China’s Stock Market on Bumpy Road
SHANGHAI
At the Shenyin & Wanguo Securities brokerage office here, investors stand shoulder to shoulder as huge screens flash share prices in the final hour of trading. There’s a party atmosphere as the mostly elderly crowd laughs, kibitzes and exchanges tips. People fight over seats; a woman knits a sweater as one group of retirees cackles at a friend who’s just clocked a big loss.
“It’s fun,” says Yue Gendi, a 46-year-old shop assistant who has zipped in from work to check on a few of her prospects. “But stocks in China are risky. I view it more as a form of entertainment.”
Welcome to stock trading with a Chinese flavor, marked by insider trading, funny numbers, one-eyed regulators and government-stoked speculative bubbles. For many, it is more like horse racing or mah-jongg than investing in a country’s future.
“The Chinese market is very speculative,” says Hu Yun Qiang, 65, a former state company employee with whiskers and a stained polyester jacket. Most of his money is in the bank, he says. “The state is too involved, and the market is still immature. It will take at least five years to develop.”
For Beijing at the dawn of a new century, however, five years may be too long to wait. Increasingly, the government sees this once-hated symbol of capitalism as a lifeline in its bid to dispose of the flotsam and jetsam of communism while boosting the economy at large.
The single greatest economic problem facing China’s central planners these days is what to do with the nation’s bloated, money-losing state-owned enterprises. These are a legacy of the now-rusty iron rice bowl that once promised every Chinese a job for life.
Beijing has balked at pushing reform too aggressively lest it push millions of people out of jobs and onto the streets. But Beijing also is running out of money for subsidies as the banking system totters. Selling more state-owned firms off to foreign and domestic investors would transfer some of the state’s burden while forcing greater market discipline on long-coddled managers.
“Well-developed capital markets are essential,” said John Lai, Hong Kong-based chief investment officer with Nikko Global Assets. “If you manage a company poorly, it’s taken over or bankrupt. If you do well, the shares go up.”
A second hope is that a rising equity market will restore consumer confidence and reverse the recent worrisome trend of falling prices. Beijing has seen what a booming stock market in the U.S. can do to boost consumption and hopes to create some of the same magic closer to home.
Although economists praise the government’s growing willingness to develop its stock and bond markets, they say that in practice its efforts are often naive and lead-footed.
One tactic, for instance, is to penalize people who save. Beijing on Nov. 1 imposed a 20% tax on bank deposits in a bid to encourage consumer spending and spur other kinds of investments. Yet people have very good reasons to want to save: China’s social safety net is collapsing, unemployment is rising and the economy is slowing.
Another fillip was its recent move giving state companies a green light to trade stocks among themselves. The practice, designed to build trading volume, had been banned in the wake of the Asian economic crisis. But some fear it could fuel more speculation as companies try to boost profits by trading rather than by reforming their operations.
A third tack was to talk up the market. On June 15, a Communist Party newspaper heralded a six-week 40% run-up in share prices as “normal,” encouraging investors to keep on trading. Economists, however, warned of speculative fever. Two weeks later, prices tumbled, and they haven’t stopped since, wiping out the gains.
Analysts say Beijing is still guilty of a top-down approach that too often browbeats domestic investors rather than improving the business fundamentals or creating an attractive investment climate. There’s little evidence that individual Chinese, whose trades account for an estimated 90% of the volume on the Shanghai and Shenzhen stock markets, have heeded the government urging.
“It’s not well thought-out,” said Daniel Lian, economist with Barclays Capital. “It’s not the governments job to try and change people’s appetite for equities.”
A visit to the floor of the new Shanghai Stock Exchange underscores the gap here between appearance and substance. An impressive array of sophisticated computers, high-tech communication networks, digital graphs, charts and news links are all housed in what is proudly described as the biggest single room in Asia that doesn’t have to be supported by columns.
But a well-functioning market is about far more than equipment.
“The Shanghai Stock Exchange has a state-of-the art facility,” said Fred Hu, Hong Kong-based executive director of Goldman Sachs, “but what you really need is the regulatory framework in place, and laws and regulations to ensure disclosure and protect small investors.”
Clearly, China has made huge strides in the 10 years since stock markets were introduced there, and it has learned fast. The total value of all shares listed on both Chinese exchanges now exceeds $240 billion, making it the fourth-largest market in Asia after Japan, Hong Kong and Taiwan.
Even by its own count, however, it’s got a ways to go. “To cross the river, you must feel the stones,” said Han Hua Liu, director of enterprise development at the government’s Shanghai Academy of Social Sciences, paraphrasing an old Chinese proverb on the need to move slowly through treacherous conditions. “It will take time for us to develop a mature share market.”
And that will mean addressing the problems of weak disclosure, spotty regulation and a general lack of experience that are hampering market development and undermining China’s ability to transfer risk. Foreign and domestic investors add that problems at Chinese public companies are not publicized in a timely fashion, and that the accounting system, to put it kindly, is at best “unique.”
“If you’re an investor, why would you want to go into the market when you still don’t know the rules of the game?” asked Husan Pai, senior portfolio manager with Indocam Asia, an asset management firm in Hong Kong. “How can you be sure the numbers coming out of the credit rating agency are really what they represent?”
Other problems include the weak companies China has chosen to float, decisions typically based on quotas or Communist Party obligations rather than merit.
Finally, China’s tumultuous trading history is hurting equities. Many investors got burned by defaults last year at Guangdong International Trust & Investment Corp., one of China’s many regional investment groups, and were slammed when the stock market bubbles of 1992-93 and 1996-97 burst. While speculation can be found in any country, of course, planners here have often done little to dampen the excess.
“Getting trapped in a bubble is like losing a chunk of your flesh,” says Xin Shen Lin, a 48-year-old Shanghai investor.
Stock prices of most state-owned firms have, predictably, tumbled. In just two of many examples, Jiangsu Expressway Co. came to market over a year ago at $40.01 and now trades around $17.11. And Zhejiang Expressway Co. shares have fallen to $15.44 from an initial public offering of $30.62.
“They should list good, strong companies rather than just lousy [state-owned ones],” said Goldman Sachs’ Hu. “Instead of having government bureaucrats decide what to list, it should be market-driven.”
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China’s Limits
Obstacles such as a lack of full disclosure have limited investment in China, yet the country’s promise has been evident on the Shanghai Stock Exchange:
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Source: Shanghai Stock Exchange
