2.1Comparing China’s stock market with US’s
2.1.1overview of the stock market in China and America
2.1.2 Some differences between China’s stock market and America’s
2.1.3China’s dual-share system
2.1.4Settlement day of the month
2.2Three typical features of China’s listed companies
2.3Corporate governance’s influence
2.3.2The board of managers ( BOD )
2.3.3Weak external administration construction
China is deriving more attending of the universe due to its high economic system growing velocity. However, China security market is stating a bad narrative to us, which conflicts with the good image of China economic system. In this study, we try to discourse why China security market did non work every bit good as American market did. We chiefly illustrate this inquiry from typical differences on corporate administration between China security market and North American market.
By and large, it is believed the stock market is the weatherglass of one country’s economic system ; nevertheless, it is non the instance in China. When China’s GDP increases at an over 8 % rate yearly, China stock market has been on diminution in the past 4 old ages. With its flagship stock exchanges set up in Shanghai and Shenzhen, the China securities market truly merely started in 1990 with 10 listed companies. In 2013, the figure is 2489 ( China Securities Regulatory Commission [ CSRC ] , 2014 ) . The US fiscal markets are extremely developed and influential on the universe economic system. The US equities markets comprise several stock exchanges and its most of import 1s are located in New York City: the New York Stock Exchange ( NYSE ) and the American Stock Exchange ( AMEX ) ( Legislative Council of Hong Kong [ LegCo ] , 2014 ) . Finger 1 compares America’s S & A ; P 500 index ( ^GSPC ) with China’s SSE Composite Index ( 000001.SS ) which proves that America’s stock market performed much better than China’s even though its growing of GDP is evidently lower than China. This study aims to analyze why China security market did non work every bit good as US market did. It introduces some differences between China stock market and America stock market. Then it analyses typical features of China’s listed companies which different with America’s. Finally, several grounds refering corporate administration is discussed.
Finger 1Performance of GSPC & A ; 0000001.SS from 2009 to 2014.
- Comparing China’s stock market with US’s
2.1.1overview of the stock market in China and America
In contrast to US, China’s stock market has a history of merely 23 old ages. As a state, China has the 2nd largest stock market by trading volume and the 3rd largest by market capitalisation, $ 3.7 trillion in 2013, after the US and Japan. The chief boards of the Shanghai and Shenzhen Stock Exchanges list larger more mature stocks, like the NYSE in the US. The Shenzhen Stock Exchange besides includes two other boards, the Small and Medium Enterprise Board and the ChiNext Board, besides known as the Growth Enterprise Board, more comparable to the NASDAQ in US, which provide capital for smaller and high-technology stocks. In a whole, China stock market is really big and seems like US stock market.
2.1.2 Some differences between China’s stock market and America’s
China’s stock market has some typical characteristics. First, it is a pure order- driven market, as opposed to a quote-driven market, whereas the US and several other states have intercrossed equity market systems. Second, it is a centralised market, whereas the US market is fragmented, with dark pools and other off-exchange trading. This may hold of import deductions for market in formativeness. There are no dark pools with concealed orders in China, all orders are seeable. Furthermore, there is no drawn-out trading period for institutional investors. Institutional and retail investors have equal entree to information from a market microstructure point of position. In add-on, China’s stock market has a monetary value move bound of 10 % to discourage extra volatility and stock use.
- China’s dual-share system
Different with the US, China’s stock market has a dual-share system in which domestic investors can put merely in A portions, while foreign investors can put merely in B portions. In add-on, many houses have H portions, traded on the Hong Kong Stock Exchange. A figure of articles, such as Chan, Menkveld, and Yang ( 2008 ) and Mei, Scheinkman, and Wei ( 2009 ) , study the price reduction of B portion and H portion value relation to A portions, which they attribute to information dissymmetry between foreign and domestic investors and bad motivations. With the debut of plans such as the Qualified Foreign Institutional Investors ( QFII ) plan of 2002, which relaxed the cross-trading limitations, B portion issue and trading have largely vanished. In add-on, China’s equity market used to hold a big non-tradable constituent, held by corporate laminitiss, frequently cardinal or local authoritiess. With the portion construction reform get downing in 2002, this phenomenon has largely disappeared among mid and small-cap stocks, though non wholly among big stocks.
- Colony day of the month
Colony day of the month is another difference between China and America. China’s portion market adopted T+1 which means the colony day of the month of security minutess and denote that the colony occurs on a dealing day of the month plus one twenty-four hours. As many other states, the colony day of the month of US’s portion market is T+0 which means you can sell the portions on the same twenty-four hours when you buy it.
2.2 Three typical features of China’s listed companies
In 2001, a celebrated Chinese economic expert, Wu Jinglian, characterized China’s stock market as a ‘Casino’ manipulated by speculators, misled by the cardinal government’s seeable manus to unfairly support state-owned endeavors ( SOEs ) , and without a strong nexus to basicss ( Allen et al, 2005 ) . These listed companies have great concern due to three typical features
( 1 )Percentageof State ownership is comparatively high: The bulk of these listed companies in China evolved from State-owned endeavors. To do certain those companies are still province controlled, the per centum of portions available to the unfastened market is comparatively low.
( 2 )Percentage of negotiable portions is comparatively low: State-owned portions and legal entity portions are non traded in the unfastened market. As such, much more than planetary mean degree of the portions are non-negotiable.
( 3 )Number of single stockholders is comparatively high: China securities market is chiefly made up of single investors and lack institutional investors. However, the shareholding ratios are comparatively low, and they can non take part every bit efficaciously as American stockholders do.
These three features are besides different features from American market, which are besides three most of import grounds weakening shareholders’ abilities to take part in the corporate administration of public companies and maintain the stock market’s soundness.
2.3 Corporate governance’s influence
As is mentioned, it is thought that China’s stock market misled by the cardinal government’s seeable manus to unfairly support state-owned endeavors ( SOEs ) , and without a strong nexus to basicss. Due to this, the corporate administration can partly explicate the ground why the public presentation of China’s portion market can non play the function of weatherglass of its economic system.
- The stockholders
( 1 ) Highly concentrated corporate ownership: In China, present corporate ownership system includes province portion, legal individual portion, which is owned by companies, and societal common portion ( Cheng, 2003 ) . The province portion and legal individual portion are non-tradable portions. Harmonizing to a study, at the terminal of 2004, 47 % of public companies’ portions are province portion, and 16.55 % of portions are legal individual portion. Harmonizing to Cheng’s sentiment, the consequence of bulk non-tradable portion is struggles between involvements of holders of societal common portions and the province. Because bulk portions are owned by the province and the companies themselves, common stockholders can non efficaciously supervise management’s behaviour and the province normally does non exert its rights as a stockholder to act upon direction efficaciously. For illustration, the Ministry of Agriculture, which is the supervisory bureau of Lantian Co. Ltd. , was either unable or unwilling to happen out the company ‘s fiscal misconduct before it was reported by a university professor ( Shi, 2002 ) . In add-on, since merely minority portions can be freely traded in the market, the stock monetary value can non reflect companies’ public presentation. It’s easy for the stock monetary value to be distorted by the non-rational investors. For case, in the Initial Public Offer ( IPO ) of Mingdong Power in 2000, the P/E ratio was 88. These phenomena seldom appear in US because of widely held ownership. Therefore, cut downing the per centum of province portions is one manner to decide the jobs of extremely concentrated ownership construction.
( 2 ) The comparative little size of Chinese stock market: China’s fiscal system is dominated by its big state-owned banking sector and spread outing shadow banking sector. Entire bank recognition was 128 % of GDP in 2012, harmonizing to Elliott and Yan ( 2013 ) , and entire recognition in the shadow banking sector was reckoned to be anyplace from 40 to 90 % of GDP, while China’s stock market capitalisation is merely 44 % of GDP. By contrast, US bank recognition and stock market capitalisation were 48 % and 118 % of GDP in 2012.
( 3 ) Weak protection for stockholders, particularly single minority shareholders’ rights: Chinese Torahs comparatively neglect civil liabilities and compensation, and have non provided a process and specific clauses for enforceable civil actions. In add-on, there is no proviso for a category action case under Chinese jurisprudence and it is really hard for an single stockholder to action a public company for fraud ( Lin, 2004 ) . To better corporate administration, attempts are needed to beef up the mechanism for stockholders to implement their rights.
( 4 ) Common shareholders’ short-run behaviours: Harmonizing to Cheng’s probe, in China, 76.3 % of investors’ investing rhythms are no more than half twelvemonth, and 27 % of investing rhythms are shorter than one month. Harmonizing to Prisoner’s Dilemma theory, short-run investors have less incentive to take portion in the corporate administration because of ground of cost-efficiency. Another job is the low instruction degree of common stockholders. The probe of Shenzhen Stock Exchange in 2001 shows that 44 % of common shareholders’ instruction degree is lower than senior high school and more than 12 % of shareholders’ instruction degree is lower than junior high school. Because of limited professional investing cognition, it’s difficult to inquire them to do rational investing determinations and acquire involved in corporate administration.
- The board of managers ( BOD )
( 1 ) Legitimacy of supervisory BOD: Different with US, in China, many supervisory BOD members are leaders of Party Committees of the company who are appointed for legitimacy by the authorities due to the state-owned nature, they really lack of motive to supervise the direction BOD. The supervisory BOD meets far less frequently than direction BOD, and deficiency of expertness impairs the map of supervisory BOD. Harmonizing to the stakeholder theory, the company should be responsible to all who has a direct or indirect involvement in the house, instead than merely to maximise shareholders’ involvement ( Hasnas, 2013 ) . Due to high province ownership in China, it is suggested that the supervisory BOD should hold representatives of common stockholders, and more expertness should be included.
( 2 ) Weak independence and hapless responsibility and duty of direction BOD: BOD should obey the fiducial responsibility theory, which means moving in the involvement of stockholder instead than maximise their ain involvements. However harmonizing to a study ( 257 companies listed in Shanghai Stock Exchange ) , in China, merely 3.1 % of BOD has some grade of independence ( Guo et al, 2013 ) . Lack of jurisprudence is one ground, merely the ordinances can non implement the execution of BOD independence. Besides, most of the members in BOD who lack of cognition and professional experience are straight appointed by the authorities ; normally the chair of the company is the leader of Party Committee of the company. Furthermore, the end of BOD is non clear, most of the BOD playing as a adviser instead than supervising direction behaviour and maximising shareholders’ net income.
- Weak external administration construction
( 1 ) Lack of professional direction and its market, obstructions in ordinances, and deficiency of information transparence ( Lin, 2004 ) : In America, professional directors will confront force per unit area from the direction profession. If they are caught of deceitful behaviours or lost due to bad public presentation, their calling in this industry will be dark. There is no such force per unit area in China because there is non such a profession.
( 2 ) Weak or absence of supervising function by Bankss:In the US, Bankss, as the creditors, have great inducements to supervise companies’ behaviour and can act upon companies to execute good. In China, if the province controlled Bankss suffer from bed debt, they will non travel bankrupt, because the authorities will take the loss. As a consequence, the Bankss will non take all attempt to supervise the companies.
( 3 ) Small and undistinguished figure of institutional investors that do non play a major function to better corporate administration: In America, many institutional investors trace companies’ information, and information dissymmetry is reduced to lower degree, which is good to efficient market. However, in China, the absolute figure and the expertness of those institutional investors are non comparable to those in America, and their influences on companies are comparatively weak.
China’s stock market is evidently different with America’s. Many factors make them different but the function of the authorities is the most of import 1. High province ownership lowers down market maps, and authorities intervention does it further. In America, this is really rare. Even though Chinese authorities failed to rock the markets by many ways, it is reforming its SOEs late to cover with jobs exist in its listed companies which may assist its stock market flight from the tendency of diminution ( Lim, 2014 ) . Due to influence of SOEs is a major ground for bad public presentation of China stock market, this reform is extremely possible aspirant to do win. Actually, in the past several months, China stock market appeared a inclination of lifting as figure 2 shows.
Figure 2Shanghai Stock Exchange Composite Index last three months
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