The Development of Chinese Stock Market and Its Critical Issues for Future Development - Case Study Example

Student’s Name: Professor’s Name: Subject: The development of Chinese Stock Market and its critical issues for future development Date: The development of the Chinese stock market Introduction There have been tremendous changes experienced China (Gao 2002). The changes range from an economy that is centrally planned in the mid-20th century to an economy that is more market-oriented since the eighties. Contemporarily, the economy of China is among the most significant global economy participants. The emerging Chinese stock market has experienced tremendous development and growth. This has however happened since the establishment of the 1990 Shenzhen and Shanghai stoke exchanges. The development however still believed to be in its tender or early stages since 1990, it has been noted that the number of companies listed in both the stock exchanges developed by at least one hundred times. The total capitalization of the market by far is more than five hundred billion US dollars (Jianguo et al. 2007). Research shows that the stock market of China has got a number of negative things (Lu, 2014). The negative things, for instance, include a structure of governance that is incompetent, significant market defect structures, and a regulatory capacity that is inadequate and finally wild market manipulators. It is, therefore, necessary to fix the issues for the sake of future long-term development of the economy in the market. There are a number of market features in China that are idiosyncratic and unique. The features, for instance, include the different shares that are offered to state, enterprises, and individuals with different circulation regulation and purchasing costs and finally strict market segmentation for foreign and domestic investors (Lu 2014). Other features also include high rates of transfers high profit-earning (P/E) indicator values and risks that are relatively high. There is a relatively low quality of investor education as well. The regulatory system maturity is also doubtful. This paper analyzes the development of the stock market of China indicating the fundamental future development issues (Lu 2014). The Development of the Chinese Stock Markets The People’s Republic of China saw the two exchange markets opening in 1990 (OECD 2003). The Shangai Stock Exchange which was established in 1990 and in 1991 the Shenzhen stock exchange was also established. The two stock markets have been rapidly developing since then. Their developments have significantly contributed to the economic growth of the country. The stock markets stimulate the corporate governance, financing and investment, and the entire financial system of China. Some Chinese economists in the 1980s raised the use of shareholding system possibility for the purposes of improving the corporate ownership and structure of the government (Swanson 2007). Some enterprises at the same time (1980s) begun to offer equity shares to the public so as to raise capital. The early shareholding companies’ success gives encouragement to more enterprises to follow. Shareholding hence ends up becoming a practice accepted by the government. The over the counter share trading by the late 80s was popular in cities such as Shenzhen and Shanghai where there was a high concentration of the shareholding companies. The two stock exchanges (Shanghai and Shenzhen) were established in 1990 and 1991 respectively by the government so as to discourage the black-market trading as well as the unorganized trading (Huang et al. 2002). The two exchanges were set to help in shares trading centralization and promotion of advanced mechanisms of trading. They did so by, for instance, making use of mechanisms of trade such as paperless trading and matching of orders by the help of computers. The innovations have significantly improved, in a tremendous manner, the market efficiency for equity share trading. The two-stoke exchanges in 1991 made a launch of the B-shares that were seen to have dominated the Hong Kong or US dollars. The B-shares were exclusively available for investors outside the mainland of China and were designed so as to attract Chinese foreign-currency investment (Wang 1999). The Chinese government on late 1993 decided that the stock market and the shareholding system are fundamental components of the socialist market of China. The government had further realized that stock marketing was an integral component of the market system. It helps in allocating the resources of the society efficiently. The stock market of China underwent tremendous growth in 1993 and 1992. As the number of listed companies increased in the market, there was also an improvement of the market infrastructure. Either exchange made fundamental progress in their system of trade. The development was wholesome; the security company numbers that offered services to the companies that were listed and investors also increased tremendously. Additionally, there were several enactments of important regulations and laws by the government that purposed to formalize the stock market operation (Heilmann 2002). The overall characteristics of the growth of the markets and how they contribute to the Chinese economy The two Chinese stock markets by 200 had given out 379.17 billion shares in total. Of the total shares, 135.43 billion shares were negotiable (Joes 2002). The total market value of the shares was 4,809.09 billion renminbi (RMB) which approximately one third with 1,608.75 being negotiable. The figures indicate a drastic development from 1992. In 1992, the total market value and total issued market were 104.81 billion and 6.89 billion RMB respectively. The composite index of the two stock exchanges, Shanghai and Shenzhen more than doubled in just nine years. There was a tremendous increase in the number of investors from the 1992nd 2.16 million to at least 58 million by the 2000 (Allen et al. 2005). The stock-market capitalization of China as a GDP percentage saw an increase from the 1992nd just 3.93% to at least 50% by 2000. Its contribution to the domestic of China raised capital from 0.60 per cent in 1992 to 1999th 3.04 per cent. The tremendous development in the Chinese stock market to the Chinese economy is apparent. The Chinese top rank officials in the government have indicated that in five years’ time, China will be having between 3000 and 2000 listed firms. They also mentioned that the Shanghai Stoke Exchange is going to become one of the very prominent stoke markets globally (Amihud 2002). The public listed companies of China come from cities and provinces of a wide range (Asness 2013). The proliferation of the various categories of the shares of the stock markets in China is another interesting aspect. The structure of the shareholding of the listed companies is decomposable further as: a) State-owned shares- are the shares that an institution of the state obtains for the sake of an institution corporations capital contribution in return. b) Domestic legal-person shares- are shares for sponsors that have been held by the domestic legal people. c) Foreign legal-person shares- are shares for sponsors held by the foreign legal people. d) Private placement of the legal-person shares- are the shares that the legal people subscribed to apart from sponsors and issued by the private placement. e) Staff shares- are the shares that are issued during the private placement of companies, however, not listed at the time of report. Securities-laws and market regulations The stock markets of China, like any other markets that are emerging, have experienced a number of institutional reforms (Bai 2013). The key motive is the establishment of open, fair and just regulatory and legal framework for the sake of the stock market of China guidance. The Shenzhen and Shanghai stock Exchanges were majorly governed by Shanghai Securities Interim Administration rules together with the Shenzhen Stock Exchange administration interim rules for trade issuing. Over years, the market security regulatory structures were entirely governed and manned by the central bank. As much as there has been developments significantly made in the stock market in China there are still existing tremendous opportunities for further market growth. The number of companies that were listed in China as by 2000 was 1,088. This was less than the 2, 468 in New York by far, 2, 929 in London and 2, 096 in Tokyo (Bai 2013). The stock Markets positive contributions The stock markets of China have played significant roles of the Chinese economy development as well as its market system The Stock Markets positive contributions (Baker 2003). The markets have helped the Chinese companies in raising the much needed financial capital. The markets have also helped in the corporate governance improvement of the companies that have been listed. The financial channels have been opened by the stock markets. The markets have as well optimized the Chinese listed companies listed structures. The stock markets of China, in the last ten years alone, have helped in raising at least five hundred billion RMB for the companies that were listed. Injecting capital into the companies that have been listed provides funds that are necessary. The enterprises of China for so long were majorly financed by banks and government fiscal allotments. Since the economic reform started, the capital of enterprises that was newly created has been mainly coming from bank financing. The Chinese enterprise over dependence on banking funds eventually result into a debt-asset ratio that is very high (Lu 2014). The stock markets have as well given the transformational of management impetus of the state-Owned Enterprises (SOEs) of China. The Chinese SOEs were dependent on the funding by the state. A Chinese investor’s generation has been fostered by the development of the stock markets of China as well as the society’s capital allocation. The number of investors has been steadily increasing in the past decade. The capital market liquidity has been enhanced by the savings deposits diversions toward stock markets and has as well improved the resources allocation (Lu 2014). Challenges that face the stock markets of China The Chinese stock market is reportedly at a tender age and is facing a lot of challenges. To start with, the market was born from an economy that is centrally planned hence inheriting the economy’s formidable weaknesses. The stock market development has been a constant subject of government interventions. The government does not give the stock market the mandate of deciding for itself on matters to do with its expansion but rather the government takes the obligation of determining the expansion of the market. Second, an equity share, in a market that is mature, has the classification of common or preferred stock as per the responsibility and equity right differences. The state shares representatives often have dominance over the management and board decisions ignoring the public and small shareholders interests. The listed companies acquisition and mergence can just be privately done without public market resort. This I another key drawback of the non-publicly-traded shares large proportion. Market regulators and individual investors in most cases, in a lot of these private deals have stayed in darkness until the last stage (Lu 2014). Third, in a stock market that is mature, the IPOs pricing and number are established by listing companies, and investment banks according to the condition of the market (Banz 1981). The Chinese government controls pricing and timing of IPOs. The government announces an offering delay when the market gets down. As much as shares are given as scheduled, the price of issuing may be slightly than the price of the market hence generating huge losses to investors. Conclusion The Chinese stock market is an emerging market; however, some of its features make it so different from the other markets that are emerging. The major concern is supervision and control by the government. Other issues are segregation and separation of the stock market. There are specific structure and capital and district division in sharing of classes and number of structure failure. This has hence made it so difficult to change from emerging to developed markets. The stoke market of China is highly speculative. List of references Allen F. et al., 2005, ‘Law, finance, and economic growth in China,’ Journal of Financial Economics, Vol.77, pp.57–116. Amihud Y., 2002, “Illiquidity and stock returns: cross-section and time-series effects,” Journal of Financial Markets, Vol.5, pp.31–56. Amihud Y., 1988, ‘Liquidity and asset prices: Financial manage-meant implications,’ Financial Management, pp.5–15. Asness C., 2013, ‘Value and momentum everywhere,’ The Journal of Finance, Vol.68, pp.929–985. Bai J., 2013, “Have financial markets become more informative?” New York, University Working paper. Baker M. el al., 2003, ‘When does the market matter? 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