Broader change needed for China's stock market to prosper

By Yi Xianrong Source:Global Times Published: 2018/6/19 22:38:39

Illustration: Luo Xuan/GT

Looking back at the past few years, a basic consensus has been reached among financial practitioners and the relevant government departments in China that the main problems and risks in the domestic financial market are a result of its improper structure. The difficulties of addressing the excessive proportion of indirect financing and the inadequate proportion of direct financing are also an important factor.

Lately, A shares have finally been incorporated into the MSCI Emerging Markets Index. This has led to hopes for greater development and prosperity of the Chinese stock market, both at home and abroad, and is seen as a milestone for the market.

From now on, overseas recognition of China's stock market is likely to increase, making it easier to attract international capital and boost the market's prosperity.

However, the market's performance has not yet reflected this optimism, with the A-share indexes having dropped recently, instead of rising.

The current situation is actually helpful for the A-share market, including the evolution of the Sino-US trade dispute, the easing measures of the central bank, positive macroeconomic data in May and generally satisfactory performance by domestic companies in the first quarter.

So why are domestic investors unwilling to put their money into A shares?

The modern stock market should offer a path to profit. In the US, Warren Buffett's Berkshire Hathaway has soared in value over the years and the Dow Jones Industrial Average has risen from about 6,000 points in early 2009 to more than 25,300 points now.

But the Chinese stock market has been far less reliable, making it hard for investors to gain any profit.

The low return rate on investment has been an embarrassment for China's stock market. Some have even joked that the yield from fixed deposits is better than that of the stock market.

But the stagnation of the domestic stock market is not only because of the financial market environment. China's overall investment environment is also to blame.

For more than a decade, the real estate market has seen a long-term continuous rise. Even though the government has been emphasizing regulation of the real estate market, housing prices in many cities have kept increasing.

Entering the real estate market offers profits without the risk of a fall in prices. The availability of financial incentives and loans is also tempting.

However, stepping into the stock market is not only unprofitable, it is also fraught with risk.

Under these circumstances, it is not hard to figure out the direction in which domestic capital is more likely to flow. If the overall investment environment does not change, it will be impossible for the Chinese stock market to develop.

Meanwhile, the stock market itself is still hampered by major defects.

The biggest problem is distortions in the credit system. The government still plays a big role in allocating resources in this market. But if the government dominates the market, the allocation of credit will inevitably be determined and guaranteed by the government. It will also lead to inefficient market operation and corruption, making it difficult to protect the interests of smaller investors.

Therefore, whether the inclusion of China's A shares in the MSCI index can really make the Chinese stock market more prosperous will be decided by whether the regulatory authorities can deal with the problems in the stock market, carry out major reforms and gradually establish a proper credit system.

At the same time, changes are needed in the overall economic environment in order to deal with the real estate bubble and lead the property sector toward healthy and sustainable development.

The author is a professor with the School of Economics at Qingdao University.


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