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Q: The stock market is the barometer of economic development. However, China's rapid economic growth and long-term sluggish stock market are in striking contrast, something rarely seen in worldwide securities markets. What is the reason behind this phenomenon? What are the defects in China's stock market? A: China's stock market, developing along with the country's market economy, has made great contributions to national economic development. However, we should admit that as our knowledge and experience are insufficient, the establishment of infrastructure such as the system of the stock market has been weak, and the market is incomplete, causing the continual falling of share indexes in recent years. The stock market is considered the barometer of economic development. When the economy develops, the stock market will flourish. While economy shrinks, the stock market will be bearish. But it's an abnormal phenomenon that China's stock market remains sluggish despite the country's rapid economic growth. Data from the National Bureau of Statistics show that, in 2004, China's GDP reached 13.65 trillion yuan (US$1.65 trillion), rising 9.5 percent year-on-year. Meanwhile, the composite index of the Shanghai Stock Exchange dropped 15.15 percent. China's GDP has maintained a growth rate of more than 7 percent in recent years. But the composite index of the Shanghai Stock Exchange fell gradually, from 2,245 points on June 15, 2001, the highest point, to 1,187 points on February 1, 2005, a six-year low. The duration of adjustment and the range of the drop are rarely seen in the worldwide securities markets. It clearly shows that hidden in China's stock market is inefficiency and other problems difficult to solve with regards to future development. According to economic laws, fluctuation in the stock market is inevitable, but it should basically be in synch with the situation of the macro-economy. China's stock market is far from being a barometer, as the market value of tradable shares accounts for less than 20 percent of the GDP. Such a small proportion can't make the stock market a barometer. Currently, China's stock market has three innate defects. One is the split share structure. The biggest difference between domestic and overseas stock markets is that about 70 percent of shares are non-tradable shares held by the state or legal entities, which was originally designed to prevent the loss of state-owned assets. Until now, this defect in the system has been the biggest obstacle for the development of the securities market. Split share structure brings different interests and rights among shareholders, leading to inadequate tradability in the market, and impeding the flow of social capital in the same direction as the heated sector of national economic growth. Another important defect of China's stock market is the quality of listed companies. There are 1,400 listed companies in the domestic stock market, but there is a severe shortage of a group of companies worth investing in. On one hand, Chinese listed companies are poor in quality, low in credit and incomplete in corporate governance. Investors can't get the return they deserve. On the other hand, as China's market situation is not favorable, many good quality large enterprises are listed in overseas stock markets. As a result, the structure of domestic listed companies can't be improved. The third defect is the incomplete legal system and environment. In the stock market, illegal cases are too numerous to mention, but people violating regulations haven't received due punishment. Small and medium-sized investors can't afford the high cost of protecting their rights. Despite being in a downturn, the stock market is also in the right period to be adjusted. At present, China is solving the problem of split share structure according to the principle of “following market rules, being beneficial to the stability and development of the capital market, and protecting the legal rights and interests of investors, especially public investors.” The first round of trial reform on split share structure started in May 2005 and has achieved preliminary success. The second round has already been launched. China will sum up the experiences of trial reforms, finish outlining rules, and propel listed companies to join in the reform of split share structure. All of this is to resolve the problem left over from the past that has long been plaguing the stable development of China's capital market, and to lay a firm foundation for healthy growth.
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