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 China faces a stock market breakdown [Chris Leahy. Euromoney. London: Dec 2004. pg. 1] |
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正月鼠
[博客]
头衔: 海归准将
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加入时间: 2005/05/15
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作者：正月鼠 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
Abstract (Document Summary)
China's domestic stock markets need fixing. Their problem lies in the history behind their formation. After years of exploiting the exchanges as a source of capital for creaky state-owned enterprises, maintaining share prices at unrealistic levels and incessantly manipulatinng the market, the government has succeeded in creating domestic stock markets that are rigged, corrupt and dysfunctional. So much so that the domestic IPO market has virtually seized up. A curious yet worrying side effect of China's hamstrung domestic stock markets is that a vast offshore market has developed in Chinese stocks, which might already be larger than the domestic markets. Luckily for the mainland government, before things had really turned sour at home, along came the stock exchange in Hong Kong begging to list China's state-owned assets. Indeed, the government has been highly successful in raising from abroad large amounts of much-needed capital for its ailing state sector and, crucially, without ceding control. Exploiting overseas investors' hunger for all things Chinese might seem like a neat solution to the government's problems but it comes at a price. International investors are sophisticated enough and overseas listing regulations sufficiently stringent to ensure that only the most attractive SOEs and private companies will ever get near an international listing.
Full Text (3564 words)
Copyright Euromoney Institutional Investor PLC Dec 2004
China's economy is humming along in top gear but its domestic securities markets remain stuck in neutral. As the central government continues to struggle with financial reform, losses mount and systemic risk increases.
Meddling in the markets
EVEN IN THE face of the current slowdown, China's annual GDP growth is motoring along at about 8%. So why are China's stock markets drifting listlessly? The two domestic securities markets, in Shanghai and Shenzhen, have barely moved in three years. Their combined market capitalization, officially some $500 billion and second in size in Asia only to Japan's, is in fact less than $200 billion when account is taken of what is actually tradable and not state-owned. Even that valuation might be generous. The country's stock markets are mired in corruption, dominated by moribund companies and manipulated by government and speculators alike.
Fraser Howie, co-author of Privatizing China -- the stock markets and their role in corporate reform, elaborates on this China conundrum. "You can be bullish on the Chinese economy -- GDP growth," he says. "But that tells you nothing about what to invest in. There's a disconnect between the market and what's going on in the economy."
China's domestic stock markets need fixing. Their problem lies in the history behind their formation (see box on page 9 . After years of exploiting the exchanges as a source of capital for creaky state-owned enterprises, maintaining share prices at unrealistic levels and incessantly manipulatinng the market, the government has succeeded in creating domestic stock markets that are rigged, corrupt and dysfunctional. So much so that the domestic IPO market has virtually seized up.
"Officially, there's no [listing] quota now." says Bao Fangzhou, attorney at law at AllBright Law Offices in Shanghai. "Anyone can apply to list, but new listings are not the priority of the CSRC [the market regulator] and the government now. Our experience is that they approve new listing applications very cautiously. Good companies need to wait. They've really slowed down the process."
In fact many good companies do not wait; if they can, they head overseas. A curious yet worrying side effect of China's hamstrung domestic stock markets is that a vast offshore market has developed in Chinese stocks, which might already be larger than the domestic markets.
Luckily for the mainland government, before things had really turned sour at home, along came the stock exchange in Hong Kong begging to list China's state-owned assets. The initial approval to list nine state-owned enterprises in Hong Kong, now dubbed 'H' shares, in October 1992, started the trend of listing key state-owned assets internationally. In addition to Hong Kong, Singapore, the New York Stock Exchange and Nasdaq have all attracted numerous China listings, of both SOEs and private companies.
Indeed, the government has been highly successful in raising from abroad large amounts of much-needed capital for its ailing state sector and, crucially, without ceding control.
"The Chinese have found a nice little niche to finance their own reform," says Carl Walter, managing director and China chief operating officer at JPMorgan Chase Bank in Beijing. "People are crazy about China." Walter is also co-author of Privatizing China.
He believes that little forethought went into the government's decision to look overseas for capital. "I don't think they really thought about the impact at the time," he says. "Once they realized they could list companies overseas, they also realized that they could raise a hell of a lot of money."
Outsourcing the stock market
Howie explains the impact that Walter refers to. "They've outsourced the stock market," he says. "Look at the tradable market capitalization of the companies listed in Hong Kong versus the tradable 'A' share market: the ratio is US$250 billion to US$150 billion. So you already have a bigger market offshore than onshore. Plus all the best companies are listed offshore. A lot of people [in China] complained at the time."
Exploiting overseas investors' hunger for all things Chinese might seem like a neat solution to the government's problems but it comes at a price. International investors are sophisticated enough and overseas listing regulations sufficiently stringent to ensure that only the most attractive SOEs and private companies will ever get near an international listing.
Given the strict capital controls in place, domestic investors, including insurance companies and pension funds as well as retail investors, are essentially forbidden from investing in what are inevitably the mainland's most attractive assets.
As long as these restrictions persist, moreover, the greater the problem, since the better Chinese companies will continue to seek listings overseas. Raymond Hood, managing director of the China private equity fund Asian Direct Capital Management, explains: "We're seeing a disproportionate number of Chinese companies listing outside China," he says. "In the long term, deep liquid markets are very important for private-equity investors and those kind of characteristics come from well-regulated markets."
Hood is in the process of listing one of his fund's Chinese investments, Crystal Display Works, a leading manufacturer of backlit displays for mobile telephones.
"It's a company founded by a Japanese entrepreneur who moved his manufacturing to China," he says. "We're listing it in Singapore because listing on the China domestic markets is effectively a political process. Private companies find it very difficult to access domestic capital markets -- it's not a realistic opportunity."
The corollary of listing all the good companies overseas is that the bad ones, mainly SOEs, list at home, because that is all they can do, further discouraging better assets from contemplating a domestic listing. The market discrepancies thus become self-perpetuating. The government's view is worryingly myopic, says Howie. "It's good for them because they can raise large sums of capital and it's new money, foreign money," he says. "But they're also cannibalizing their own market."
Insourcing investment
With a precariously fragile financial system, change is clearly needed if China's securities markets are ever to perform the function for which such markets are normally intended. The government understands the need for change and a number of initiatives are under way or under consideration to resolve some of the more chronic market problems, including tightened regulation to improve corporate governance, proposals to solve the issue of the state shares overhang and encouragement of Chinese companies listing overseas to list simultaneously in China. Opinions are divided, however, on just how the government should tackle the problems and if it will be successful.
"Going forward, government has to bring the best companies to the market," says Frank Gong, managing director, head of research and chief economist for China at JPMorgan Securities (Asia Pacific) in Shanghai. "It also has to try to set up a sensible regulatory environment, with strong standards of disclosure and a legal system to protect minority interests. We need foreign investors in the market. One of the reasons the best Chinese companies go abroad is to bring in foreign investors. Why not do it in China?"
That is easier said than done, perhaps, but, in its defence, it can be said that the government has at least started to try. In December 2002, as part of China's accession to the World Trade Organization, it approved the qualified foreign institutional investor programme (QFII), an attempt to open up, very slowly and under strict supervision, the local domestic securities markets to foreign investors. The government also hopes that international capital and know-how will assist in the necessary restructuring of the securities markets.
Much trumpeted at the time, the government has since licensed a restricted number of large foreign investment banks to purchase limited amounts of securities on behalf of clients. Critics have dismissed QFII as a sideshow with relatively small allocations granted. They believe that the enthusiasm of foreign banks for the programme can be explained by the fact that these banks regard the allocation as little more than a licence fee for eventual entry to the domestic market.
Nicole Yuen of UBS, one of the first banks to receive a QFII allocation, points out that the amounts involved are not the point of the programme. "They [the government] should do a lot more," she says. "The objective is not to attract capital -- the market's already big. They want the values we inject -- the fund management skills, research, the investment in better-quality stocks."
Yuen does not think that the domestic market is all bad. "There are good 'A' shares," she says. "The quality's increasing but it's not enough, we want more. They [the government]are starting a change of heart. If you're a SOE, you have to stay at home; there's a lot of pressure for the banks to stay at home, to list on the 'A' market."
Forcing home listings
Most recently, a Hong Kong listing candidate, Shanghai-based Bank of Communications, was informed by the mainland government that it would also be required to list locally as an 'A' share, a decision that not everyone believes was the correct one.
"The problem still exists -- that the stock market in China reflects government interference," says Bao. "In September, the government ordered Bocom [Bank of Communications] to list on the mainland as well as Hong Kong. So the bank had to change its plans. Investors have lost confidence."
Others point out that while a listing of the better Chinese assets locally will eventually improve the quality of the market, such a move comes at a price.
China's domestic markets already suffer from the massive overhang of state-controlled shares created by the government's bungled attempts to partly divest from listed SOEs. Originally deemed non-tradable, such shares account for about two-thirds of the entire market.
Solving the vast overhang of the non-tradable shares is critical to normalizing China's domestic securities market. But adding vast new supply to weak markets might trigger sharp falls. In the meantime, listing new companies, especially higher-valued assets, will add to the problem.
Zhu Shan, managing director of FTSE/Xinhua Index in Beijing, says: "The government will solve the overhang. There's more urgency to solve it. The 'A' share markets have performed very badly so there's huge pressure on the government to solve this. The government will do it in a gradual way -- not all in one go."
Walter of JPMorgan proposes a more radical solution. "They should just declare them [the state-controlled shares] tradable and take the hit," he says, "The markets are already at five-year lows. It doesn't mean they're all going to trade."
JPMorgan's Gong is not so sure: "The government has to decide whether the market can suffer that shock," he says. "It'll be a heart attack for many people. Could they live long enough to enjoy the rebound?"
Behind Gong's comment lies the fact that the local domestic market is increasingly dominated by government-controlled securities houses and fund management firms, not the retail investors that many assume to be active. And they are in an increasingly precarious financial position. Any significant move by the government that sends the market into free fall risks dragging with it any number of these domestic market investors.
Brokers at risk
It is a risk most observers believe the government simply cannot afford to take. "This is a very, very big issue -- one of the most challenging issues the government faces, along with the bad loans to the banks," says Zhu Shan "The people at the CSRC are very keen to solve this issue.
They deny it, but I believe they have a list of the brokers at risk; they're looking at finding financial partners and at M&A opportunities."
At least here the government has made some progress. About seven securities firms have been closed or sold since 2002 and others have been hived off to state-run debt restructuring specialists. To date, only two joint ventures have been formed between domestic and international securities firms, although Goldman Sachs recently announced that it was negotiating to invest in an investment banking joint venture on the mainland that would seek to obtain its securities licence from failed broker Hainan Securities.
Despite the progress, there is still a long way to go. According to Walter and Howie, there are some 124 securities brokerages in China, with a network of more than 2,500 offices and regulatory capital of Rmb104 billion ($12.6 billion). Although they are not all sick, the smaller firms, perhaps as many as 80, are more vulnerable and are closely monitored by the CSRC.
Howie believes that the government must make a stand against corrupt and incompetent securities firms and draws a distinction between these firms and the state-owned banks.
"The securities industry is yet another sector the government feels it has to bail out," he says. "The banks were clearly used as policy banks for the government. You can't say that of the securities companies. They borrowed money, they stole it in some cases and they took bets and they lost. Why should the taxpayer foot the bill for that? How do people think they can live in this non-responsibility environment? Enforcement is so weak that they get away with it. They do it and it ends up as another problem for the government."
Eddie Wong, chief strategist at ABN Amro Bank, agrees. "If they want companies to be disciplined, they have to reduce the moral hazard problem -- to allow the SOEs and securities companies to go bust," he says. "They have to learn that if they make a bad investment decision, they'll go bust, not that if they make a bad decision, the government will bail them out. There's no responsibility -- it's an asymmetric incentive."
So the government is faced not only with restructuring the SOEs but also much of the country's domestic securities industry, both victims, though not innocent ones, of China's botched securities markets. It is a gargantuan task.
Yet whatever model the government chooses for reform of the state sector, it is doomed to fail, says Walter, because it still involves the government. "No matter where the assets are listed, the government still owns the majority and management is responsible to the government so its interests are not necessarily aligned with the company," he says. "There is an inherent conflict in this situation."
China's central government is swamped with problems from all directions. The state banks are technically insolvent and in need of radical restructuring. Official statistics place banks' non-performing loans at about 25% of total loans; independent analysts place the figure closer to 40%. China's domestic savings, a staggering 200% of GDP, or $3 trillion, are barred from investing in attractive assets overseas and instead are stuck in low-yielding domestic deposits, squandered propping up the very system that the government is desperately trying to reform.
China's capital controls and fixed currency regimes that government guards so jealously constantly work against the reform process and perpetuate the mispricing of risks and assets. Banks lend, invariably, to weak or bad credits because they need to pay depositors. SOEs happily borrow to increase production capacity, safe in the knowledge that no-one seriously expects they will ever pay the money back.
For as long as China's financial system continues to operate in its constipated and dysfunctional way, there is little prospect of an immediate resolution to any of China's financial problems.
It is a situation that calls for drastic and concerted action. Yet despite this, no-one is expecting the central government to move quickly. "They are in fear of taking any dramatic action in any field, because of unforeseen circumstances," says Howie. "They've seen Russia's short sharp shock as a disaster, mainly because they're not prepared to share power."
Looming pension crisis
In fact, Howie expects that the government will carry on with business as usual. "They will muddle on as best they can," he says, "and they can keep getting away with that because China's important to you and me, because we need cheap manufactured goods. Westerners misunderstand how long these companies can muddle along. When is a company bankrupt? Not until it's made bankrupt. If it can get someone to lend it money it can keep going. That's what China's doing; it's wasting its valuable resources."
Muddling through will get China so far but eventually the government will have to take the painful decisions. There is a looming social security crisis with a hugely underfunded pensions system and a rapidly ageing population.
The necessity for domestic institutions to invest in viable investments with attractive returns is pressing indeed. "The life companies and pension funds have to meet payout ratios," says Gong. "There's no way they can do that unless you let them go out and invest overseas."
Yet the government's refusal to reform the domestic securities markets means that the best Chinese assets will continually end up on foreign bourses, denied to the very institutions that need them most. The government has committed itself to instituting a qualified domestic institutional investor programme (QDII) an attempt to permit much-needed investment overseas by certain Chinese institutions but the details have yet to be hammered out.
"Why has QDII been delayed for so long?" asks Walter. "Why is there even a discussion? For domestic insurance companies and pension funds there are no renminbi investments they can buy domestically that can beat inflation, so they've got to let them invest overseas."
Meanwhile, some restrictions have been lifted to enable domestic institutions to start to invest internationally, but the liberalization is clearly not nearly adequate yet. "The Chinese government has been trying very hard to create institutional investors, like pension funds and insurance companies, but China is likely to get old before it gets rich." says KK Tse, executive vice-president Asia Pacific at State Street Bank and Trust Company.
China's fundamental problem lies with itself, or rather its system of government, as Howie explains. "Ideologically, they're not ready to trust the market," he says. "If you're moving from a Marxist system to a capitalist system, it's not a continuum. At some point there has to be a break. You have to take the medicine some time."
Raymond Hood of Asian Direct Capital Management, agrees. "The thing which underlies the reform process," he says, "is a change to a different model of power, giving up authoritative control of the economy. The [Communist] Party seems to be much more concerned about its monopoly on power. The biggest threat to it is social unrest. A lot of people in the Party understand that social reform is the only way that they can hold on to power."
There are signs now emerging that it might in fact be starting to lose control of the reform agenda. Through exploitation of the anomalous system of non-tradable shares created by the government's obsession with retaining control over state-owned assets, a set-up that created the pricing discrepancies in the first place, controlling stakes in listed SOEs in China are increasingly changing hands through the trading of so-called legal person shares. These trades generally occur off market and while they are subject to certain rules and regulations, the system is open to regular abuse, as a recently published report notes.
"[The] approval-heavy approach is aimed at preventing the stripping of state assets," writes Stephen Green, head of the Asia Programme at independent think-tank Chatham House in The privatization two-step at China's listed firms "but in practice it also creates opportunities for corruption and considerable uncertainty in the takeover process."
Losing control
Although not all of this so-called privatization is to be welcomed, there is a discernible trend of foreign-owned entities acquiring control of SOEs, notes Green (see table on page 100). The establishment in March 2003 of the state-owned Assets Supervision and Administration Commission (SASAC), which assumed ownership of some 190 SOEs deemed strategically critical to China's economy, has increased the scope for genuine privatization of the thousands of other SOEs into the private sector and especially, says Walter, into the hands of foreigners.
"You'll end up with a bunch of sectors that will be owned by foreign companies," he says. "You can see it already in the auto sector. It will come down to political will and sensitivity."
Can China's leaders make the ideological leap implied by these comments? If they cannot, China might well make its next great leap without them. As more power is necessarily devolved to provincial and local governments, the Communist Party risks losing control of the country's reform agenda. The final irony might be that the Party's reluctance to relinquish control could actually accelerate the process by which that control is ultimately ceded.
Foreign acquisitions of Chinese listed companies State shares (2003)
Stock name __ Seller __ Buyer (ultimate) __ Nationality
Saige Sanxing __ Shenzhen Saige __ Samsung Corning __ Korea
Huarun Jinhua __ China Resources __ China Resources Enterprise __ Hong Kong
Pufa Bank __ Shanghai State Assets Management __ Citigroup __ USA
Chongqing Beer __ Chongqing Beer __ Scottish & Newcastle Breweries __ UK
Lucky Film __ China Lucky Film __ Eastman Kodak __ USA
Veken Elite __ Ningbo Textiles __ Itochu __ Japan
ST Hualin Tire __ Hualin __ Gajah Tunggal Tbk __ Singapore
Bright Dairy __ Shanghai State Asset Management __ Danone Group __ France
Shanghai Industrial United __ Shanghai Industrial United __ Shanghai Industrial __ Hong Kong
ST Jilin Development __ Jilin Provincial Development & Construction Investment __ China Resources __ Hong Kong
Shenzhen Development Bank __ Shenzhen Investment Management __ Newbridge Capital __ USA
Source: 'The China privatisation two-step at China's listed firms' -- Stephen Green, Chatham House
作者：正月鼠 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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 China faces a stock market breakdown [Chris Leahy. Euromoney. London: Dec 2004. pg. 1] -- 正月鼠 - (24156 Byte) 2005-6-03 周五, 06:56 (1292 reads)
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