You've expressed doubts about the relevance of a stock market to a developing economy in the past. What is your view now?
Stephen Green: The stock market is still not especially significant in China. In terms of total funds raised, it represented only 4% last year, the same as in 2002, but sharply down on 8% in 2001. The banking system is still far more important. Also, the listing process is still bureaucratic. The China Securities Regulatory Commission is in charge of the process, and despite some reforms there is a still a very long queue of companies waiting to list.
Why does this back-log exist?
The problem is that the CSRC decides which companies should list rather than the market. In developed markets, the underwriters choose companies they feel will be capable of a successful listing. By underwriting an IPO they also bear the risk of the venture failing. But the CSRC simply says any company with a return on assets of over 10% for the last few years can list, which is many hundreds. Another anomaly is that if a company has ROA of 20% it's not given precedence over the company with 10% ROA. Nor is there any assessment of the company's future potential, which is crucial to investors. Finally, there still seems to be a perception that the government should support many of these state-owned companies with stock market capital. Perhaps that's a remnant of the planned economy mentality.
Is the CSRC reluctant to hand over power to the underwriters?
Possibly. Generally speaking, under Shang Fulin, the market has not seen any big advancements in stock market policy. However, nor has it seen any step backwards.
What is the market outlook for this year?
The stock market has run up 10% in the last few months, so that has increased people's confidence. The wall of institutional money building up, and the State Council's nine articles in February, have both given investors some confidence that 2004 will be the year in which the market recovers.
What are investors actually buying?
Blue chips. Everybody is putting money into the same companies - the top 50-100 companies, such as BaoSteel, the power companies, China Telecom and the oil companies. There is a possibility that this concentrated investment is causing a bit of an asset bubble.
Where's the money coming from?
Institutional funding/asset management is really taking off in China. We are seeing huge sums of money pouring into equity funds (and money and bond funds - they are rapidly diversifying). Money is also coming from retail investors and also from insurance companies. Interestingly, insurance companies can invest 30% of their funds in the stock market, but have only invested 5% so far. That is because they don't like paying fees to the fund management companies, and also because they are cautious. However, in February they were permitted to set up their own fund management companies, and I am sure that will mean they sharply increase the amount of funds they put into the stock market.
Has corporate governance improved? In the past there have been numerous scandals.
Yes, the consensus view is that the top 100 companies have got credible accounts. They are also often audited by international auditors. However, the second and third tier companies are being punished for not having greatly improved corporate governance.
Are we seeing an influx of more QFII money, and does this mean that the stock market is getting more attractive to foreigners?
The money allowed to be brought into China so far is around $2 billion. I am not sure it's necessarily because Chinese companies have suddenly become more attractive. It is possibly also because many investors are betting on the appreciation of the Yuan. So at least some of that money is sitting around in bank accounts or money market and bond funds. That's perhaps why the State Administration for Foreign Exchange is being slow about expanding the QFIIs' quotas.
How realistic is the prospect of QDII being introduced soon?
QDII is an important way of making sure Chinese people get the most from their savings. Allowing their pension, insurance and fund firms access to international capital markets will allow them to diversify their risks and boost their returns. It would have a positive overall impact on China. The problem is that people fear that QDII would cause the domestic stock market to crash since money would flow out. So in the first instance, there would be a QDII 'experiment' with limited funds which could be gradually expanded. That is fine. What is important in the long term though is protecting investors - not companies - and QDII would help in this. Also, I think that Chinese investors would stick with China's blue chip firms since many of them are very profitable. It would be the bad firms that would be punished.
How about the bond market?
The bond market is also slightly disappointing, The CSRC does not have jurisdiction over the issuance of corporate bonds, which is still under the National Reform and Development Commission. The CSRC wants to expand the bond market but doesn't have the power. All it can do is allow issuance of convertible bonds, which has gone up significantly. Last year, which was hailed by many as being the turning point in the development of the bond market, turned out to have around the same amount of issuance as the previous year (around Rmb40 billion). That is not much compared to the stock market's Rmb70 billion in 2002 and Rmb135 billion in 2003.
Privatization is always an important topic in China. How useful is the stock market for that? How is it occurring?
It is happening away from the stock market via the negotiated sale of legal person shares, not by the acquisition of listed shares. The number of privatizations is growing, and it is a positive thing, since these companies are more likely to perform better. There is a lot of manipulation of these acquisitions, however - many of them are faked. But despite this, it is a good thing, since private owners on average do a better job. What I hope will happen soon is that listing companies will sell off strategic stakes just before or after their IPO so we can get ownership being transferred as well as capital being raised. This would I'm sure increase the quality of listed firms.
You can contact Stephen Green at [email protected]
