Invest In China Equity Markets
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Invest in China: Equity Markets
Summary
While China's economy grows at an impressive rate of nearly 10% per year, its domestic capital markets are struggling. The private sector heavily relies on foreign investment, particularly hard currency, due to an underdeveloped bond market, banks burdened with bad debts, and underperforming stock markets in Shanghai and Shenzhen.
Insight into China's Equity Markets
China's stock exchanges, excluding Hong Kong, were initially established to provide funding for inefficient state-owned enterprises (SOEs) that the government wished to support for political reasons. These exchanges took on the role previously held by domestic banks, which often issued loans to SOEs that went unpaid. Today, listings are dominated by these inefficient SOEs, with only about one-third of shares freely floated. This ensures continued government control and limits private shareholders' influence, leaving SOEs with little incentive to reform.
Foreign investors face challenges due to the division of shares into two categories, with roughly two-thirds off-limits, and restrictive investment quotas imposed by China on overseas capital.
The Dilemma of SOE Control
China is caught in a difficult situation. Offering stakes in SOEs to private interests could lead to their failure if they can't market shares, potentially leading to increased unemployment and uncertain political consequences. Maintaining control over SOEs keeps share prices low, depriving the private sector of necessary capital. Foreign investors are hopeful that China will soon address this issue.
Growing Interest Despite Challenges
Despite these obstacles, China’s equity markets have attracted significant interest from international institutional investors. They see potential in low share prices and are encouraged by government promises of reform. Recently, China has increased investment quotas for overseas investors, and there is talk of unifying the share market to grant greater access to foreign investors. Analysts anticipate faster reforms once China opens its banking sector to foreign competition in 2007, in line with its WTO commitments.
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