For 20 years, China has maintained what it calls a GDP quality index - a theoretical measurement reflecting “true wealth, sustainable development and social harmony.” This index is said to have grown rapidly since 2005 giving China enough ammo now to call its growth ‘quality-oriented.’
Unfortunately, quality is not something associated with the Chinese stock markets. No amount of regulations and reform promises have succeeded in bringing back retail investors to the market after they lost faith in the crash of 2008. The Shanghai Composite is down a whopping 65 percent from its peak in late 2007 and is still below the psychological level of 2300 points. Retail investors see little charm in a market whose participants continue to treat shareholders shabbily. Core aspects of stock investing such as dividend payment is often missing or erratic, making stock investment a non-option for the small investor. By contrast, Hong Kong, which is down 35 percent since the highs of 2007, has managed to hold on to its players because of its greater openness and high credibility.
With stock returns at an all-time low, Chinese investors are forced to look to other markets, such as the commodity sector of which they have little or no knowledge, or other asset classes to manage their wealth. Also, in the absence of a vibrant market, real estate remains the only sector where they can park their money. High net worth individuals, instead of investing in Shanghai stocks, have simply migrated to global luxury real estate, over the last four years, preferring to buy up properties in Hong Kong, Singapore and even London.
Woo back attempt
As precious resources get frittered away abroad or to the sluggish domestic real estate bazaar, attempts to lure retail investors to the mainland bourses have not been too successful. This week, top securities regulator, the China Securities Regulatory Commission (CSRC) made yet another attempt to introduce a reform package for the mainland markets, encourage openness and ensure some basic rights for small shareholders.
The CSRC, in its latest package of regulations, is now building a national profile database and information search system to disclose the credit quality of market participants. Information about illegal activities of companies or defaults, if any, will be stored in the system for five years, while updates on criminal punishments and serious administrative penalties will be stored for 10 years. Regulators hope this will generate ‘trustworthy behaviour’ on the part of companies, many of whom tend to use the market only to raise funds, without fulfilling obligations like handing out dividends to its shareholders.
The CSRC is also trying to improve reduce costs for investors eager to play the markets. It will cut securities transaction commissions by 20 percent before September 1, this being the third cut this year. In June, the Shanghai and Shenzhen stock exchanges lowered transaction costs of A shares by 25 percent, and cut the transaction commissions of futures products by 30 percent. Trading regulation fees have also been reduced or removed altogether for some products. The CSRC hopes that lower fees may help enlarge the market size. And in what may seem slightly desperate now, the securities regulator is even encouraging staff members and high-level managers to hold shares of their own companies. This latest seems rather startling considering that regulators have been trying hard to clamp down on insider trading.
Insurance booty
Retail investors, howsoever enthusiastic, will not be able to bring the required volumes needed to beef up the credentials of the Shanghai market. This volume can come only from insurance funds as and when they invest in the markets. Since 2003, insurance companies in China have managed their own funds, or entrusted that task to insurance asset management companies. But this model is becoming increasingly unviable and unprofitable, especially with the Chinese insurance market now growing in enormous proportions. Last year, premium income of Chinese insurance companies amounted to a neat 1.5 trillion yuan, but suffocating restrictions prevent them from participating in the market.
By 2020, China plans to modernize its entire social security system and universalise health insurance. These schemes may turn out to be a super-burden if the companies are not allowed to invest in the market. The CSRC is now working with the China Insurance Regulatory Commission to frame regulations allowing insurance companies to invest in securities, equities and properties. How long this process takes, is anybody’s guess, but sooner reforms happen, the better for China’s tired stock market.
— The writer is a journalist based in China.
