China's stock market is still a teenager, but it's a healthy one with dreams of becoming more like the grown-up markets internationally. Especially for China's stock market, 1998 was a long time ago.
That was the year Shenzhen Development Bank issued public stock-the first such kind approved by the Chinese Government.
In recent years, the terms "stocks" and "stock market" have become household names for Chinese people. At the same time, more and more companies are seeking ways to profit from the record-breaking A share market.
However, there is still a huge developmental gap between the Chinese stock market and mature stock markets around the world.
Still developing
Since the Chinese stock market was born only 20 years ago, its size is far smaller than those of mature markets. On January 9, 2007, the aggregate market value of Shanghai and Shenzhen, China's two stock exchanges, surpassed 10 trillion yuan after China Life contributed 810.7 billion yuan, according to China Business News. In comparison, listed companies on the New York Stock Exchange (NYSE) represented a total global market value of approximately $25 trillion as of December 31, 2006, according to the NYSE's website.
"In China, however, the proportion of tradable stocks is very low," Ouyang Liangyi, a lecturer at the School of Economics of Peking University, told Beijing Review. "Every year, less than 1 trillion yuan can be collected through the stock market, so long-term capital mainly comes from bank loans."
The derivative market in China is also underdeveloped.
"The transaction value of the Chicago Mercantile Exchange, which is No.1 in the United States and No.2 in the world, may arrive at $640 trillion a year, while the total transaction volume of China's three commodity exchanges totaled only 14 trillion yuan," Ouyang said. "In China, there are no futures of crude oil and iron and steel, and only the Shanghai Futures Exchange has fuel futures."
Moreover, the Chinese stock market contains only two main boards composed of the Shanghai and Shenzhen stock exchanges, and a secondary board in the Shenzhen Stock Exchange that was established in 2004 for small and medium-sized businesses. In comparison, the U.S. stock market contains main boards (such as the NYSE), secondary boards (such as Nasdaq), curb trading (trading that occurs outside of general market regulations, commonly through computers or telephones after the official exchanges have closed) and online trading.
"Since curb trading is not available in China, stocks cannot be traded after their transactions are suspended by stock exchanges, leading to losses of investors," Ouyang said. "It is also impossible for us to see online trading in China."
According to him, Binhai New Area in Tianjin once proposed to offer curb trading, but it failed to be approved.
Short on innovation
In terms of technological support, Chinese stock exchanges are by no means weak, because they never adopted manual transactions since their establishment. "Chinese stock exchanges are not competitive because the supervision mechanism impedes their innovation," Ouyang said.
An example is that the five Chinese exchanges (two stock exchanges and three commodity exchanges) had all hoped to develop derivative products, but the China Securities Regulatory Commission denied their applications. It tried to develop derivatives products by itself, but failed at last, leading to a waste of resources.
Sizes of listed companies in China are small. In the early days of the Chinese stock market, a quota mechanism to issue new stocks was adopted, which means that every year the volume of newly issued stocks was fixed. If more companies wanted to issue shares, each of them had to issue fewer shares. At that time, many companies just issued shares valued at several hundred million yuan. In recent years, however, much larger companies have listed such as China Life, Industrial and Commercial Bank of China and Bank of China.
"Since a large number of Chinese securities companies are state-owned, they are short of innovation capabilities and almost all large securities firms have suffered from scandals," said Ouyang. According to him, by making use of their large market influence, large securities companies will often seek illegal benefits for themselves. But in the United States, securities company capital comes from individuals or companies, so they must be purely business-oriented and expand their market influence.
Supervision problems
Supervision over the stock market in China has developed-it realizes the quota system for stock issuance is a thing of the past. But it's still not up to par with international practice, such as the record system adopted in the United States. In a record system, the market, instead of supervisors, will judge qualifications of companies to issue stocks, and only if the companies disclose authentic, exact and complete information.
"China will not adopt the record system," Ouyang said. In his opinion, there is a complete civil procedure in the United States, which can regulate liabilities that result from breaching contracts. But in China, the judicial system is not efficient and investors cannot expect compensation if there is market manipulation.
"China will also adopt the record system when the legal system becomes perfect-maybe in decades," Ouyang said.
Proportion of Direct Financing to the Total Financing Volume
China (as of the first half of 2006) 13.1%
Japan (as of 2004) 37%
South Korea (as of 2004) 38.4%
U.S.A (as of 2004) 50%
Britain (as of 2004) 50%
Canada (as of 2004) 50%
Australia (as of 2004) 50%
Sources: www.free-lunwen.com, finance.people.com.cn
Proportion of Total Market Value of Stocks to GDP in 2006
China (2006) 45%
U.S.A 162%
Singapore 290%
Japan 160%
South Korea 100%
India 97%
Brazil 92%
Indonesia 15%
Source: Luyuan Tianwen Management and Research Center of Market Value of Chinese Listed Companies
Proportion of Issuance of Stocks to That of Bonds
China (2006) 1:0.27
U.S.A 1:3.4
Germany 1:5.2
Japan 1:11.3
South Korea 1:86.1
Hong Kong 1:11.3
Taiwan 1:1
Proportion of Balance of Bonds to GDP
China 2%
Japan 25%
U.S.A 36%
Source: www.folo.cn
Total Market Values of Stock Exchanges in 2006 ($trillion)
Shanghai Stock Exchange 0.96
New York Stock Exchange 14.37
Tokyo Stock Exchange 4.42
NASDAQ Stock Market 3.67
London Stock Exchange 3.44
Toronto Stock Exchange 1.64
Frankfurt Stock Exchange 1.43
Hong Kong Exchanges and
Clearing Ltd. 1.36
Source: World Federation of Exchanges
Total Market Value of Top 30 Listed Companies ($bn)
China 23.7
U.S.A 143
Britain 74.2
Japan 53.3
Germany 35.8
Japan 13.6
Source: Bloomberg
Proportion of Market Value Held by Institutional Investors
To Total Market Value
China (2006) 9%
U.S.A (2006) 70%
Britain (1997) 79.5%
Japan (1997) 81%
South Korea (2005) 37.2%
Sources: sc.stock.cnfol.com, www.free-lunwen.com, news.hexun.com, news.media.daum.net
Xu Jie, Deputy Head of the Research Department of ABN AMRO TEDA Fund Management Co. Ltd. contributed to this article.
Annual Financing Ability of Stock Exchanges
Annual Average Financing Annual Average Financing
Volume ($bn) Volume/GDP
China (1996-2005) 10 0.73%
U.S.A (1995-2001) 60 0.7%
Japan (1987-2005) 21.9 0.6%
Brazil (1995-2005) 2 0.42%
Taiwan (1998-2005) 2.1 0.52%
South Korea (1988-2005) 2.3 0.48%
India (1996-2005) 3.6 0.64%
Source: CEIC and Research and Development Center of China Merchants Securities
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