When it comes to stock markets, hard stats rarely lie. China’s A-share market has lost half its value over the last five years with 80% of investors losing out on their transactions in 2005. For a long time the blame has been pinned on systematic problems, principally the fact that two-thirds of all shares were state-held. This stock was non-tradable, which robbed the market of liquidity, while investors also lived in fear of a government turnaround and a mass dumping of the shares, prompting existing holdings to crash in value.
After a couple of false starts, the government’s share reform program finally got off the ground in mid-2005, as Beijing pushed the 1,400-odd listed companies towards dealing with the overhang of state-owned shares by making them fully tradable. Now, with the program over 60% complete, the overall response of the market has been positive – the Shanghai Stock Exchange Composite index (SSEC) has rallied to 1,300 from lows around 1,000.
Meanwhile, existing A-share holders have been appeased by promises of compensation for any loss in share value resulting from the addition of new stock to the market. All is sunshine and harmony – or so we are led to believe. The axing of a popular Shanghai TV chat show hosted by controversial economist Larry Lang has exposed the forces of dissension and suppression in this share reform story.
Lang is seen as representing the views of the millions of ordinary share investors who have lost a lot of money in the markets over the past 10 years. He and other commentators have been arguing that the share reform process is going in the wrong direction. The interests of small investors, he argues, are once again being ignored while the "laozhong" – the leaders of the listed companies – seize another opportunity to make a pile for themselves.
Given the high sensitivity levels about public debate on economic issues, the government wanted to keep the share reform issue off the agenda, so it pulled the TV show. The irony is that many of the issues highlighted by Lang have also been addressed by the authorities. For example, he claims the management buyout process through which state assets have been privatized has led to serious losses for the state – the government doesn’t disagree.
Lang also shares the authorities’ concern over flawed financial statements being provided by many listed companies and he has fully exploited his public platform to make frank and often damning statements about particular firms. Changhong Electronic, long considered to be one of China’s leading blue chips, turned in abominable results for 2005. The company turned in a deficit of US$462.5 million in its first loss-making annual result since its initial public offering.
Lang raised the possibility that this loss was in part the deliberate creation of Ni Runfeng, the former chairman of Changhong, arguing there was clear evidence that Ni was attempting to push through a management buyout.
Rather than muzzle Lang, the government should appreciate the common ground it shares with the TV economist. The China Securities Regulatory Commission is already struggling to improve the authenticity of the financial reporting from listed companies. And there are signs that it is working to get profitable Chinese firms listed overseas to come and offer shares on the domestic market.
While once-bitten, twice-shy investors have responded with suspicion to mainland IPOs in recent years, the market is in desperate need of more blue chips. There is a need for companies that can offer a stable return to investors, which will help shift the market from its current perceived status as a zero-sum casino.
In recent years, many of the best of Chinese companies such as China Telecom, PetroChina and CNOOC have chosen to list in Hong Kong and New York. Yet their business is rooted in China’s domestic economy. China Telecom is the key telecom operator in the south of the country while PetroChina and CNOOC play a vital role in getting petrol into the nation’s cars.
No place like home
The obvious question is why are these firms offering shares abroad and neglecting their home markets. From a domestic company’s point of view, the people who are most likely to buy its stock – and, more importantly, understand what the company is doing – are the people who also buy its products. And from a purely financial perspective, a China listing brings access to a fresh pool of potential investors.
It is up to Beijing to reassure this new wave of blue chips that this time market reform is for real. Re-launching domestic listings rarely creates an immediate re-bound in a market. New IPOs are effectively adding to the total number of shares available and cause a drain in liquidity from the secondary market into the primary market. It takes time for the demand to match the supply but it will do – provided the companies listing are attractive investment targets.
China’s long-neglected investors would welcome the chance to buy into a company that is likely to generate a substantial flow of dividends. Fueled by a blue-chip bonanza, the bulls would finally resume their run – as Larry Lang would no doubt say, given access to the airwaves.