.
The debate rang a warning bell for market participants about the
bubbles. It also made people rethink investment ideology and to
some extent helped push the bourses to adjust its direction to
become more market and value oriented.
The exploration of the new path for the stock market has never
stopped.
Still an emerging market now, China is already undergoing a
transition towards a more globalized and developed market.
And as it further opens up to foreign investors, domestic
institutions are also confronting mounting international
competition.
Such external forces will ultimately drive local participants to
change their way of thinking.
Foreign investors
Since China formally introduced the qualified foreign
institutional investors (QFII) scheme in December 2002, 20 foreign
institutions have acquired QFII licences, which enable them to
invest in yuan-traded A shares, bonds and mutual funds within
authorized investment quotas.
QFII has also created a new channel of foreign investment in
China.
To foreign investors, the Chinese market is attractive largely
because of the rosy economic outlook, the strong renminbi and the
vast growing potential of the capital market, though presently,
compared to the overseas markets, the A share market is still
over-priced, while the quality of the listed firms and market
fundamentals is still lagging behind.
But even with price gaps and flaws in the market system, a
growing number of foreign investors are still heading on with
capital market expansion plans in China.
The American International Group (AIG), which launched the first
foreign insurance company in China in 1992, is now developing into
the country's asset management business.
Its fund management joint venture with China's Huatai
Securities, AIG-Huatai Fund Management Co, is expected to open for
business soon, with each of the two sides holding 33 percent.
AIG intends to increase the ratio of stakes in the fund venture
to 49 percent next year, also the maximum ratio China allows a
foreign company to hold in such ventures, according to Joel
Epstein, AIG Country Manager in China.
In only two years after China's entry to the World Trade
Organization, the country already has more than a dozen fund
management joint ventures in operation or preparation.
When asked if the timing of entering the securities business is
appropriate as the stock market is weak, Epstein said the strategy
was based on confidence in the Chinese economy and long-term
prospects.
Similar expectations of good investment returns over the long
term have also pushed QFIIs to apply for investment quotas
including UBS, which quickly used up an initial US$600 million
quota, the biggest granted by the Chinese authorities to a
QFII.
Nicole Yuen, head of China equities at UBS, said that though the
market is in a correction, the company does not intent to change
the general investment direction and will continue to invest in
stocks with good potential for growth.
Some QFIIs also said that as the Chinese economy is expected to
maintain momentum, the long-term investment outlook remains
solid.
Obviously, the market consolidation will further squeeze out
bubbles and lower the price/earnings ratio, reducing the room for
profit-taking.
As A share companies see their prices getting closer to that of
H shares, they may find themselves more attractive to overseas
investors.
Fred Hu, managing director of Goldman Sachs (Asia), said that in
spite of the market corrections in China over the past few years, a
few good-quality companies have managed stable performance.
Though indices have been moving down, the investment ideology in
the Shanghai and Shenzhen bourses is apparently more rational.
And as long as the macro economy stays on a healthy growing
track and listed companies can improve their management, results
and information disclosure, investor confidence will recover
gradually, Hu said.
Future trend
The quality of listed companies is a basic element to measure
investor confidence, the basis for market development.
When many listed companies used to rely on government support
for an entry ticket, it is no longer so now.
With a series of reform plans adopted by regulators, the overall
listing, trading and supervision systems have been undergoing a
reshuffle.
The cancellation of the listing quota, the introduction of the
sponsor and initial public offering pricing systems, the launch of
new standards for information disclosure and stronger protection of
the civil rights of investors are driving China's stock market into
the direction where market rules are in command.
And regulators are unlikely to always come to the rescue with
policy boosts when the market is troubled.
An official with the China Securities Regulatory Commission said
the commission would see to the fixing of existing problems in the
market and combine it with market development during future
regulatory work.
Instead of being a player itself, the watchdog will stick to its
position as a referee to ensure order and fairness during the
competition.
And more often, it is trying to cut out the roots of the
problems from the very start.
The expected new IPO pricing system is an implementation of that
ideology.
It is expected that companies launching IPOs will have to make
inquiries about share prices among institutional investors, which
will make prices more reasonable and let second market investors
have more say in the price formation process.
As the sponsors and the listing applicants are to take more
liability for the correctness of financial figures and listing
qualifications, it may help block bad and disqualified ones from
the beginning.
Meanwhile, investors are also offered a wider range of
investment tools and products than before.
The mutual fund market, for example, has experienced fast
expansion since the second half of last year. And apart from equity
funds, more new products such as bond funds, index funds, guarantee
funds and monetary market funds have entered the market.
The large savings pool in China still leaves more room for fund
managers and securities houses to come up with more diversified
investment products to meet growing demand.
And meanwhile, intermediaries such as the securities houses
themselves are undergoing restructuring to improve efficiency.
As declining brokering fees and stocks investment failures have
pushed many domestic securities firms to the wall, the expected
arrival of a Goldman Sachs' joint venture investment bank is
expected to inject fresh energy into the industry.
"We do not really have an investment banking culture in China,"
said an official with a securities company in Beijing.
What most securities companies are doing is focusing on
brokering and proprietary investments, which are actually the
source of losses when the market is low.
They should be exploring new profit resources and try to build
up the strength of investment banking, experts say.
Many other transitions are also expected in the stock market.
And similarly, none is easy because of the aftermath of the planned
economy and the complicatedness of the Chinese market.
"It takes a whole generation of Chinese to have a better
understanding of the stock market and rebuild it in some form of
order," said Dong Chen, an analyst with China Securities Co, who
has been witnessing the ups and downs of the bourses for more than
a decade.
"We have experienced bad times and good times," he said.
"It is hard to predict when the next bullish run will
start."
"But now that more new standards and rules are taking shape,
hopefully the market will go forward on a healthy track and offer
newcomers more things to enjoy."
(China Daily?October 7, 2004)