China is known the world over for its manufacturing prowess. Its impressive economic growth has earned the country the distinction of being the engine of world economy, something which only the US boasted of till now. However, on the capital market front, it is falling behind when compared with its neighbors, especially India. The markets have witnessed significant fall during the past four years. Government's overbearing influence on listed companies, corruption and incompetent local securities houses have all added to the below par performance of markets. Most of the companies that are listed on bourses are not there because they were in good businesses, they were politically well-connected.
The major reforms announced in the past few months have hardly yielded any results when it comes to rescuing the bourses. Deep-seated structural problems, low-quality of the listed companies and weakness of country's brokerage sector have resulted in worst performance of domestic `A' share market. On the other hand, the `H' share index (Chinese companies listed in Hong Kong stock exchange) is moving in line with the country's GDP growth compared to domestic `A' share market. The quality of companies listed in these exchanges make the difference in performance. Though, China has huge financial assets, six times more than that of India, its capital allocation in the system is quite poor, banks having more reserves of money than in the capital markets. With the 40% savings in the economy, the Chinese have very few options other than to park their money in the banking system which pays low interest rates. Most of the 1,400 listed firms are poor performers and they simply have little concept of return on capital
In the late 1990s, the Chinese government realized the importance of the stock markets in the market system. It started two stock exchanges in Shanghai and Shenzhen to facilitate the exchange of shares and discourage unorganized or black market trading. Trading for different types of shares is done in the Chinese stock markets, these include A, B, legal person, state and H shares. Type `A' shares are traded on both the stock exchanges, B shares, Legal Person or LP shares; state shares and H shares. Among the 1,400 listed companies, 80% of companies that are listed on domestic `A' share market are state-owned enterprises (SOEs). The government enacted several important laws and regulations to formalize the operations of the stock market. A slew of profit-making scandals and frauds have made the market highly risky and speculative. As a result, the government initiated several measures to reform the market in February 2004. Along with special panels in all departments to implement the reforms, a coordination channel was established between three financial regulatory bodies. The major reforms that were initiated are facilitating the listing of small and medium enterprises in the Shenzhen exchange, upgrading the stock issuing system, allowing the securities companies to issue bonds and increase short-term financing with banks. Other initiatives include faster approval of fund companies' products and permitted insurance and pension funds to invest in stocks.
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