The Chinese Stock Market Volume I

A Retrospect and Analysis from 2002

S. Cheng, Z. Li, S. Cheng, Z. Li

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137391100
• Topic: Business
• Subtopic: Financial Services
• Index: Business

Both quantitative and qualitative analysis is used to review China's stock market in a book containing the latest research on China's IPO market, the 2006-07 market bubble, the development of institutional investors, the stock index futures market, stock sector performance, corporate governance of listed firms and China's growth enterprise market.

1

Review of China’s Stock Market from 2002 to 2014

Ping Li

The history of China’s securities exchange can be dated back to the early 20th century, with the first-ever stock in China issued by the China Merchant Steam Navigation Company (established in 1893). In 1914, the Beiyang government enacted the securities transaction law and, in June 1918, founded the first securities exchange in China: The Beijing Stock Exchange. The Shanghai Huashang Stock Exchange followed in 1920. China thus entered the era of stock exchanges during the period of the Republic of China. Being highly lucrative, a number of trust companies and exchanges were set up nationwide, but after the First World War the stock exchange and trust companies began to exploit each other, giving rise to rampant stock speculation. However, trends reversed relatively quickly. As foreign private capital flowed into China and the central bank tightened the money supply, stock prices slumped sharply and many exchanges and trust companies collapsed. The ‘unrest of trust companies and exchanges’ of 1921 began.

The stock market of New China was established after the reform and opening-up, according to the instruction of Deng Xiaoping. In December 1990, the Shanghai Stock Exchange (SSE) was set up, marking the beginning of New China’s securities market. In June 1991, the new Shenzhen Stock Exchange (SZSE) followed. Then, in October 1992, both the Securities Committee of the State Council and the China Securities Regulatory Commission (CSRC) were established. At the same time, stock issuance was expanded to the whole country and a nationwide securities market was born in China. Over the past two decades, China’s stock market has made significant strides forward. Since the establishment of the SSE and SZSE, China’s capital market has been in operation for over two decades. After experiencing so much in such a short period, the stock market is now approaching a new era. Parallel to the stock market’s development, China’s enterprises have also experienced their ups and downs.

On December 19, 1990, in Pujiang Restaurant (a European-style old building on the west bank of the Huangpu River), the SSE’s opening gong was struck for the first time: The curtain of China’s capital market was thus raised. When compared with Wall Street, which has dominated the global financial market for over a century, the newly-established SSE was rather insignificant. It initially boasted only eight listed companies, 25 members, 30,000 investors and a market value of CNY1.234 billion.

The history of China’s stock market in the past two decades is one of continuous innovation, expansion, development and regulation. Since the establishment of the first exchange, many ‘firsts’ have followed on the Shanghai market: The first B-share of Electro Vacuum B, the first open-ended fund of HuaAn Innovation, and the first Exchange Traded Funds (ETF) of the Shanghai 50 ETF. With the development of the stock market, the variety of products on China’s capital market increased and began to link with other mature markets. Shortly after the stock market was established, the central government launched pilot projects and the SZSE tightly grasped this opportunity to incubate new avenues for development, strengthening its awareness of service and striving to achieve ‘growth with standardization and standardization in growth’. Distinct from the growth models and paths of traditional exchanges, the SZSE made innovations and improvements in the maintenance, organization and development of its market. It succeeded in escaping the constraints of a regional market and contributed to the perfecting of China’s securities market system and its technological infrastructure. In this way, the SZSE gradually grew, standardized, and became a national securities market.

Further, the SZSE has continued its efforts and become the ‘experimental plot’ for setting up the growth enterprises market (GEM) in China’s securities market. Following the principles of ‘innovation, supervision, service and cultivation’, it courageously assumed responsibilities and risks to pioneer an effective set of measures for systematically cultivating small- and medium-size enterprises. This has included transaction regulation mechanisms (like suspension), supervising the market, educating investors, and regulating the governance practices of listed companies, the sponsor system, and the securities issuance system.

In April 2005, the CSRC released the Notice on the Trial Implementation of Measures on Full Circulation Reform for Listed Companies and Related Questions. On May 11 of the same year, one of the first four pilot companies, Sany Group (a listed company on the SSE), revealed its reform plan and subsequently saw its plan passed by a large-margin of its shareholders. This symbolized the beginning of a ‘full circulation era in China.’ During the past two decades, the stock market has played an important role in accelerating the formation of capital in China, spreading market risks, broadening financing channels, and optimizing resource allocation. It has also helped push forward the rapid growth of the real economy, conducive to the overall sustainable, stable and healthy socio-economic development of China.

1.1 A brief review of the development of China’s stock market from 2002 to 2014

As the reform and opening-up deepened and was pushed by domestic demand spurred by economic growth, in December 1990 the SSE and SZSE were established. They represented the first-ever attempt to build a capitalist market under a socialist system. China’s stock market has, after two decades of development, accomplished major achievements. In October 2007, the total market value of China’s stock market (including Hong Kong stocks) amounted to USD$673 million. This surpassed that of the EURONEXT, NASTAKE, Tokyo Stock Exchange and London Stock Exchange, and was second only to that of the New York Stock Exchange. By this time, most of the core state-owned and holding enterprises had gone public and the incremental effect of capital from state assets was prominent. The national economy had more vitality, with increasing influence and control. Private enterprises had become prominent, accounting for over 80 percent of listed companies on the small and medium-sized enterprises (SME) market and the GEM, promoting the establishment of a modern enterprise system according to the standards of a public company. Further, many innovation-oriented and technology-oriented companies representing the future direction of the economy excelled in the capital market and vigorously propelled both industrial restructuring and technological innovation.

In the last decade, China’s stock market has progressed rapidly, with many impressive accomplishments. A brief review of these follows.

(1)The year of 2004 – The opening of the SME market: A breakthrough in building a multi-layered market.

On June 25, 2004, the first batch of eight new firms listed, marking the formation of the SME stock market. This was not only the start of the GEM but also a major step in building a multi-layer capital market in China.

The SME stock market was the first step in establishing the GEM. Its success laid a strong foundation for the latter. Since the establishment of the GEM, it has been described as a business incubator for high-growth companies shouldered with great expectations from the market. On October 30, 2009, the GEM was formally put into place and subsequently developed rapidly. After four years, on October 30, 2013, the number of listed companies in the GEM had increased from an initial 28 to 355. From the outset, the government has maintained reform and innovation in the market. The GEM has also generated a ‘rich road’, giving rise to the emergence of multiple billionaires and large numbers of millionaires. However, upheavals in the GEM have also resulted in market instability.

(2)The year of 2007 – The incident of ‘5.30’: The raising of the stamp duty and the stock market crash.

The year 2007 was memorable for China’s stock market, as Chinese investors pumped large amounts of money into the market. The SSE Composite Index rose 97 percent year-on-year, making it the best performing stock index in the world. This irrational phenomenon drew worldwide attention to China’s stock market.

In 2007, China’s capital markets were experiencing a bull market, ending a prior long, torturous bear market. At the end of 2006, the average price of listed stocks was around CNY5, but within four years this average had risen to CNY12; stocks under CNY5 no longer existed. In April 2007, the stock index of the SSE and SZSE increased by 30 percent, and, from January to April 2007 the increase at one point reached over 80 percent. Under these conditions, the Ministry of Finance (MOF) announced a new policy on the late evening of May 29, 2007. The MOF raised the stamp duty for stock transaction from 1 percent to 3 percent. Since this decision (or at least the announcement) was made late at night, most media outlets, such as newspapers, could not immediately publish the news. Instead, news of the decision was released through broadcasts and TV the following morning. The stock market responded to the news promptly. When the two exchanges opened on May 30 (the following day), the stock index began to slump significantly. Within one day, the SSE Composite Index fell 281 points (6.5 percent). Countless stocks on both exchanges went limit down and a market value of CNY4253.2 billion evaporated, trapping many investors. More frighteningly, this initial reaction was just the beginning. Over the following few trading days, the stock market crash continued in both Shanghai and Shenzhen.

The market was incensed by the sudden action of the MOF. Since the decision was announced at midnight, it was called ‘the cock’s crow at midnight’. Strangely, before the official release, an MOF official had stated through the media that there was no such plan to raise the stamp duty. In fact, however, at that time the MOF had submitted the plan to the State Council for approval (which came two days after submission). It was because of this false signal from an MOF official that investors dismissed the rumor of a stamp duty hike. This dismissal further encouraged rampant growth in the SSE Composite Index. The inconsistency in policy signals, and the painful market reaction, made the MOF, as a responsible government body, the target of public criticism.

The bull market was finally stricken and reversed. The prolonged market slump made the government realize that the overuse of administrative controls would be detrimental to the market. In the beginning of June 2007, the CSRC adopted a mild policy with the aid of the media. A press conference was formerly scheduled on 5 June to publicly punish some commercial bank for infringing regulations on offering loans to securities companies. However, the night before the official announcement, the media was tipped that this action had been cancelled. This indicated that the government was unwilling to give another shock to the market. It also represented the warming climate toward market sentiments at the policy level. It was not until this moment that the stock market crash halted, after the Shanghai market had dropped thousands of points.

The incident of ‘5.30’ was seminal in the history of China’s stock market. It revealed many problems. On the one hand, the government lacked appropriate approaches to administration of the stock market. On the other hand, the incident showed that China’s capital market was extremely unstable and speculative, falling into long bear market periods and rapidly reversing into bull markets.

From October 2007 to October 29, 2008, the SSE Composite Index slumped sharply from an unprecedented 6,124 points to a much more modest 1,665 points. Within one year, a market value of over CNY20 trillion had evaporated, echoing the saying that ‘the higher one climbs, the deeper one falls’.

(3)The year of 2008 – The impact from the United States’ Subprime Crisis: A moderate bull market turned into a bear market.

In January 2008, influenced by the Subprime Crisis, major financing institutions in the US suffered from severe losses, badly damaging investor confidence. On January 15, Citibank announced it had suffered a loss of USD$9.83 billion in the fourth quarter of 2007 (the highest quarterly loss since in its history). On January 16, JP Morgan revealed that its net income for the fourth quarter had been reduced by 34 percent to USD$2.97 billion. And on the following day, Merrill Lynch declared its fourth quarter losses at USD$10 billion – again the highest quarterly losses in its history. The Subprime Crisis also resulted in major bank layoffs. Influenced by the Subprime Crisis and the related US stock market crash, global stock exchange indexes (including China’s) also declined sharply. On January 15, 2008, the SSE Index fell below 5000 points (a loss of 5.14 percent), beginning a new round of bear market moments and ending the era of the frenzy bull market in A-shares.

(4)The year of 2010 – CNY460 billion: A historical record in new initial public offering (IPO) financing.

In the SME stock market, Hepalink issued its new stock at the price of CN148 – a record issuing price in the history of China’s A-share market. This not only provided the Li couple (the actual controllers of the company) with assets of over CNY40 billion but also convinced Goldman Sachs of the huge profits generated by investments in China. Hepalink’s value had multiplied by 90 times within three years. In fact, Hepalink was not an isolated case. Among the new IPOs in 2010, the ‘three highs’ (high issuance price, high earnings multiple and high excessive financing) phenomenon kept cropping up.

According to WIND Information, among the more than 300 companies which have listed or issued new stocks since 2010, 31 of them had issuing prices over CNY50. Indeed, Hepalink was not the only company that issued new stock at a price above CNY100. By-Health Corporation also issued in the GEM at CNY110. High issuance prices have made excessive financing quite common. The scale of financing since 2010 has struck a record in China’s A-share market with a value of CNY460 billion. Starting from 2006, new IPO financing began to exceed CNY100 billion and, when the stock market climbed in 2007, giant companies like Sinopec Group, China Shenhua, and China Construction Bank all rode the tide of the A-share market with total financing of CNY446.9 billion in that year (setting a world record). Surprisingly, three years later when there were few similar firms seeking...

Table of contents

• Cover
• Title
• 1  Review of China’s Stock Market from 2002 to 2014
• 2  Market-Oriented Reform of China’s IPO System and Information Disclosure Regulations
• 3  Institutional Investors in Chinese Stock Markets
• 4  Characteristics of Different Styles and Sectors in China’s Stock Market
• 5  Development and Problems of Stock Index Futures and Margin Trading and Short Selling in China
• 6  Development, Problems and Suggestions for China’s GEM
• Index