China is gaining more attention of the world due to its high economy growth speed. However, China security market is telling a bad story to us, which conflicts with the good picture of China economy. In this report, we try to discuss why China security market did not work as well as American market did. We mainly illustrate this question from typical differences on corporate governance between China security market and North American market.
Overview of the Stock Market in China and America
In contrast to US, China’s stock market has a history of only 23 years. As a country, China has the second largest stock market by trading volume and the third largest by market capitalization, $3.7 trillion in 2013, after the US and Japan. The main boards of the Shanghai and Shenzhen Stock Exchanges list larger more mature stocks, like the NYSE in the US. The Shenzhen Stock Exchange also includes two other boards, the Small and Medium Enterprise Board and the ChiNext Board, also known as the Growth Enterprise Board, more comparable to the NASDAQ in US, which provide capital for smaller and high-technology stocks. In a whole, China stock market is very large and seems like US stock market. 2.1.2 Some differences between China’s stock market and America’s China’s stock market has some distinctive features.
First, it is a pure order- driven market, as opposed to a quote-driven market, whereas the US and several other countries have hybrid equity market systems. Second, it is a centralized market, whereas the US market is fragmented, with dark pools and other off-exchange trading. This may have important implications for market in formativeness. There are no dark pools with hidden orders in China, all orders are visible. Moreover, there is no extended trading period for institutional investors. Institutional and retail investors have equal access to information from a market microstructure point of view. In addition, China’s stock market has a price move limit of 10% to deter excess volatility and stock manipulation.
Different with the US, China’s stock market has a dual-share system in which domestic investors can invest only in A shares, while foreign investors can invest only in B shares. In addition, many firms have H shares, traded on the Hong Kong Stock Exchange. A number of articles, such as Chan, Menkveld, and Yang (2008) and Mei, Scheinkman, and Wei (2009), study the discount of B share and H share value relative to A shares, which they attribute to information asymmetry between foreign and domestic investors and speculative motives. With the introduction of programs such as the Qualified Foreign Institutional Investors (QFII) program of 2002, which relaxed the cross-trading restrictions, B share issuance and trading have mostly vanished. In addition, China’s equity market used to have a large non-tradable component, held by corporate founders, often central or local governments. With the share structure reform starting in 2002, this phenomenon has mostly disappeared among mid and small-cap stocks, though not entirely among large stocks.
Settlement date is another difference between China and America. China’s share market adopted T+1 which means the settlement date of security transactions and denote that the settlement occurs on a transaction date plus one day. As many other countries, the settlement date of US’s share market is T+0 which means you can sell the shares on the same day when you buy it.
In 2001, a famous Chinese economist, Wu Jinglian, characterized China’s stock market as a ‘Casino’ manipulated by speculators, misled by the central government’s visible hand to unfairly support state-owned enterprises (SOEs), and without a strong link to fundamentals (Allen et al, 2005). These listed companies have great concern due to three typical characteristics (1) Percentage of State ownership is relatively high: The majority of these listed companies in China evolved from State-owned enterprises. To make sure those companies are still state controlled, the percentage of shares available to the open market is relatively low. (2) Percentage of negotiable shares is relatively low: State-owned shares and legal entity shares are not traded in the open market. As such, much more than global average level of the shares are non-negotiable. (3) Number of individual shareholders is relatively high: China securities market is primarily made up of individual investors and lack institutional investors. However, the shareholding ratios are relatively low, and they cannot participate as effectively as American shareholders do. These three characteristics are also different characteristics from American market, which are also three most important reasons weakening shareholders’ abilities to participate in the corporate governance of public companies and keep the stock market’s soundness.
As is mentioned, it is thought that China’s stock market misled by the central government’s visible hand to unfairly support state-owned enterprises (SOEs), and without a strong link to fundamentals. Due to this, the corporate governance can partially explain the reason why the performance of China’s share market cannot play the role of weatherglass of its economy.
China’s stock market is obviously different with America’s. Many factors make them different but the role of the government is the most important one. High state ownership lowers down market functions, and government interference does it further. In America, this is very rare. Even though Chinese government failed to sway the markets by many ways, it is reforming its SOEs recently to deal with problems exist in its listed companies which may help its stock market escape from the trend of decline (Lim, 2014). Due to influence of SOEs is a major reason for bad performance of China stock market, this reform is highly possible hopeful to make succeed. Actually, in the past several months, China stock market appeared a tendency of rising as figure 2 shows. Figure 2 Shanghai Stock Exchange Composite Index last three months.
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