The economic crisis continues to deepen as some of its effects are being found in the aftermath of capital allocation. The Asian Tigers together with its regional leader China now face difficulties that force them to become the west. It has become obvious that what happened before 2009 was not only a consequence of wise economic behavior mixed with state intervention but an opportunity for markets with cheap labor, large consumers base and a great export potential.
The Chinese stock market is as new as its understanding of western capitalism. It lures China`s previous state control to give a chance to the market hoping to bring a boost back to its economy. In 1978 China`s denationalizing economic reforms started to propose a threat of fractional market management. The government maintained control over state owned enterprises while foreign and local businessmen entered the game. The Chinese stock market was introduced in 1992 bringing up an essential question of a corrupt government pursuing its own interests in the state owned enterprises. It failed to guarantee unbiased evaluations and fair trade policies which could have balanced the market.
The elimination of a fair referee has lead China`s stock market to lose about 50% of its value since 2000. The foreign investments continued due to manipulated evaluations of shares as well as the governments willingness to get rid of weak stocks. China as opposed to the western economies can not be accused of borrowing credit and creating government debt but it can be accused of non experience in the belief of a stock market that will somehow run its own course. The stock market once opened forces China to become like the west as opposed to keeping its capital safe. The US can allow itself a smirk: China will not be able to establish an economy that is non-respondent to the needs and requirements of capital flight risk.
George Zhibin Zu (business consultant in China) said that wealth is created by entrepreneurs, laborers and managers, not the government. This is the start of the end or the end of the start of China`s liberty in calling its own deals. The corruption of the government ruins the stock exchange game and switches the risk of corruption against the risk of global economic markets. Since 2004 Beijing has allowed some companies to sell the non-tradable shares if they gave cash incentives and shares to regular shareholders for freely trading their holdings. The strategy proved to be somewhat progressive but not efficient enough to stop the market from jumping up and down.
The outside institutions account for only one per cent of China`s market capitalization. The new rules of ETF ( Exchange Traded Funds) have given rise to fresh investments. The China focused inflows reached 9.3$ billion during the first eight months of 2012 against 2008 annual record of 9.1$ billion. The reason for such rise came through the launch of cross-border and cross market physical ETF that sells shares through less counterparties than the previous synthetic ETF system which kept the costs of shares low and the risk of counterparties high. The US and European investors have faced their share of non-profitable investments and mistrust of China`s stock exchange rules. Surprisingly Europe`s investments have started to rise as opposed to the logic of its monetary crisis and risk taking judgment. The US have pulled out 731$ million of China focused ETF. It remains a question whether the US in influenced by the crashes of its own stock market, by Obama`s strategy to lower taxes for the US multinationals bringing jobs home or by the judgment that this will weaken China`s economy and allow the US to locate funds into non-rival locations.
The second hope for China`s stock market is Quo Shuqink who became top securities regulator in October. Mr.Quo could be praised upon taking bold moves in opening up the stock market as well as putting limits to the selling of low-value shares. In other words Mr.Quo can be congratulated in going out of the Chinese way through trying to finish the market bubble and inviting in foreign capital ownership in uncontrolled quantities. Mr.Quo has also argued the retailers protests against IPO (Initial Public Offerings). The investor protection bureau stated that stopping IPOs is not going to boost the market. The logic of this lies in another Mr. Quo`s initiatives to call for listed companies for increasing dividends. The latter policy would rise the trust in the value of shares as well as back up a rise in the securities market. For one part the market could be on rise as companies with ST( Special Treatment) that are suffering losses in two consecutive years will face a limit of how much the ST per cent is allowed to rise daily. This calculation delists the shares that would trade over their value hence causing losses for counter parties and overall market trust. Lastly Mr.Quo announced over the weekend that the transaction fees of the stock market will be cut by 20% which was logically followed by the rise in Shanghai Composite Index.
China`s stock market is on the way to the US, metaphorically speaking. The available amount of its ETF has gone up from 1 ( in 2008) to 138 (in 2012). The Chinese are still learning about the capital gains as throughout their opening process they have tried to maintain a prospect of safe state control over an economy that would quickly grow out of hand. It is only unfortunate that in capitalism the stock market plays by the rules of security and openness for it opens all parties up to an equal risk. The Asian Tigers are soon forced to make a decision in either accepting a slow down as compared to the miracle they experienced or accept the global crisis and the fact that in capitalism profit growth could be sustained by the policies they hoped to avoid. An illusion of an uncorrupt Chinese government in such a short time could be compared to the illusion that Mr.Quo`s reforms will not bring stock market ups and downs in the future. But the show must go on as the Wall Street demands; unfortunately there are no rescue boats.
BY: Tuuli Riit