Was Deng Xiaoping Right? An Overview of China's Equity Markets |
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| Authors: | Carl E Walter |
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| Institution: | CARL WALTER lived and worked in Beijing from 1991 to 2011, first as an investment banker involved in the earliest SOE restructurings and overseas listings, then as COO of China International Capital Corporation, China's first and most successful joint venture investment bank. As an investment banker, he played a leading role in China's groundbreaking first IPO in 1992, as well as the first listing of a state‐owned enterprise on the New York Stock Exchange in 1994. As a member of the Management Committee of CICC, he supported many debt and stock offerings by domestic companies, and participated in numerous financial reforms over the years. Until his recent retirement, he was JP Morgan's China chief operating officer as well as CEO of its China banking subsidiary, where he helped build a successful and profitable domestic security and currency trading operation. |
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| Abstract: | In the western world, stock markets arose from the search by privately owned companies for capital to build their businesses. Over time, the markets became places where ownership interests and even entire companies were bought and sold. In China, the complete opposite has happened. The markets arose out of the need for capital by bankrupt state‐owned enterprises operating in an economy with no history of private property. Deng Xiaoping, China's last emperor, gave the green light for the stock market experiment in early 1992 more with the hope of encouraging reform and efficiency than from any conviction that stock markets were the next sure thing. Now, after more than 20 years of experimentation with domestic and international listings, it appears evident that stock markets whose primary function is to trade minority interests in government‐controlled companies have not achieved the goal of improving enterprise performance, as China's leaders originally hoped. Instead, the combination of state monopolies with Wall Street expertise and international capital has led to the creation of national companies that represent little more than the incorporation of China's old Soviet‐style industrial ministries. As for the markets, the government's determination to prevent real privatization has produced separate classes of shares that are defined almost entirely by one thing: the shareholder's relationship to the government. And with all aspects of stock market activity regulated, managed, and owned by various state agencies, it is not surprising that non‐state investors have become motivated more by speculative opportunities than by investment fundamentals. But a quarter of a century is a short time in any country's development and, for all their shortcomings, the markets in mainland China and Hong Kong have played a significant role raising capital for China. It may be too early, perhaps, to suggest that China's equity markets have failed to accomplish what they were intended to do. |
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