CHINA STOCK MARKET IN A GLOBAL PERSPECTIVE

Executive Summary

China’s stock market has experienced amazing growth since establishing its twoexchanges in 1990, although the growth has been uneven and irregular, and themarket remains in the early stages of its development. This report seeks to identifythe key characteristics of China’s market and how they combine to form the mostdynamic and intriguing developing market in the world.The current structure of China’s market is one of its key obstacles to further development.There are very few stocks that would fit the definition of “blue-chip” tradingon China’s mainland exchanges. Whereas most developed markets are dominatedby a limited number of large-cap stocks, China’s market is cramped by amultitude of small-cap stocks. This feature allows for increased speculation andhigher turnover for both investors and indexes, among other problems.A related matter is the reliance of China’s market on external expansion, that is,expansion through the issuance of new shares rather than the appreciation invalue of existing stocks. Since these shares generally do not experience sustainedgrowth, often because of market manipulation, they contribute to the dominanceof smaller size stocks in China’s market.

Ultimately, the current structure is amajor obstacle to the creation of viable index-related products in China.Another issue is the fact that, despite the tremendous growth of the stock market,China’s companies are not operating at a high level of profitability. They areplagued by poor earnings and low dividend yields. China’s companies need toincrease their profitability if they are to compete in global markets.Finally, government seems to have too much influence on the market. It keeps a tightcontrol on the issuance of IPOs, and, as a result of widespread government holdings,many listed companies in China have very low free-float ratios.

Meanwhile,due at least in part to the unusual market structure, market manipulation andspeculation are common. The solution is simply a matter of strengthening controlsin certain areas while relaxing them in others in order to foster an environment inwhich China’s stock market can continue to thrive.