China’s Capital Markets

By Yong Zhen

Capital markets in China include stock, bond, futures and other derivatives, as well as the private equity market. China’s Capital Markets is the first book to systematically study China’s capital markets, examining its evolution, policies, reforms, current situation and challenges. Following an introduction to China’s capital markets and economic growth, the book moves on to cover further capital markets in China, including: the banking system, mergers and acquisitions, and valuation adjustment mechanisms, before concluding with a discussion of the opening up and internationalization of China’s capital markets.

• Provides an overall picture of China's capital markets including: policy analysis; case studies; investor strategies and behaviours; and suggestions for success in the markets
• Offers diverse perspectives, using rich data and analysis
• This is the first book to systematically study China’s capital markets

• Language: English
• Publisher: Elsevier Science
• Release date: Oct 17, 2013
• ISBN: 9781780633602

Yong Zhen

Dr Yong Zhen is an Assistant Professor of Business and Management at Beijing Normal University, Hong Kong Baptist University United International College. He has over 10 years of work and research experiences in Chinese retailing. He studied in the USA and the UK; and obtained Ph. D degree from University of Cambridge.

Book preview

Competitiveness.

Introduction

China’s capital markets, particularly the stock market, have been widely criticized by both Chinese and foreign investors for years. While China’s economy has achieved over 9 percent annual growth rates for the past 10 years, China’s stock market does not reflect that growth. Shanghai Stock Exchange Composite Index (SHCOMP), the main indicator of China’s stock market, shows no great difference between 2002 and 2012. From 2007 to 2012, China’s Gross Domestic Product (GDP) more than doubled, while SHCOMP in 2012 was only about one-third of that in 2007. On the other hand, some people say that China’s capital markets have only taken about 20 years to finish the journey that took Western markets more than 100 years. How should we look at China’s capital markets? Why are China’s capital markets here? Where should they be? This book tries to explore the real face of China’s capital markets and look for the answers.

China’s capital markets are different from Western markets, because the economy in which they are developing is different. To understand China’s capital markets well, it is essential to understand the characteristics of China’s economy, a state-led economic growth model. China’s economy is, first, a transitional economy. At the same time, it is also an emerging economy. This means that China’s capital markets have characteristics of both a transitional market and an emerging market. As the economy transitions from a planned economy to a market economy, although China’s planned economy has largely disappeared, its influence is still invisibly strong and can be seen in the government’s way of developing and supervising China’s capital markets. In fact, China’s capital markets are an essential part of China’s economic model. The strategy and thinking of developing China’s economy are also used in developing China’s capital markets: it is the Chinese government that leads and dominates the planning and development of China’s capital markets.

In China’s capital markets, state-owned enterprises (SOEs) are small in numbers while powerful in their influence. Their market value accounts for more than half of China’s total stock market value. They are also the main players of China’s bond market. So, the performance of China’s capital markets is closely related to SOEs. It is SOEs that dominate China’s capital markets. SOEs are responsible to governments and the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), which may have more influence on the SOEs than the market. This may partly explain why corporate governance in China’s stock markets is weak.

China’s capital markets were originally developed to solve the capital shortages problem of SOEs and the central government. Since established, China’s capital markets share the responsibility of financing SOEs and government with banks, which not only greatly reduces banks’ non-performing loans (NPLs), but also lowers the financing costs of SOEs and government. This is why China’s capital markets, particularly stock markets, have developed a fundraising function stronger than their investment function. Since China’s stock exchanges were established in 1990, there have been 2464 listed companies. China has about 100 million stock investors, the largest stock investor group in the world. However, their investment returns in stock markets are often not much better than savings interest rates in banks for most individual investors. In addition, Chinese small and medium-sized enterprises (SMEs) greatly contribute to economic growth, innovation and employment. But they experience much more difficulty than SOEs in obtaining financing. China requires sustainable economic growth of a better quality, which needs the contribution of SMEs. Can such capital markets support sustainable growth?

To achieve sustainable economic growth, China’s capital markets need a change and a new strategy. A possible strategy in the next years may be an inclusive strategy to develop real inclusive Chinese capital markets, which not only serve large firms and SOEs but also, equally, serve a large number of SMEs; not only for fundraising, but also for investment purposes. China’s capital markets need to answer two questions: how to provide financing for sustainable economic growth, and how to provide or improve investment opportunities for investors. It is time to change the imbalanced development and structure of China’s capital markets. To do this, at least two problems need to be solved.

One problem is the positioning of China Securities Regulatory Commission (CSRC), which is the main regulator of China’s capital markets, supervising China’s stock markets, futures markets and bond markets. The current problem is that CSRC is not independent. It is under the State Council and has to follow and implement the central government’s economic policies. In other words, China’s capital markets have become a means of implementing central government’s economic policies. Then, efficiency is often not the most important goal of China’s capital markets. The dying fate of B-share markets was, in fact, caused by CSRC. In developing H-share and red chips markets for bringing SOEs more benefits, B-share markets have been sacrificed. So, it is necessary for CSRC to be independent and in a neutral and fair position. Although CSRC proposes to develop a fair, transparent and efficient capital market, this is hard to realize when CSRC is a means to implement central government’s economic policies, and when senior appointments frequently flow between SOEs and governments. The quality of listed companies is the cornerstone of developing an efficient stock market. Without an independent CSRC, the quality of Chinese listed companies is hard to improve. This may be one reason why the delisting mechanism is still not well established in China’s stock markets after more than 20 years.

Another problem is applying the market mechanism in China’s capital markets. What kind of mechanism is established in China’s capital markets is a basic question to be answered. Even though China’s economy is a state-led model, a working market mechanism is critical to make the capital markets perform well and develop sustainably in a relatively efficient way. An efficient and effective capital market needs to follow market rules and should embody market advantages. For this to happen, it is critical to deregulate and gradually liberate interest rates. Only when the interest rate is market-oriented can China’s capital market establish a real market mechanism, such as the bond market developing well. For example, when inflation is high while the interest rate is still regulated, it is quite common to see savings flow to shadow banking, because the regulated interest rate brings low returns for depositors. A regulated interest rate also means that bond markets cannot work and develop well due to a distorted yield curve. Meanwhile, a unified market and supervision are necessary for developing China’s capital markets. China’s bond market is administratively fragmented, with five separate regulatory agencies for supervision, which is ineffective and has to be solved. A more standardized and unified bond market needs to be established. In today’s Chinese capital markets, there has been too much administrative interference.

It is obvious that China’s capital markets need reform. A basic question to be answered is the positioning of China’s capital markets: what kind of capital market should they be like? China’s capital market should be a capital market itself. It is as it should be. It should have equally important functions for fundraising and investment. For fundraising purposes, it is time to change the fundraising priority provided to SOEs, and more attention needs to be given to SMEs and private firms. There are studies (Zhang, 2012) showing that, for listed companies, SOEs cannot outperform non-SOEs in financial performance and profitability. For investment purposes, strict supervision of the quality of listed companies and establishing a market-oriented mechanism, such as a delisting mechanism and promoting a dividend payout culture, are necessary. Active speculations in China’s capital markets are the result of the current capital markets’ institutional arrangement, and rooted in the reality of China’s capital markets. It can be argued that China’s economic sustainability is closely related to what kind of Chinese capital markets will be developed. Market-oriented Chinese capital markets can contribute to the sustainable development and growth of China’s economy. But, under the state-led economic model, it is a big challenge to develop a market-oriented capital market. China’s capital markets have a long way to