A shares: not worth the paper they're written on?

Does the meaning of a æshareÆ lose something when translated into Chinese? æGu piaoÆ in Mandarin, means little more than ticket and the idea of this piece of paper entitling the owner to a share of a companyÆs earnings has little meaning.

Recent talk from the China Securities and Regulatory Comission (CSRC) chief advisor Anthony Neoh on the A and B share markets has sparked more euphoria about the China market. So have changes in the Chinese fund management industry.

Recently, retail investors were helped in their search for better performance by the creation of an open ended fund by Hua An in cooperation with Fleming Investment Management. The open-ended fund will help investors by giving them the option of redeeming their shares if they are unhappy with the performance of their fund managers.

Until now, they could not retrieve their money for an average of at least five years. But some commentators say that a more sophisticated fund management industry is irrelevant compared to the influence that central planning still has over the stock markets.

Does the meaning of a ‘share’ lose something when it gets translated into Chinese? Share is ‘gu piao’ in Mandarin and means little more than ticket. The idea of this piece of paper entitling the owner to a share of the company’s earnings has little meaning in China. This is because all assets in state run firms are owned by the state – as stated in article 4 in the 1994 company law.

This means, in theory, that not only does the government own its shares in an incorporated state firm, it also owns all the assets, to which a shareholder is commonly acknowledged to have some right. A contradiction? Yes, but it hasn’t prevented managers in SOEs from issuing shares as an easy way to raise cash. It also explains why company managers are not concerned with running the company to provide profits to shareholders.

Conversely, investors don’t have high expectations from companies. Cash dividends are rarely paid, and instead, investor are happy to  receive rights to new shares. Chinese investors, 90% of them retail investors, look for capital gains. And they know that capital gains are achieved by the government talking up the market. The government did this in June this year, when the government state organ, the Renmin Ribao, proclaimed that there had been “a fundamental change in the economy”, and share prices shot up.

Consequently, shares are traded in a manner quite unrelated to the quality of the issuing company.

And with 50 million retail accounts, the government knows that any downward move in the stock market will hit the man in the street – precisely the person that the government is concerned about hurting when China is suffering from record unemployment. According to Anthony Neoh, chief adviser to the China Securities Commission, only a fraction of domestic savings have been mobilized in China. Neoh estimates that there are $850 billion in bank deposits.

While the market cap of the Shenzhen and Shanghai stock markets is a combined $450 billion only a third, or $150 billion is non-state held, reflecting the relatively small amount of money put in by investors. A market downturn would put off holders in these funds from investing in the stock market.

The stock market in China was not originally conceived as a way of raising funds from investors. The government encouraged the markets in the early 1990s after Deng Xiaoping’s Southern Tour in 1992 after shares were already being traded informally on the grey market.  

Originally, corporatizing companies was meant to be just a way of giving managers a stake in their own bottom line and thus improving profitability. The shares were not meant to be traded but SOE managers quickly saw that issuing and selling shares was a simple and non-binding way of raising capital. The creation of the stock markets in the early 1990s was a way to legalize a part of the economy that was rapidly slipping out of the control of the state.






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