Thursday, April 14, 2005
From Fang Xinghai of the SHSE
China's weak link - Capital market reform will take years. Why not start now?
14 April 2005
(c) 2005 The Financial Times Limited. All rights reserved
The fragile banking sector is not the only problem that ought to give Chinese leaders sleepless nights. There are also the country's stock markets.
The days are long gone when the rising markets of Shanghai and Shenzhen threatened to eclipse Hong Kong as the listing location of choice for the best Chinese companies. Although a handful of locally listed companies have prospered, the markets as a whole have fallen since 2000. Last year, the Shanghai composite index dropped 15 per cent, making it one of the world's worst performers in spite of Chinese economic growth of 10 per cent.
Instead of complementing bank lending by giving companies another way to finance growth, the stock markets weigh on the banks; many brokers are near bankruptcy and thousands of irate retail investors are in debt.
In the short term, a plan by the China Securities Regulatory Commission to forge ahead with privatisation by reducing the state's shareholdings in listed companies could make matters worse. The pilot schemes being mooted to sell more shares in state companies - in which the state has typically kept a 70 per cent stake - will remind investors how much unsold stock is hanging over the market. Fewer than one-tenth of Chinese listed companies are from the private sector.
There is, however, no other obvious way to begin. Investors have been aware that the overhang has existed since state companies first began listing minority stakes. China must not balk at doing what is required.
That does not mean that this inevitable round of further privatisation will be easy. Managers of state companies, some of them corrupt, have come to see a listing as an easy, one-off form of capital-raising to finance ailing operations. Too few have understood the true purpose of the markets, which is to finance enterprise and to reward investors for the concomitant risk.
A tougher official attitude - leading to heavily discounted share sales by shoddy state companies, better opportunities for private entrepreneurs and strict regulation of brokers - will face political resistance, especially from cities and regions where the worst companies and brokers are based.
But it is essential that the stock markets in Asia's most dynamic economy be made healthy. Private sector companies need capital, and China's future pensioners need liquid shares in a range of blue-chip companies in which funds can invest on their behalf.
Along with the banks, the capital markets are the weakest parts of a Chinese economy renowned for rapid economic growth and the prowess of its manufacturing industry. If China fails to get this right, shareholder capitalism could be delayed for another generation. Pensioners would lack a reliable source of income, and capital for dynamic Chinese companies - the ones that should be taking the economy to the next level of development with investments in high technology and services - will remain all too scarce.