Howie is co-author of Privatizing China and an expert on the history of the Chinese stock market. He says China's attitude to foreign investors changes depending on market conditions. "When things are going badly, the Chinese authorities are eager for foreign investment. The qualified foreign institutional investor scheme (QFII) is used to pump up the market in bad times, for example, but foreign investors are left scrabbling for quota when the market improves,ö he says.
Yet such a suspicious attitude to foreign investment is absurd if the authorities are serious about transforming Shanghai into a genuine international financial centre. Successful cities such as New York, London and Hong Kong all have a major foreign presence. Such an arrangement brings the biggest companies, the largest institutional investors and the best international practices.
Howie says itÆs not clear what the Chinese governmentÆs plans are regarding the role of the domestic capital markets. ôThe biggest weakness at the moment is listing companies on foreign exchanges, including Hong Kong. Half to two-thirds of the domestically listed companies are dross. They should be replaced with the blue chips that are currently going abroad,ö he says.
Indeed, with Hong Kong being guaranteed autonomy for 50 years following the 1997 handover, itÆs not clear how the tension between the domestic market and the Hong Kong market will be resolved. Given the much-vaunted Chinese long view, it might even be possible that the Chinese government is waiting to obtain control of the Hong Kong stock market.
One solution to improving the domestic market, suggests Howie, would be to allow a far larger QFII quota and list more companies locally. The QFII would help bolster the domestic capital pool, which becomes overstretched in the event of large listings, and provide investment expertise.
The domestic markets are in such a poor state, that many IPOs have been shelved in recent years - making it difficult for the markets to fulfill their most basic task of supplying local companies with capital.
Howie is also skeptical about the efforts of current top securities regulator, Shang Fulin, at propping up the market. ôThe regulator is subject to intense lobbying by the securities houses. As a result, the China Securities Regulatory Commission has become obsessed with keeping the index up,ö he points out.
ThatÆs in contrast to the previous chairman, Zhou Xiaochuan, currently governor of the central bank who allowed the market to collapse while he worked on ways to clean up the market and solve the problem of the state ownership overhang, comprising two-thirds of total shares. ôThe important thing here is to make the market more effective and transparent. Shoring up the index shouldnÆt be part of the regulatorÆs job description,ö notes Howie.
That share overhang problem has been solved with the latest batch of reforms, which involved listed companies, most of which are state-owned, converting their state shareholding to tradable share status and compensating minority shareholders via cash and rights issues. This reduces state ownership and theoretically opens the door to privatisation. It should also allow a M&A process to get underway.
ôMany people are touting M&A as a way of putting managers under pressure, and thereby improving their performance. But itÆs a fallacy to imagine that previously bad managers will suddenly become good managers. ItÆs not as if they were pretending to be bad managers in the past,ö he notes.
Fixing the state share overhang problem was an important pre-condition to reforming the market, but is not sufficient on its own to justify a bull market in Chinese stocks, he concludes.
The key Shanghai composite stock market index is currently hovering at 1600 points. In 2000, at the height of the tech bubble, the index touched 2100. ChinaÆs capital markets clearly have plenty of catching up to do.