China set to clean up its stock markets
Institutions need greater accountability and transparency from listed companies
SHANGHAI — Walking the streets of Shanghai, it’s easy to see why investors’ appetite for all things China is running so high.
As in so many boomtowns past and present, one can practically feel the energy. The sights, sounds and buzz of Shanghai make you wonder if Asia’s No. 2 economy isn’t getting the credit or attention it deserves. If China reported 15 per cent growth next quarter, you could find anecdotal evidence here to justify it.
Unfortunately, China’s growth rate of 9.4 per cent isn’t reflected in its stock markets. Dodgy corporate dealings get most of the blame. The Shanghai Stock Exchange Composite Index and the Shenzhen Stock Exchange Composite Index are among the world’s 10 worst- performing equity markets this year.
China ranked ninth among 10 markets rated in the sixth annual corporate governance survey conducted by CLSA Asia- Pacific Markets and the Asian Corporate Governance Association. Only Indonesia ranked lower this year. The survey didn’t include Japan.
It doesn’t take much looking to find reminders that China’s economy has a transparency problem. China Construction Bank Corp., Beijing Media Corp. and China Aviation Oil ( Singapore) Corp. are but a few companies that recently shook investors’ confidence with scandals or belated disclosures.
Copper markets, meanwhile, have been unnerved by reports a trader at the government stockpiling agency entered into a massive wrong- way bet on lower prices — and that the agency will continue selling the metal to reduce its losses as prices went the other way.
Now for the good news: there are signs China is getting serious about transparency, accountability and promoting greater corporate fairness.
It’s no mystery why. While stock valuations don’t always correlate neatly with gross domestic product, it is rare for the two to be mirror images of each other, as they are China. Clearly, officials in Beijing see this as a public relations problem, not to mention a blot on an otherwise improving economic report card.
With 100 being a perfect score, the Asian lineup is as follows: Singapore (70 per cent) and Hong Kong (69 per cent) got the No. 1 and No. 2 spots in the survey, followed by India ( 61 per cent), Malaysia ( 56 per cent), Taiwan ( 52 per cent), South Korea ( 50 per cent), Thailand ( 50 per cent), the Philippines (46 per cent), China ( 44 per cent) and Indonesia ( 37 per cent).
The scores were based on five areas: rules and regulations, enforcement, the political and regulatory environments, international accounting and auditing standards and, more generally, a nation’s corporate governance culture.
China’s low rank should be of particular concern to investors, even though CLSA and the Asian Corporate Governance Association predict that “ China will catch up on corporate governance scores given its continuously improving economic and regulatory regime.”
At the same time, the report said, World Trade Organization rules and “ competitive pressures that Chinese companies face at home and abroad are also expected to drive the country’s corporate governance rating over coming years.”
That would be an important step in China’s financial maturity. China may be pulling in the bulk of the world’s foreign direct investment, yet it punches well below its potential with institutional investors. It’s exactly the opposite of what India is experiencing.
That goes a long way toward explaining why on the day the latest corporate governance survey was released ( Nov. 22), the Shanghai Stock Exchange Composite Index was down 13 per cent on the year, while India’s Mumbai Stock Exchange Sensex 30 Index was up 31 per cent.
China has a host of other problems. Its financial system is fragile and it’s an open question whether the Communist Party can continue creating the hundreds of millions of jobs needed to maintain political stability.
Better companies may attract more of the capital China needs to support its financial markets. That, in turn, will make it easier for businesses to raise money to finance growth, research and development and, ultimately, create jobs.
China has a long way to go, as evidenced by the report’s focus on companies that don’t measure up. While citing improvements at China Life Insurance Co. and Hopson Development Holdings Ltd., it underlined concerns about Yanzhou Coal Mining Co., Beijing Media, China Gas Holdings Ltd., China Force Oil & Grains Industrial Holdings Co. and others.
Bloomberg