August 24, 2008

Money Money Everywhere … But Stock Slippage in China Incites Worry, Doubt

Print More

In a dramatic text message sent in June, China’s financial insiders likened the trends marring the Shanghai Stock Exchange to an earth-shattering natural disaster. “More than 100 million investors have been buried in the ruins of the stock market by the earthquake in China’s capital markets,” the text message read. “Most of them are dying.”
In a country exuding yuan — or so it seems — from the banks of the Yangtze River, such a debacle might seem surprising, even out of character. Especially in the wake of this summer’s Olympics for which China spent a whopping $42 billion, making history as the biggest Olympics budget to-date. Greece’s $16 billion expenditure on the 2004 games, in comparison, left the country ridden in dept.
China’s stock market downturn is significant not only in economic terms, the Ivy League Student Delegation to China learned during our 10-day trip through China’s major cities and rural countryside. It highlights an ideological shift in the country’s monetary policy, as well as a grass-roots involvement in national financial well being — a fascinating concept in China’s famously massive, yet closed-off, economy — an economy whose $4 trillion GDP is the second largest in the world according to the World Bank. The China Daily reported in March that China’s projected GDP growth rate for 2008 is 10.5 percent, down from 2007’s 11.7-percent rise.[img_assist|nid=31164|title=The People’s Bank of China|desc=In September 1983, the State Council decided to have the PBC function as a central bank. The PBC plays a central role in monitoring China’s macroeconomic policy. courtesy of Elan Greenberg|link=node|align=left|width=|height=0]
In our meeting with Mr. Yao Gang, vice chairman of China’s Security Regulatory Commission, the delegation discussed China’s slow and steady, yet undeniable, introduction of capitalist ideals into its tightly regulated economic structure. The CSRC is a centralized securities supervisory system that assumes direct leadership over securities and futures markets. It oversees funds management companies investing in securities, raises the standard of information disclosure, helps prevent and handle financial crises, organizes and drafts laws and regulations and exercises centralized supervision over securities businesses.
During the last two decades, China has experienced growth in its securities market, which is based in two mainland cities — Shanghai and Shenzen — as well as the administrative region of Hong Kong. The market, although similar to the U.S. in structure, is defined by its fascinating idiosyncrasies. Like in the U.S., stocks, bonds (treasury bonds, corporate bonds and convertible corporate bonds) and funds are traded. However, unlike in the U.S., stocks come in two forms: A shares and B shares. A shares, traded primarily by domestic investors, are priced in the local Renminbi currency (Renminbi, abbreviated RNB, is interchangeable with yuan). B shares are quoted in U.S. dollars, and are available to both domestic and international traders. Since 2002, however, the international community has been able to invest in A shares with limitations.
After handing the delegation members thick, bound volumes of the CSRC’s annual report, Yao began to digest the complex figures and highlight underlying economic trends in China. China’s capital securities market ranks fourth globally with about 150 million investor accounts, and there are about 1,576 companies publically traded between the Shanghai Stock Exchange and Shenzen Stock Exgange.
Shanghai, the larger of the two mainland markets, is host to many large-scale enterprises where Shenzen has small to medium-scale enterprises. Yao claims that the millions of investor accounts “demonstrate enthusiasm of the Chinese people to participate in the capital market.” In the province of Liaoning with a population of about 45 million, for example, more than 300,000 people have brokerage accounts, according to a Washington Post article that described Chinese investors as “mesmerized” by the idea of getting rich, willing to pawn their possessions to invest in the stock market.
This enthusiasm, however, does not come without risk and repercussion. The stock index has both skyrocketed and plummeted within recent years — first from 1,000 in mid-2005 points to 6,000 in October 2007, and then this from 6,000 to 3,000 within the past six months. Reasons include, Yao explained, the large number of retail investors who can pull out their funds at a hint of market downturn and the largely undeveloped futures market. “The CRSC engaged in several concerted efforts to create stability, and the efforts have made great progress,” Yao reassured as he explained that such drastic complications must be addressed though macroeconomic policy, not just from within the capital market.
But in a country with such tight regulation, will a fully capitalist market, one without government oversight and ultimate control, ever emerge in China? New York Times blogger Joe Nocera thinks no — well, not so fast at least. “It’s hard to know what the real numbers are, for example, in a banking sector that can keep quiet about bad loans — with the government’s approval,” he writes. As the most lucrative Chinese companies, the one’s with the greatest influence over the stock market prices, are government-owned, can a government-free market even exist?
To reap the benefits of capitalism and let stock prices eb and flow according to market forces, China has to get over its separation anxiety by letting its citizens satiate their appetites for getting rich on their own dime. It should educate its people to understand and analyze market trends rather than just look to the government for information on the economy. A protest organized by frustrated investors in June highlights the deception many investors feel with China’s stock market. They accused big institutional investors of artificially supporting the stock to make money at the expense of small investors, according to the International Herald Tribune.
“The history of China is longer than the history of the U.S., but its capital history is smaller than [that of] the U.S. market,” he said. “But 16 years out, we have achieved great progress. We have a young history, but there is large vitality in the market.” We’ll see where it goes from here.