Free economy is cornerstone of a booming equity market

July 04, 2019 11:44
Large state-owned corporations in China often have to serve the government agenda in addition to pursuing profit. Photo: Reuters

As US-China trade tensions ease, mainland firms listed in Hong Kong have been doing quite well lately on the stock market. Yet that doesn't necessarily mean investors should chase them.

Looking closer, we find that many Chinese firms are still trading well below their one-year highs, suggesting a far gloomier picture from a longer term perspective.

Counters that kept setting new highs, names such as AIA (01299.HK), Link Real Estate Investment Trust (00823.HK), HK & China Gas (00003.HK) and MTR Corp (00066.HK), are non-mainland firms.

The China Enterprises Index has lagged the Hang Seng Index year after year, although China’s GDP growth beats Hong Kong every year.

The conclusion is quite obvious. Investment does not have too much to do with overall economic growth.

More importantly, free economy is the cornerstone for a prosperous equity market.

If companies are not free to pursue profits and realize their full potential in a restricted economy, their shares are unlikely to perform well.

China Mobile (00941.HK), China Life Insurance (02628.HK) and most Chinese banks have seen their stocks languish for years. Part of the reason for the weak sentiment is the fact that the firms have to serve the state agenda, which may sometimes override profit considerations. That sort of thing holds back investors.

This article appeared in the Hong Kong Economic Journal on July 3

Translation by Julie Zhu

[Chinese version 中文版]

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Columnist at the Hong Kong Economic Journal