Wu Guangqiang

jw368@163.com

THE Chinese stock market has been on a downward spiral since the beginning of 2018, with the benchmark Shanghai Composite Index diving from its latest peak of 3,587 on Jan. 29 all the way down to 2,691 on July 6, a 25-percent drop over the first half of this year.

The sharp fall came after a three-year-long bear market since June 12, 2015 when the main Shanghai index hit 5,187.19.

Many have attributed the recent plummet to the ongoing trade war that Trump forced on China. That’s partly true since the largest trade war in history will multiply uncertainties of the future and overshadow the prospect of economic growth, both domestically and internationally.

In my view, however, the slump has more to do with the inherent flaws and problems of the Chinese market than with external factors.

Comparisons are frequently made to contrast America’s nine-year bull market with China’s chronically bear market to demonstrate U.S. advantages over China in the trade war. Again, this deduction missed underlying causes.

I described China’s stock market as “highly volatile, speculative, and risky” in my article entitled “Behind the Stock Boom” on Dec. 22, 2014 for Shenzhen Daily. Unfortunately, four years have passed and, despite some positive measures, many of the institutional faults in China’s stock market still linger on.

Doubtlessly, problems must be addressed effectively to forge a healthy and resilient stock market capable of boosting China’s economic growth and advancing China’s economic transformation.

The biggest problem is the A-share market’s listing and delisting mechanism, which makes the index fail to reflect China’s real economic strength.

The A-share listing standards are more stringent than those of the U.S. market, with the issuance of new shares on the main board (including the small and medium-sized enterprises board) requiring such conditions as the applicant being profitable for three consecutive years before listing and its accumulated net profit exceeding 30 million yuan (US$4.40 million).

And the approval process is lengthy and complicated, which is time-consuming and labor-intensive. Many new economic companies have abandoned their A-share listings because they have not met the standards.

On the contrary, the New York Stock Exchange has much more flexible prerequisites to applicants’ performance. Any company can go public as long as its assets are large in scale and high in quality, and the company has profit potentials. NASDAQ even designed a system to accommodate different share rights for the new economic companies, creating conditions for the landing of these companies.

Therefore, new economic companies such as Alibaba, Baidu and JD.com have landed in the U.S. capital market.

On the other hand, however, the delisting mechanism is too rigid in the A-share market. Statistics show that, on average, only five companies have been delisted from the market in the past five years, a mere 0.3 percent, while in the past five years, about 300 companies have been delisted each year in the U.S. stock market, a 6.3 percent rate. Over time, more and more worthless companies deposit in the A-share market while the U.S. market is alive with profitable companies.

From the 1980s to the present, the number of listed companies in the U.S. capital market remains about the same: 3,000. That means there have been as many companies delisted as listed over the 30 years. As a result, with the same number of listed companies, the total market capitalization of these companies rose from US$12 trillion in 2008 to US$21 trillion in 2018, with U.S. GDP rising from US$12 trillion to US$20 trillion, and with the U.S. benchmark index climbing 6,000 points to 25,000 points.

The current A-share market system actually encourages cheating since delisting is a rarity. Many companies that were hardly operational struggled to survive by all means: changing names, shifting to other businesses, cooking the books, and fabricating operational records and performance results.

So, obviously, the A-share market system needs an urgent revamp to restore its normal function. Institutional and structural reforms are required to encourage the listings of high-tech and innovative companies, to lure more long-term, institutional and overseas investment, and to eliminate disqualified companies.

Given the short history of China’s stock market, it’s natural to experience troubles and setbacks. With constant reforms, a bright future is in sight.

(The author is an English tutor and freelance writer.)