Q: The stock market is the barometer of economic
development. However, China's rapid economic growth and long-term
sluggish stock market are in striking contrast, something rarely
seen in worldwide securities markets. What is the reason behind
this phenomenon? What are the defects in China's stock
market?
A: China's stock market, developing along with the country's
market economy, has made great contributions to national economic
development. However, we should admit that as our knowledge and
experience are insufficient, the establishment of infrastructure
such as the system of the stock market has been weak, and the
market is incomplete, causing the continual falling of share
indexes in recent years.
The stock market is considered the barometer of economic
development. When the economy develops, the stock market will
flourish. While economy shrinks, the stock market will be bearish.
But it's an abnormal phenomenon that China's stock market remains
sluggish despite the country's rapid economic growth.
Data from the National Bureau of Statistics show that, in 2004,
China's GDP reached 13.65 trillion yuan (US$1.65 trillion), rising
9.5 percent year-on-year. Meanwhile, the composite index of the
Shanghai Stock Exchange dropped 15.15 percent. China's GDP has
maintained a growth rate of more than 7 percent in recent years.
But the composite index of the Shanghai Stock Exchange fell
gradually, from 2,245 points on June 15, 2001, the highest point,
to 1,187 points on February 1, 2005, a six-year low. The duration
of adjustment and the range of the drop are rarely seen in the
worldwide securities markets. It clearly shows that hidden in
China's stock market is inefficiency and other problems difficult
to solve with regards to future development.
According to economic laws, fluctuation in the stock market is
inevitable, but it should basically be in synch with the situation
of the macro-economy. China's stock market is far from being a
barometer, as the market value of tradable shares accounts for less
than 20 percent of the GDP. Such a small proportion can't make the
stock market a barometer.
Currently, China's stock market has three innate defects. One is
the split share structure. The biggest difference between domestic
and overseas stock markets is that about 70 percent of shares are
non-tradable shares held by the state or legal entities, which was
originally designed to prevent the loss of state-owned assets.
Until now, this defect in the system has been the biggest obstacle
for the development of the securities market. Split share structure
brings different interests and rights among shareholders, leading
to inadequate tradability in the market, and impeding the flow of
social capital in the same direction as the heated sector of
national economic growth.
Another important defect of China's stock market is the quality
of listed companies. There are 1,400 listed companies in the
domestic stock market, but there is a severe shortage of a group of
companies worth investing in. On one hand, Chinese listed companies
are poor in quality, low in credit and incomplete in corporate
governance. Investors can't get the return they deserve. On the
other hand, as China's market situation is not favorable, many good
quality large enterprises are listed in overseas stock markets. As
a result, the structure of domestic listed companies can't be
improved.
The third defect is the incomplete legal system and environment.
In the stock market, illegal cases are too numerous to mention, but
people violating regulations haven't received due punishment. Small
and medium-sized investors can't afford the high cost of protecting
their rights.
Despite being in a downturn, the stock market is also in the
right period to be adjusted. At present, China is solving the
problem of split share structure according to the principle of
“following market rules, being beneficial to the stability and
development of the capital market, and protecting the legal rights
and interests of investors, especially public investors.” The first
round of trial reform on split share structure started in May 2005
and has achieved preliminary success.
The second round has already been launched. China will sum up
the experiences of trial reforms, finish outlining rules, and
propel listed companies to join in the reform of split share
structure. All of this is to resolve the problem left over from the
past that has long been plaguing the stable development of China's
capital market, and to lay a firm foundation for healthy
growth.
The Stock market is a barometer of
economic performance. Pictured are stock investors in Fuzhou,
capital of Fujian Province.
