A book review by Jorge A. Maceyras
The enormous potential of China’s stock market is well publicized. According to some estimates, China’s GDP is expected to approach $5 trillion by 2020, assuming 8-10% annual growth, which would bring the stock market to $2.5 trillion. China’s stock market, though booming, still has several hurdles to overcome to effectively compete with the established stock markets of today.
In “China’s Stock Market: A Guide to its Progress, Players and Prospects”, Stephen Green provides an insightful overview of the issues affecting the stock market and other capital markets in China as of the year 2002.
Green begins with a brief history of the stock market, giving adequate political and economic perspective to the regulatory decisions which have most recently been affecting the market. Many of these issues are detailed thoroughly throughout the book, with significant data to support the arguments. For example, many of the shares of listed companies are non-tradable, which leads many outside observers to grossly over-estimate the total market capitalization of China’s stock market. In these estimates, China dominates the pack among emerging countries and their capital markets; however, when adjusted for shares that are traded and tradable, China falls short of other emerging countries in terms of total market capitalization and proportion of total GDP. While China’s total market capitalization in 2002 is Rmb 3,832.0 billion and 37.0% of GDP, tradable market capitalization is only approximately 1/3 of this figure at Rmb 1,248.5 billion and 12.0% of GDP. This ranks China fifth among emerging countries’ stock markets and other stock markets in Asia.
Green contends that the growth that China’s stock market has seen in the last 20 years is even more impressive considering the age and significant political and economic transition that has occurred over that period. Additionally, several scandals, poor regulation and weak enforcement have obstructed even further growth of the stock market and are described. As these obstacles are addressed, we can expect the stock market in China to continue its growth at an even greater rate.
China’s bond market, as Green describes, is also in a state of development, partially due to the uncertain nature of the interest payments to potential bond holders. Because a fully developed infrastructure for credit ratings does not yet exist, risk assessment of corporate bond issuers falls in the realm of due diligence of potential bondholders.
Foreign investment vehicles are described as a means for globalization and source of non-domestic capital, although setbacks resulting from policy decisions have prevented even further growth. For example, the B-share market, which allows foreign investors to invest in denominations of $USD and issuing companies to raise hard currency, has largely failed due to low liquidity and other political and economic deterrents.
Green also provides an interesting profiling of the investors in the Chinese stock market, including securities companies, investment management companies, investment funds, insurance and pension funds, and asset management companies. Listed companies are also profiled, from ownership, performance, and corporate governance standpoints.
One of the largest opportunities for improvement in the Chinese stock market is the regulatory infrastructure governing the activity in the primary (IPO) and secondary markets. Green addresses the weaknesses here and provides some explanation from an expert’s perspective, and provides data from a 2001 survey of individual and institutional investors which asks them to rank the activities that they believe hurt them the most.
As an introduction to the stock market in China, Green’s book avoids the sensationalized data which tends to pervade the mainstream media and provides a solid source of consolidated and apparently objective information on the topic. Because of the enormous speed in which changes in the regulatory and economic frameworks are taking place, Green’s book would benefit from an updated revision, given that much of the most recent data provided dates back to 2002. However, as an introduction to the historical context and ongoing issues which have been plaguing the system, “China’s Stockmarket” is a good pick.