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How to rescue China's underperforming stock market
www.chinanews.cn 2005-02-17 12:10:33
(Translated and excerpted from China Newsweek )
People undoubtedly have confidence in China's medium and long-term
economic growth, but nevertheless worry about the fundamental system and
structure of China's stock market. Therefore, the government has to
thoroughly consider and solve the problems that have long plagued China's
stock market.
The Chinese stock market has reached a critical phase. On January 20, the
index of the Shanghai Stock Exchange fell below the psychological bottom
line of 1,200 points, sinking to 1189 points, an eight-year low.
Against this backdrop, with approval by the State Council, the Ministry
of Finance decided to reduce the stamp tax rate of stock exchanges from
0.2% to 0.1%; it took effect on January 24, 2005. This action has been
undertaken to determine the proper preferential tax policies for the
capital market, as defined by the "Nine opinions of the State Council."
Prior to this, the government had cut the sales tax for stock and futures
exchanges, as well as for securities and futures companies.
However, a survey conducted by the website finance.sina.com indicated
that 42.26% of stock owners in China thought the reduction of the stamp
tax rate has had little impact on the stock market. This point was
obvious and widely perceived. Currently, money flow in the capital
markets has experienced a fundamental change. Since many investors have
chosen not to make any transaction, what practical difference would it
make between the original and lowered taxes? Furthermore, stamp taxes
only account for a small portion of the total investment costs for small
and medium sized investors, thus it will have little effect in rescuing
the stock market.
Right now, the market is anxiously waiting for the government to rescue
it by issuing more favorable policies. However, even if the government
issues expedient measures to help the market, these measures would not
have the desired beneficial effects.
If the fundamental framework of the stock market is reasonably designed,
short-term problems and troubles originating from the outside may be
solved by administrative policies of the authorities, as the market has a
relatively normal mechanism to respond to these policies. However, the
stock market currently faces systemic problems. Policies can stimulate
the market momentarily, but cannot make the market move automatically
towards the track of a virtuous cycle.
It is a well-known fact that the government's provisional efforts to
rescue the stock market in recent years have become gradually less
effective. A bigger slump will follow temporary prosperity, and
short-term rescuing efforts often fail to ensure the confidence of
long-term investments. Long-term investments rely on public confidence in
the country's continued economic growth and in the fundamental system of
the stock market.
Investors are not lacking in confidence regarding China's long-term
economic growth. The problem lies in the underlying fundamental structure
of the stock market. Therefore, all commentators agree that currently,
the government should seriously consider measures to solve the
fundamental problems of the stock market. Just as the Central Economic
Working Conference has stated that it is urgent to establish a system to
ensure steady growth.
In fact, stock exchange management has been engaged in systemic reform,
such as the implementation of sponsor and IPO pricing inquiry mechanisms.
But these reforms amount to technical adjustments, and may be easily
distorted by the fundamental flaws of the system.
Since the Chinese stock market did not naturally emerge from the
marketplace, the basis of the system was dictated directly by the
relation between the government and the market. In fact, the Chinese
stock market has been regarded as a financing channel for state-owned
enterprises (SOEs) from its very inception, a clear distortion of the
intended function of a stock market.
In order to finance SOEs, the government has implemented very tight
controls over listing. Securities regulatory organizations are
responsible for stipulating listing standards and examining and approving
the listing of publicly traded companies. The financing of SOEs by the
government and its efforts to maintain a leading position for its
holdings in SOEs has led to the prominent issue of disconnect between
shares and rights. The inequality between the majority shareholder in
SOEs (the Chinese government) holding illiquid shares and other
shareholders with liquid shares is widely viewed as a structural issue
that needs to be resolved quickly.
However, a proposal titled "Some Opinions of the State Council of the
People's Republic of China, on Promoting the Reform, Opening and Steady
Growth of the Capital Market," (also know as Nine opinions of the State
Council) published at the beginning of 2004, has already suggested basic
principles for solving this issue of shareholder inequality.
Nine opinions of the State Council stated its goals to, "actively and
steadily bring the issue of disconnect between shares and rights...to a
close, steadily solve the issue of full trading of restricted stocks of
listed companies. When solving the issue, we should respect market laws,
strive for stability and development of the market, and take effective
measures to protect the lawful rights and interests of investors, esp.
public investors." Regretfully, more than one year after the publication
of the document, little progress has been made on the issue of
shareholder rights.
Therefore, many critics have made an appeal to those at the
decision-making level. They believe that "great wisdom" must be used to
settle the systemic problems that entangle the stock market. For the
government, great wisdom would mean clarifying the relationship between
itself and the market and reducing its degree of intervention and control
over the market. This would allow the market to operate in accordance
with its own internal logic. In addition, people would no longer blame
the government for their personal financial losses in the market.
In order to achieve this, the authority of the securities regulatory
departments may have to be adjusted. With more authority, securities
regulatory departments could reduce the market distortions that are
caused by the government. This would further allow regulatory
organizations to maintain market stability and protect investors
according to the letter of the law. For instance, listing procedures may
have to be reformed, to transfer the authority to examine and approve
listing procedures to the stock exchanges.
Great wisdom also means that the government treats all participants in
the market equally. In the eyes of the government, the treatment of
state-owned shares versus floating shares and of government securities
firms versus medium to small investors, should all be equal, and all
participants are entitled to equal legal protection and equal punishment
for violations. However, at present, problems still exist in market
regulation. State listed companies have cheated investors, and many
illegal actions made by big shareholders have gone unpunished. Even the
compensation claims of medium and small investors have been denied by
judicial organizations. Unfair regulation is the primary reason small and
medium investors have lost confidence in the exchanges.
In the past three years, despite a prosperous Chinese economy, the stock
market has dropped more than 1000 points. It is just one indication that
the time has come to deal with some long-standing issues.
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(2005-01-19)
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