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China's Quirky Stock Market Finally Matters
Economic success in China and other Asian countries has given the region large foreign reserves, producing a global money glut that has driven down interest rates and driven up the price of assets from San Francisco to Sydney to Shanghai, creating worries of an asset bubble in China and elsewhere. The Chinese government has been trying to address those imbalances, but it is unclear whether that can happen in an orderly way in an economy so heavily controlled by a Communist government.
An announcement by the Chinese government that it was cracking down on illegal trading contributed to the Shanghai stock exchange's dramatic slide on Tuesday.
  An investor checks stock prices on a board in Shanghai on Friday, when the benchmark index gained 1.2 percent after significant losses early in the week. (By Eugene Hoshiko -- Associated Press) |
Established in 1990, the Shanghai market has for most of its existence has been considered one of the world's worst stock exchanges.
From 2002 until the beginning of 2006, even as the Chinese economy grew 10 percent a year, the stock market fell. And as late as mid-2006, large Chinese companies would not list their stocks on the mainland markets as a matter of course. But Chinese policymakers pushed changes to improve the credibility of the market. Instead of requiring only annual or semiannual reports, for example, companies now have to release quarterly reports.
Three years ago, Chinese officials took control of five brokerages that had engaged in illegal trading. Last year, securities regulators freed the more than 1,300 listed companies to sell their state-owned shares over time, in effect putting $270 billion in government-controlled assets into the public sphere.
Analysts think that was at least partially responsible for setting off the recent stock market boom. Another factor was the increasing number of Chinese consumers borrowing against real estate and investing in stocks. State-owned enterprises and large Chinese investment firms control 40 to 50 percent of shares, with the rest owned by individual Chinese shareholders. This differs from the United States and other more mature markets, where institutions control 80 or more percent of shares.
As of the end of 2006, 842 companies were listed on the Shanghai Stock Exchange. Its composite index was up 130 percent from the previous year, far outperforming the Dow Jones industrial average, which was up 16 percent.
In recent months, the Shanghai and Shenzhen exchanges have had a combined market capitalization of roughly $1.4 trillion, compared with the New York Stock Exchange's $20 trillion.
There are other indicators that the government influence on the markets is starting to recede.
Ninety to 95 percent of the companies listed, such as China Telecom, Baoshan Iron & Steel and the Industrial and Commercial Bank of China, remain state-owned. But in recent months, "we're finally seeing for the first time, good, big companies listing rather than heading straight for Hong Kong," said Peter Alexander, founder and principal of Z-Ben Advisors, an investment consultancy in Shanghai.
Many challenges to achieving a fully transparent and fair stock exchange remain, however.
Part of the difficulty is that the typical structure of Chinese companies listed on the exchanges differs from those of the United States in that most have state-owned parent companies that are not listed.
