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Why does the world s most dynamic economy have such a moribund stockmarket?
Oct 13th 2012 | HONG KONG | from the print edition
CHINA S stockmarkets sit in what is still one of the world s fastest-growing
economies. In the past year they have also fallen under the wing of one of
China s more vigorous policymakers: Guo Shuqing, who was appointed head of the
China Securities Regulatory Commission (CSRC) in October last year. Yet since
his arrival the markets have fallen by more than 14%.
During trading on September 26th they suffered a fresh indignity. The Shanghai
Composite, the benchmark index, fell briefly to 1,999 points, a level it had
first reached more than 12 years ago (see chart). Over that period, China s GDP
has more than quadrupled in nominal terms.
During his first year in charge, Mr Guo has set about cracking down on insider
trading, cajoling firms to pay dividends, opening the door to foreign
investors, uprooting rotten companies from the exchange, and encouraging better
firms to list on it, at better prices. In a year of political transition, when
little was expected of China s policymakers, he has been a reform tornado ,
according to China Economic Quarterly, a journal published by GK Dragonomics, a
consultancy based in Beijing.
But disgruntled investors say such efforts are all thunder, little rain . The
CSRC is always talking about reform but the market does not improve, complained
one investor to an online CSRC forum.
China s stockmarkets are certainly in need of reform. They have been a meagre
source of capital, providing only 3.4% of the finance that companies raised
last year. They have provided a poor proxy for the economy for investors keen
to take a stake in China s rise. For almost 20 years politically favoured
companies listed at inflated prices, raising money from outsiders (including
foreigners) to redistribute to insiders. The exchanges provided a
spoils-market, not a stockmarket.
China s stockmarkets are not really about money (that comes from the banks),
wrote Fraser Howie and Carl Walter in 2011 in Red Capitalism , a book about
China s financial markets; they are about power.
Mr Guo is trying both to smarten up the firms on the market and educate the
investors who buy their shares. In the first half of 2012 his commission
launched 180 investigations into insider trading and malfeasance, 70% more than
in the previous year. And by clarifying what counts as evidence of wrongdoing,
China s Supreme Court and prosecution agency have given a boost to Mr Guo s
efforts. They have armed the tiger with wings , as one CSRC official put it.
The CSRC is also intervening more heavily in the pricing of initial public
offerings. Last year firms making their debut priced their new shares at 47
times earnings. Over half of those who bought shares on the first day of
trading suffered losses within three months, Mr Guo says. Firms must now
explain how they have valued themselves. And any debutant with a price-earnings
ratio 25% above its peers must reconsider its valuation.
As well as opening the door to better companies, Mr Guo is trying to show the
door to bad ones. In the past China s delisting rules have been loosely
interpreted and lightly enforced. Companies with negative net assets or with an
operating profit of less than 10m yuan ($1.6m), will now be delisted within
three years, the CSRC promises.
If listed companies smarten up their act, what about the investors who trade in
them? To attract more sophisticated money into the market, the CSRC has
increased the amount foreigners can invest to $80 billion from $30 billion and
eased the qualifications required. These foreign investors tend to be a calming
influence on China s stockmarkets, but even $80 billion is only a drop in a
market with almost $2.6 trillion of tradable shares. Much, therefore, depends
on local buyers.
Mr Guo has put his faith in investor education. He has even offered tips of his
own, advocating long-term investments in blue-chip shares, priced at a modest
multiple of their earnings. (Since his remarks, blue-chips have fallen by 8%.)
Looking for value
This kind of investing is not entirely absent from the market. One small
investor in the beachside town of Yantai, in Shandong province, says he bought
his first shares (in Xinxing Ductile Iron Pipes) in 2005 at his brother s
urging. He now researches his picks thoroughly, looking for low-key companies,
that work hard, look after their employees, earn a good reputation, and have
never lost money. This style of value investing is spreading, he says, but
it owes its growing influence more to financial blogs and bitter experience
than to formal investor education.
Mr Guo s biggest task is not enlisting people to his favoured style of
investment, but distancing the regulator from the market s ups and downs. No
one would ever look to the Securities and Exchange Commission in the United
States to determine where the index should be, says Mr Howie. Unfortunately
China s government has wielded so much influence over the market in the past,
it struggles to wash its hands of it now. The news that it raised its stake in
four banks contributed to a market rally since September 26th.
In his defence Mr Guo can point out that for much of this year the market has
done poorly for the simple reason that the economy itself has fared badly. The
market is a better reflection of the economy, but the economy is not what it
was.
from the print edition | China