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Shanghai's stock market holds huge potential
By Dan Steinbock |
January 16, 2013, Wednesday
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Print Edition
Print Edition
DURING the fourth quarter of 2012, China's recovery has been spreading, suggesting a rebound across all sectors. But the mainland's stock market performance has been a different story.
The question is: why?
In the end of November, the Shanghai Stock Exchange (SSE) Composite Index closed below 2,000, for the first time since January 2009 - in spite of a year of accommodative measures, and the burgeoning recovery. The SSE ended the year 2012 with a 3.17 percent tick-up and is currently close to 2,280.
First discrepancy
Historically, the Shanghai exchange originated from the former foreign concessions, which resulted from the First Opium War and the subsequent Treaty of Nanking of 1842. By the 1930s, Shanghai was the financial center of the Far East.
With Deng Xiaoping, China's reforms and opening-up in the 1980s paved way for the return of the securities market. In 1990, the Shanghai Stock Exchange was back to business.
The first discrepancy between economic fundamentals and market performance ensued in 2001, when China joined the World Trade Organization.
The WTO membership accelerated the mainland's economic rise as the "world factory." And yet, the market peaked when expectations were at their highest in 2001, whereas the actual economic expansion was accompanied by a four-year slump. In the process, Shanghai's market cap was halved.
Things began to change in 2005, when new IPOs were banned to curb the slump and to allow more than US$200 billion of mainly state-owned equity to be converted to tradable markets.
As the pent-up demand for equity participation soared, speculative traders hurried to the market as well. The party lasted until a peak of over 6,100 points of the benchmark Shanghai Composite Index in mid-October 2007.
However, only a year later, the global recession caused the Index to plunge a record 65 percent.
It is often said that economic performance is the result of history, while stock markets perform on the basis of future expectations. If that is true, Shanghai's exchange is an exception that confirms the rule.
Last November, the SSE still ranked only seventh worldwide in terms of capitalization, at US$2.2 trillion - far behind the stock exchanges of New York, London, and Tokyo.
Shanghai's current market cap is not that different from Canada's TMX.
And yet, Canada has a population of 35 million and its growth rate has been less than 1 percent for years.
China has a population of 1.3 billion, three decades of nearly 10 percent growth and it could grow several years more at 7-8 percent annually.
In March 2009, the State Council announced that Shanghai will become China's international financial center by 2020.
In the advanced economies, markets are ruled by sophisticated institutional investors. In China, the market is still dominated by inexperienced individual investors.
The former have a patient, long-term perspective, while the latter can only afford a less patient, short-term view.
Due in part to its past "century of humiliation," China also remains weary of significant foreign presence.
Today, China is still compelled to export capital to other nations.
In the coming years, Chinese people should be the primary beneficiaries of their own savings. That, in turn, is predicated on a financial system that can process those savings.
Toward financial reforms
But times are changing.
Recently, China's foreign exchange regulator removed the US$1 billion limit for foreign sovereign wealth funds, central banks, and monetary authorities purchasing Chinese assets through the Qualified Foreign Institutional Investor scheme (QFII). Regulators are taking steps to address investor concerns.
Among other things, trading fees have been lowered.
De-listing rules have been tightened, along with restrictions on companies suspected of insider trading. Last spring, Beijing initiated financial reforms, cautiously.
China's equity, bond, and currency markets have expanded substantially. But there's a long way to go.
Soon China may engage in financial reforms in commercial banking, lending markets, bond markets, securitization of loan portfolios, competitive entry and in other areas. Meanwhile, initiatives are being tested in pilot programs.
Today, investor perceptions are still overshadowed by the fading legacies of the advanced economies.
In portfolios, the role of international asset allocations - particularly those of emerging economies - is in no proportion to their expected growth performance in the coming years.
As investor perceptions finally catch up with multipolar realities, markets will change accordingly. In a decade or so, a convertible international renminbi or yuan could support Chinese prosperity.
Dr Steinbock is research director of international business at the India, China and America Institute (USA), and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).
The question is: why?
In the end of November, the Shanghai Stock Exchange (SSE) Composite Index closed below 2,000, for the first time since January 2009 - in spite of a year of accommodative measures, and the burgeoning recovery. The SSE ended the year 2012 with a 3.17 percent tick-up and is currently close to 2,280.
First discrepancy
Historically, the Shanghai exchange originated from the former foreign concessions, which resulted from the First Opium War and the subsequent Treaty of Nanking of 1842. By the 1930s, Shanghai was the financial center of the Far East.
With Deng Xiaoping, China's reforms and opening-up in the 1980s paved way for the return of the securities market. In 1990, the Shanghai Stock Exchange was back to business.
The first discrepancy between economic fundamentals and market performance ensued in 2001, when China joined the World Trade Organization.
The WTO membership accelerated the mainland's economic rise as the "world factory." And yet, the market peaked when expectations were at their highest in 2001, whereas the actual economic expansion was accompanied by a four-year slump. In the process, Shanghai's market cap was halved.
Things began to change in 2005, when new IPOs were banned to curb the slump and to allow more than US$200 billion of mainly state-owned equity to be converted to tradable markets.
As the pent-up demand for equity participation soared, speculative traders hurried to the market as well. The party lasted until a peak of over 6,100 points of the benchmark Shanghai Composite Index in mid-October 2007.
However, only a year later, the global recession caused the Index to plunge a record 65 percent.
It is often said that economic performance is the result of history, while stock markets perform on the basis of future expectations. If that is true, Shanghai's exchange is an exception that confirms the rule.
Last November, the SSE still ranked only seventh worldwide in terms of capitalization, at US$2.2 trillion - far behind the stock exchanges of New York, London, and Tokyo.
Shanghai's current market cap is not that different from Canada's TMX.
And yet, Canada has a population of 35 million and its growth rate has been less than 1 percent for years.
China has a population of 1.3 billion, three decades of nearly 10 percent growth and it could grow several years more at 7-8 percent annually.
In March 2009, the State Council announced that Shanghai will become China's international financial center by 2020.
In the advanced economies, markets are ruled by sophisticated institutional investors. In China, the market is still dominated by inexperienced individual investors.
The former have a patient, long-term perspective, while the latter can only afford a less patient, short-term view.
Due in part to its past "century of humiliation," China also remains weary of significant foreign presence.
Today, China is still compelled to export capital to other nations.
In the coming years, Chinese people should be the primary beneficiaries of their own savings. That, in turn, is predicated on a financial system that can process those savings.
Toward financial reforms
But times are changing.
Recently, China's foreign exchange regulator removed the US$1 billion limit for foreign sovereign wealth funds, central banks, and monetary authorities purchasing Chinese assets through the Qualified Foreign Institutional Investor scheme (QFII). Regulators are taking steps to address investor concerns.
Among other things, trading fees have been lowered.
De-listing rules have been tightened, along with restrictions on companies suspected of insider trading. Last spring, Beijing initiated financial reforms, cautiously.
China's equity, bond, and currency markets have expanded substantially. But there's a long way to go.
Soon China may engage in financial reforms in commercial banking, lending markets, bond markets, securitization of loan portfolios, competitive entry and in other areas. Meanwhile, initiatives are being tested in pilot programs.
Today, investor perceptions are still overshadowed by the fading legacies of the advanced economies.
In portfolios, the role of international asset allocations - particularly those of emerging economies - is in no proportion to their expected growth performance in the coming years.
As investor perceptions finally catch up with multipolar realities, markets will change accordingly. In a decade or so, a convertible international renminbi or yuan could support Chinese prosperity.
Dr Steinbock is research director of international business at the India, China and America Institute (USA), and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore).
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