19 November 2019
China needs to attract world-class listings to rejuvenate its stock market. Photo: Bloomberg
China needs to attract world-class listings to rejuvenate its stock market. Photo: Bloomberg

Taking stock of China’s equity market

If you love someone, guide him/her to China’s stock market; if you hate someone, do the same, so goes a joke about the abundance of joy and pain in China’s A-share market.

But in the past five years or so, the stock market has been more about pain than joy. The benchmark Shanghai Composite Index ended 2013 with a loss of 6.75 percent, making China’s stock market the worst performer among the major economies since the end of a bull run in 2008.

It may not be fair to criticize a market just because it is bearish, but it is fair to say a market is ailing if it has traveled in the opposite direction of the national economy for half a decade. Unreasonably high valuations, an off-and-on IPO fair and rampant profiteering are just a few symptoms of this ailing market.

Regulators apparently want to make some changes in the market. They suspended IPOs in 2012 to roll out reforms, with share issuance regulations being the centerpiece of the revamp. Among other things, the IPO rules aim to address the problem of high financing volumes and high valuation by allowing original stakeholders to sell old shares to boost supply. But when the regulators pressed the reset button for the IPO market in January, original stakeholders took advantage of the rules to aggressively reduce their old shares to cash out.

This shows small repairs cannot rejuvenate the stock market; only a thorough operation can achieve the task. And to do that, we have to figure out what is at the root of the problem.

The crux of the problem is that the overall quality of China’s listed companies is poor. Unlike in major developed economies, the best of the Chinese companies do not regard the domestic bourse as their favorite listing destination. More than 1,000 Chinese companies, or a quarter of those with A-share listings, trade their shares overseas. In contrast, only about 100 listed American companies have chosen to go public outside the United States.

Worse, many of the overseas-listed Chinese companies are not only the most vibrant, but also the leaders in their sectors, such as Internet giants Tencent and Baidu. And since the stocks of elite Chinese companies are not traded in China, the home market cannot reflect the real movement of the broader economy.

One may argue, however, that China’s A-share market is also home to some of the world’s most profitable enterprises such as Industrial and Commercial Bank of China and PetroChina. These enterprises expose another core problem with China’s market, though — that it is highly government dominated.

By the end of 2012, state-controlled companies, not including those with a minority government stake, accounted for 51.4 percent of the A-share market value. And given that government-backed enterprises are major players, policies governing the market are bound to favor listed companies, institutional investors, sponsors and big investors.

No wonder, small investors’ interests are constantly ignored, supervision is poor and the penalty for insider trading is light, making the A-share market an ATM for listed companies and big investors. That also explains why the implementation of an exit system has been loose with local governments trying to protect their listed companies and employing all means, including capital injection and asset restructuring, to ensure their companies stay on the bourse even if they deserve to be kicked out.

In China, the delisting ratio is no more than 2 percent, while it was 8 percent on Nasdaq annually, 6 percent in the New York Stock Exchange and 12 percent in the AIM in London. With the bad performers staying on the domestic bourse and the good ones seeking listing overseas, the Chinese stock market can only go from bad to worse.

The diagnosis of the disease afflicting the stock market has also revealed a cure: open up the market for more world-class listings so that listed companies strive to perform better to lure investors.
In this sense, the idea of establishing an international board should be refreshed. The idea was hotly discussed a few years ago, but it was shelved after policymakers thought it would bring too much of an impact on the domestic equity market.

Some have argued that China’s stock market system is different from that in other countries to justify the abolishment of the idea of the international board.

But in fact, technically, there is no problem for China to host any international listings, just as it did in collaboration with Hong Kong to launch A+H listings.

Opening-up fears should be thrown into the dustbin. The fact that the domestic stock market is not mature should not be an excuse to block foreign listings. Experience of three decades of globalization has shown that domestic companies perform the best in the most open of markets, just as trade and retail sectors do when homegrown giants dominate fully competitive markets.



The writer is an economic commentator. He writes mostly on business issues in Greater China.