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Poor governance blamed for securities market
Analysts and market participants have blamed low returns and poor corporate governance as major reasons for their lack of confidence in the bearish markets. Chinese stock markets have struggled at fresh 6-year lows during the past week, but got a strong rebound on Friday after days of consecutive drops. The Shanghai Composite Index, which covers yuan-denominated A shares and foreign-currency B shares, rose 42.33 points, or 3.58 percent, to close the trading at 1,223.57 points from 1180.37. The index slumped to 1172.57 points on March 30, the lowest point since May 19, 1999. Most analysts noted that the rebound results from excessive falls during the previous four trading days, and there are no shown signs yet of a strong recovery of the sluggish markets due to their weak fundaments. LITTLE DIVIDENDS Only a few of the companies listed on the Chinese stock marketsoffer dividends to their minority stockholders since the markets were set up in early 1990s, official statistics shows. About 65 percent of the listed firms, on average, have given no dividends each year during 1993 and 2003. This prompted the Chinese Securities Regulatory Commission (CSRC), the securities watchdog, to make it a rule in 2001 that listed firms will not be permitted to offer additional shares if they did not offer cash dividends. By 2003, only 244 of China's 1,300-strong listed firms offered cash dividends in the past three consecutive years, and only 85 ofthe 224 firms gave post-tax dividends that are higher than the one-year interest rate for banking deposits. The reluctance of the listed firms made it impossible for investors to share the growing profits of those firms and made the stock markets less and less attractive, acknowledged experts. To make it worse, Chinese firms listed on overseas markets became enticing stars due to their superb performance and fat returns they offered to their overseas investors, such as PetroChina and China Mobile, the country's leading telecommunications giant. PetroChina, the country's largest energy and petrochemical company, earned more than 100 billion yuan (about 12 billion US dollars) in profits last year, but Chinese investors did not gain a single cent from its huge profits. The corporation attracted foreign investors such as BP, Royal Dutch Shell and Exxon when it was listed in Hong Kong, and Exxon reportedly earned 11.2 billion Hong Kong dollars in profit from buying and selling stocks of the Sinopec and BP also earned 10.8 billion HK dollars from buying and selling shares of Sinopec and PetroChina. POOR CORPORATE GOVERNANCE Cheng Siwei, a noted expert and national legislator, said the key to revival of the Chinese stock markets is improving the quality of listed firms. Listed firms that are not up to the standards as a listed firm should be removed from the markets, said Cheng, and only qualifiedlisted firms with good outstanding achievements can help resume investors' confidence, which is needed to revive the stock market. Song Jinsong, an analyst with Hantang Securities Co., said poorcorporate governance, the split share structure and irregularities among major stock holders are the root causes of all evils in the securities market. He also blamed the current bearish market for China's lack of asound national credit record system, acute shortage of managerial professionals and inability of regulators to crack down on irregularities. Zhang Jingdong, a senior researcher with Hua'an Securities Co.,said that the top priority for the CSRC to revive the market is improving corporate governance of the country's listed firms, which numbered 1,377 at the end of last year, while increasing transparency and credibility. SPLIT SHARE STRUCTURE However, the overwhelming majority of investors in the Chinese securities market have been appealing for the central government to put an end to the split share structure deriving from the planned economy as a key move to invigorate the country's lackluster share markets. The split share structure refers to the existence of a large volume of non-tradable state and legal personal shares and the fact that only about one-third of the shares in domestically listed companies are floated on the market. A recent survey by a Shanghai-based investment consultancy firmshows that at least 70 percent institutional investors and 90 percent minority share holders believe that the split share structure should be given top priority by the leadership when they consider ways to revive the market. Insiders say the irrational structure puts public investors at a worse position than the actual controllers of the listed companies in making corporate policies and disposing of the companies' assets. Wu Xiaoqiu, director of Finance and Securities Institute of the elite People's University of China, cited the split share structure as "a black hole to suck up the energy accumulated on the market," and said it should be straightened out as soon as possible. The State Council, or the central government, issued its strategic guidelines on Jan. 31, 2004 in support of the capital market's development. The Chinese government has since then adopted a number of substantial measures to boost the stockmarket, including the reform of the mechanism for setting the prices of initial public offerings, lifting bans on direct access to the market by insurance firms and social security fund, and reducing tax on share trading. But the measures have only provided market indices with a short-term boost. Millions of investors in China have suffered heavy losses on the stock markets in a drastic market fall lasting for the past four years. The fall was triggered by the plan made public by the Ministry of Finance in 2001 to sell some of shares of a few State-owned firms to raise capital for the country's social security fund. The ministry has soon shelved the plan after the market responded by dumping shares in panic. The Chinese economy has been growing by an annual average of 9.4 percent in the past 27 years, while the domestic stock markets, far from being an economic barometer, were down nearly by half during the past four years since 2001.
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