China's stock market reforms
Page 3
Split-share reform as an
aspect of privatization
On the plus side, the atmosphere in China has become
more conducive to systemic reform. There is a broad consensus in society that
the government should withdraw from the business world and concentrate on the
referee role. As such, sales of state assets have picked up recently, not
limited to the stock market alone. It is clear that the split share structure
reform policy fits these general developments. At the same time, the
government entities involved have a huge financial interest in the outcome.
Privatizing creates enormous windfalls for them, giving them enormous
incentives to do so.
Consequently, Beijing, which sees asset sales as a
convenient way to dump troublesome enterprises and generate hard cash at the
same time, is actively trying to list more state assets, both within China and
overseas. Now, even the "Big Four" state banks - the Industrial and
Commercial Bank, the Bank of China, the Construction Bank and the Agricultural
Bank - are trying to get listed. But average investors remain worried. Based
on past experience, they fear that even needed reforms are just another
government ploy to get their money. So, selling government-owned shares, as
desirable as it might be in theory, has had the practical effect of pushing
the market down even further, and no lower limit is in sight.
Crossing the river by feeling the stones underneath
An old Chinese saying says, "messes are best
cleaned up by their makers". Indeed, Beijing is trying to escape a stock
market mess of its own creation. The only problem is that the market is
nervous. Beijing's solution to these jitters is to carry out the plan
gradually over a long period. The government hopes that by proceeding in this
manner, large-scale disruptions can be avoided.
So in the immediate term, Beijing has chosen to sell
the remaining shares of four companies as an "experiment", which
aims to find practical ways to meet the ultimate goal of fully floating the
entire market. Beijing is approaching the problem cleverly. The procedure for
selling the four stocks is more like a bargaining game between regular
investors and the entities holding non-tradable shares. The latter must offer
some incentives to the regular shareholders before gaining the ability to
trade the shares. Superficially, this seems like a reappearance of the old
Chinese game, "pitting people against people". But this time,
Beijing wants to act as a neutral arbiter of others' disputes, which
represents tremendous progress.
For one of the "experimentally" listed
companies, Sany ("Three One") Heavy Industry, the proposal is that
the holders of formerly nontradable shares must give both cash incentives and
shares to regular shareholders before being permitted to freely trade their
holdings. The proposal calls for regular shareholders to get three free shares
plus 8 yuan in cash compensation for every 10 formerly nontradable shares
sold. The announcement of this proposal caused all the regular shareholders of
the company to immediately calculate their gains and losses, and indirectly is
causing all investors to do the same thing for their shares. Market reaction
to the new plan was positive: Sany and two other "experimental"
companies have been trading up smartly for the last several days.
The gradualist approach may work out in the end for
the remaining companies. Countless investors now agree that having a fully
tradeable stock market is unavoidable, even if some investors will have to pay
more for this change than others. Fortunately, the market fundamentals are
improving. The top 50 listings in Shanghai had a 2004 price/earnings ratio of
about 16, which most global investors would consider reasonable. Many feel
that these listings are a good investment already. Undoubtedly, unwinding the
government's business stakes is necessary for China to truly move forward.
Despite the short-term pain, it will be positive in the end, as the stock
market becomes more like a "real" one. The reforms also represent a
larger trend: China is embracing international norms with respect to ownership
structure, corporate governance and professional management, among other
significant things.
The road ahead
The trends are in the right direction, but two basic
issues remain to be fully addressed. First, there must be a decisive
separation of government interests from the business sphere. The government
must irreversibly commit itself to only being a dutiful watchdog, not a market
competitor as well. China cannot establish a sustainable, modern economy
without this change. Second, all existing state and private-sector companies
must be transformed into modern business organizations using up-to-date
management methods. Above all, business organizations must be held accountable
to law and to their customers.
There is a long road ahead to achieve these goals,
but there is no alternative and no shortcut. If the Chinese economic reforms
have produced one great lesson so far, it is this: wealth is created by
entrepreneurs, laborers and managers, not the government. These groups must
have the right environment to succeed, and the entire society is responsible
for producing the necessary support for their work. Accordingly, curtailing
excessive government power over the economy is nothing less than a necessary
goal for the Chinese civilization. In the reform era, China has already taken
a giant step forward in this direction, and continued progress is the only way
China can achieve its national goals.
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