ideas on reform have been heard during the tenure of his predecessors. More importantly, while his leadership is ostensibly moving in the right direction, it still remains to be seen whether his policies will deal with the interests that have cast doubt on the watchdog’s independence. Addressing these interests must be a precondition for any reform. Otherwise, his chance of healing the market in the short-term and building a level playing field in the long-term will be no better than that of his predecessors.
Shady Moves
The current chaos on China’s A share market can be attributed to various factors, such as the impact of the global financial crisis and policies aimed at containing inflation. But there is already a clear consensus that unfairness and pervasive dishonesty are the biggest reasons for the predatory game in which individual shareholders lose and big players win. Analysts and investors have found that investment logic has little use in China; playing for anything more than short-term gain is futile. Companies do not have equal access to the stock market. A committee set by the CSRC has the authority to decide which companies can be floated on the market and for what reasons. As a result, when applying for permission, a company’s background is more important than its long-term growth potential. That’s why Yin Jianfeng, deputy director of the Institute of Finance and Banking at the Chinese Academy of Social Sciences, does not believe that Chinese listed companies represent the most dynamic enterprises. While monopoly-backed State-owned enterprises (SOEs) still account for the largest chunk of the stock market, private small and medium-sized companies (SMEs) have not shown better investment value. In 2011, the A share market saw a total of 1264 resignation announcements from senior executives of listed companies, most of them from hightech SMEs. While executives are not allowed to sell shares in their companies for some time after the IPO, resignation can shorten that grace period. Many have already taken this route. This eagerness for cash rather than shares betrays the fact that executives themNEWSCHINA I March 2012
selves don’t believe their own hype. Now investors can only look on with despair as one bubble after another bursts, and growth stories are exposed as illusions. The high-tech board, many analysts say, has become the grave, rather than the cradle, of innovation. Those who stay in the market often behave equally irresponsibly. Insider trading has been the biggest problem in the securities market. At a press conference at the end of December 2011, Liu Jinguo, deputy Minister of Public Security, warned that this form of white-collar crime is on the increase, expand-
“Now it is not a question of whether information is fully disclosed, it is a question of how much of it is true.”
ing from senior executives and companies to civil servants and government departments. Information disclosure, the most important way for public investors to judge a company’s fiscal position, is also a big problem. “Now it is not a question of whether information is fully disclosed, it is a question of how much of it is true,” said Zhang Wei’an, president of Dongbei University of Finance and Economics, in an interview with China Central Television (CCTV). Obviously, a group like this cannot be trusted to prioritize the interests of public investors by providing dividends or investment value.
Maybe This Time
“I hope Guo will bring some ‘bug zappers’ to the market,” said a shareholder who identified himself as Old Zhang in his open letter to Guo. The term “bugs” refers to listed companies which “suck out all the blood in [investors’] bodies.” Guo rose to the challenge. Listed companies must clearly state their dividends distribution, and the review process for IPO
applications will become more transparent. International practices show that institutional investors generally have more rational investment preference and better expertise than individual investors, so they will be encouraged to play a bigger role in China’s stock market, where most share accounts are held by individual investors. Furthermore, those involved in scandals are subject to criminal charges, and companies that perform poorly will face restructuring or be forced out. “We welcome the policies, even if it means the review committee will be more cautious about IPOs; so many companies line up to IPO, we need to pick the best apples,” said Edward Ho, assurance managing partner for Greater China at Ernst and Young, in an interview with NewsChina. However, these measures are not as new as they appear. Over the years, CSRC has issued a similar requirement on dividends distribution, repeatedly vowing to “maintain a powerful crackdown against insider trading,” and actions have been taken over irregularities. Institutional investors have already been given much more power than individual investors. While previous measures have not worked well enough to build a level playing field facilitating long-term investment rather than short-term speculation, it will take time to see whether Guo’s efforts will make any difference. “I am personally more confident than ever, but we need to see what concrete measures will be adopted to make real difference on the ground,” said Lin Yixiang, chairman of TX Investment Consulting.
Distorted interests
A level playing field is about fair, efficient distribution of interests. Distorted interests do not lay a solid foundation for the way ahead. Regulators’ interests in particular have proven a double-edged sword. “They intervene too much in areas where the market should take the lead, but do too little in areas where action is urgently needed,” said Yin. That mismatch is to a large extent caused by the intertwining of their own interests with the subjects under their scrutiny. As Yin explained to NewsChina, holding the power to
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