The Chinese Capital Market: Problems and Future Prospects

Abstract

The problems and the future fate can be a hot topic on discussion, both in the press and in academic papers. In this article, the market important problems will be counted one by one such as: not connected with the money market, non-negotiable equity, information disclosure, corporation governance, insider control, lack of efficiency. However, by contrasting to these problems with the powerful advantages such as unity of political and economic system, steady and fast growth of Chinese economy, foreign investors' optimal interest, the essay implies that the Chinese market could have a prosperous future.

Introduction

The Chinese capital market had existed for fourteen years after it was established in 1990, when Shanghai Stock Exchange, as the first stock exchange after 1949, began to operate. From then on, the Chinese capital market developed rapidly. Along with the mainland's fast developed economy, the Chinese capital market also drew much attention from abroad. Many foreign investors had shown their interest in establishing business in China even before China entered the WTO in 2001. On the other hand, there are many problems are in the face of the government and the investors. Does the Chinese market still have the motivation and energy to develop? This is a question which this essay, along with many market professionals, is interested in answering.

However, there are many conditions can be taken advantage of to solve the problems. In short, the future prospects of the Chinese market lie into the determination of the highest level of decision-making, the statues of the development of Chinese economy, and the confidence of the foreign and domestic investment.

Problems at the Present

There are many flaws in Chinese capital market today. First and foremost is that this market was not connected to the money market. Until now, the interest rate is generally speaking regulated by the Central Bank in order to protect the state-owned-banks. And the money market was exclusive to other private investors except banks, securities companies and mutual fund companies, which are only part of the capital market. And consequently, the monetary policy will be blocked in the intersection between the money market and the capital market as the central bank operations will be discounted.

The second problem in the Chinese capital market is that the bigger part of equity which is in the hand of the government is normally non-negotiable. And the government implied the market several times that it was interested to sell the state-owned equity to the privates. Unfortunately, every time after the government's told the market this information, there would be an index slump because the market was worried about that the huge sum of high-estimated shares would pour into the market. It is often described by the media and the investors that the enormous non-negotiable shares are the swords above the investors in the Chinese capital market. It is really a hot potato in the hands of the government.

The next question in the Chinese capital market is information disclosure. In the past few years, information disclosure became better under the strict demand by the China Securities Regulation Commission（CSRC）. But sometimes these public companies would rather tell the public as less as they possibly can even at the risk of receiving the condemnation from the public and the exchange stores, especially when they played bad on their business.

The coming question after information disclosure is corporation governance. As it is well known, most State-owned companies are lack of the real owner and the real manager. So, the function of board of directors, regulators and representatives from employees are often called shadow bosses in these companies. In addition, the small shareholders often had no time and energy to supervise the managers. And the non-executive directors mostly are illustrated as vases. The governance of companies made huge progress internationally, especially in the US. in the past decades. But contrastingly in China today, it is only at the primary stage. The corporation governance needs the support from the law fulfillment and the culture promotion.

The insider control in the listed companies is the main reason that hurts the efficiency of these companies, which are the base of Chinese economy. Unfortunately, research from several scholars（Zhao Xueqin, 2002）showed that the main reason that led the performance decrease of the listed companies is insider control. For example, many of the managers were more interested in their own businesses, which were often in the similar products or distributions, to those of their responsibility for the listed companies. These managers sometime fatten their own business through selling products with a higher price than the market prices to the listed companies so to make the easy money.

Lack of efficiency is the last but not least of the problems in the Chinese financial markets including the capital market. Many researches（Wang Zhenshan, 2001; et al.）showed that the low efficiency of banking system and direct financing system wasted precious capital when China was at the start line to take off in the last two decades. According to statistics, the amount of bad loan surged to 1400 billion RMB after the establishment of the four Financial Assets Management Companies in 1998, whose aim was to settle the bad loans received from the Four Stated-owned Banks in the nominal amount of over 1000 billion RMB. And figures estimated that the securities market made about 1000 billion RMB capital drain. In fact, many ST and PT listed companies are not easy to bail out because these companies had the net assets near to zero and countless complicated legal issues.

Future Prospects

It was commonly agreed that the Chinese economy will stride forward although with many difficulties, e. g. unemployment, rise of cost, and local government interference. The growth rate of GDP gained over 9% in 2003 and it is forecast by many international institutions that the GDP speed in 2004 will also exceed 9%. China has been to be the engine of Asian development. The Capital market is the main part of Chinese economic. So, perhaps the optimal elements for the Chinese capital market in the future will overwhelm its problems now. The steady and fast growth of Chinese economy provides an opportunity to solve the problems the Chinese capital market faced. The real economy provides a substantial base for the financial market.

The uppermost advantage in China is its unity of political and economic system, even though this system cannot perform well all the time. But the determination of the financial reform from the highest level of decision-making is powerful and definite. This power will become stronger when there are both supported by the people and with wisdom leadership. Moreover, the level of the decision-making has been aware of the policy coherence of economic and political system steady and efficient, and the importance of the moderate development speed that China must keep. So, the road of the Chinese capital market in the coming days probably can be explicated as“to solve problem in the progress”.

The third advantage for the development of the Chinese capital market is some of the problem is in solving although the way is difficult and sometimes hard to reach the successful goal in a single step. But good beginning is half success. There are many scholars at home and international think tank helping Chinese financial reform. In September 2004, the committee consists of the specialists and officers from the Central Bank, the CSRC, and the CBRC（China Banking Regulation Committee）began to work to cope with the financial issues. During the beginning this year, the Council of State promulgated the Opinions on the Development and Steady about Capital Market Reform. This could be a milestone on the road to a bright future to the market.

From the viewpoint of the foreign investors, Chinese market is attractive, both in real economy and capital market. China has surpassed the USA and became the No.1 country that took in Foreign Direct Investment（FDI）in 2003 by the total number of over 50 billion US dollars. For the capital market, CSRS had admitted the QFII（Qualified Foreign Institution Investor）. In addition, more and more foreign financial companies launched joint venture with home securities in fund management industry, e. g. the famous J. P. Morgan and Allianz, and so an. Hence, evidences showed that Chinese capital market has its charm.

Conclusion

The development of Chinese economy is an enigma according to the international economic researchers and the press. The miracle of the fast and steady rise astonished many experienced observers. The Chinese capital market, probably another maze made investors feel complex and puzzled and hard to sleep both with problems sometimes seemed serious and future sometimes dimmed, and sometimes dazzling opportunities. Nevertheless, the market welcomed its 60 million A-shareholders and its negotiable market value is about 1300 billion RMB, almost equally to that of Hong Kong, imaging this market is only fourteen years old.

References and bibliography

［1］Zhao Xueqin, “The Optimization and Institutional Innovation of the Chinese Securities Market”, PhD. Dissertation, Fudan University, 2002.

［2］Wang Zhenshan, On the Efficiency of the Chinese Financial Section, Economic Management Press, 2000.

［3］He Dexu, “An Analysis on the Structure of the Chinese Capital Market”, PhD Dissertation, Shan'xi Economic and Financial Institute, 1999.

［4］Wu Jinlian, “It is Necessary to Speed up the Program of Financial Reform”, Paper on the Year Forum of the International Finance, Beijing, July, 2004.