Since the international financial crisis in 2008, there is a large-scale adjustment in the global capital market. Due to the quantitative easing policy in every main economy, there is a huge increase in liquidity of funds which leads to a situation with extra funds, as well as a boost of global stock market. For China’s A stock market, despite the recurring pattern in the past decade, the market was still unable to grasp this historical opportunity, and this is a huge regret in the expanding Chinese fund market.
The introduction of Sci-tech Innovation Board and the enhancement in supervision demonstrate China’s policy motivation of strengthening the construction of the stock market though the aspect of supervision in order to promote the development of the capital market. It is undeniable that the China stock market is still the weak point of development in the Chinese capital market. Hence, there is a need to enhance the market so that the resource allocation can be optimized and the economy can be boosted in this period of time with excess surplus liquidity.
After the 2008 global recession, the global stock markets generally rebounded and ran high. This is more prominent in the United States stock market which increased continuously and recorded a 10 years bull market. On November 26, the three major stock exchanges in United States recorded the highest points in the history with Dow Jones Industrial average increased to 28121.68. S&P 500 index increased to 3140.52 while NASDAQ composite increased to 8647.93. NASDAQ composite quadrupled from around 2000 to more than 8000 in 10 years. A decade ago, Dow Jones Industrial average was around 6000, and it has increased around fourfold in 10 years. In all the developed economy markets, in the post-economic crisis era, Euro Stoxx 50 index increased in 2015 and reached its peak, from the lowest in 2009 increased to 95% in May 2019. Among major Europe developed countries, Germany’s DAX index had a highest increase of 270% after the crisis, France’s CAC40 index and United Kingdom’s FTSE 100 index had the highest increase of around 130%. In Asia, Japan had seen tremendous increase with its highest at 244%, while Korea’s KOSPI had its highest increase of 177%. In China, after the short-term bull market in 2015, SSE composite index had increase 150%. Since then China stock market has been a relatively down-turn state, it had increased from the lowest level in 2009 to 58% in May 2019. This does not match the higher development speed of China’s economy and it does not show the effect as the economic barometer.
China’s stock market too has experienced a rapid expansion. During its lowest point in 2008, the value of A stock market was RMB 12 trillion. In the end of 2009, the value of A stock market recovered to RMB 24 trillion. In April 2019, the value of China A stock market quadrupled to more than RMB 50 trillion (USD 7.6 trillion), overtaking Japan as Asia’s largest stock market. From this perspective, its increase is similar to the value of stock market in United States (currently approximately USD 32 trillion). However, the volatility of the index does not match with the expansion of market volume. Such a market can only play the role providing financing. It does not allow investors to make money, and is merely a gambling ground.
Normally a strong stock market often always relies on the development of the economy and mature market policy. The presence of both would be indispensable, especially when the stocks of the United States are leading the global stock market. There must be a reason why the United States stock market saw a bull market for 10 years. Since the outburst of subprime crisis in 2008, the Federal Reserve had relaxed its policy three times which stimulated the recovery of the financial sector and the U.S. economy. This caused the United States stock market to rally, the people getting richer, which in turn increased the spending and strengthened the U.S. economy, as well as maintaining the bull market for a decade, forming a mutually beneficial relations between the stock market and the economy.
As a comparison, the low China A stock market index showed the less-than-satisfactory growth of market and profits of enterprises, which does not lead to the effect of letting the people to get richer. This also shows the low confidence of investors and enterprises in the future of the economy. It is also the sign of the continuous decrease on China investment and the slowing down of the economy. Hence, the development of stock market is an important aspect in building confidence.
The flaws in market policy is the main defect in the lack of growth of the Chinese stock market. Take for example the situation of United States’ stock market, where a complete delisting system and registration system are the guarantee for retaining the good ones while eliminating the low quality one. The annual IPO in United States stock market is around 140, but every year there is around 400 companies getting delisted. The highest recorded number of listed companies was around 8000, yet the number is maintained at around 3800 currently. The survivor of the fittest policy causes the investors to lean towards quality investments.
This causes enterprises to focus more on their own growth which boosted the index. The fact that United States’ stock market has a strict regulation in controlling the companies and investments guarantees the fairness in transaction and the healthy growth of the market. It imposes strict penalties, which causes the listed companies prefer to delist instead of going against the rules and face the penalties. Therefore, the development of capital market and consumer market shares the similarity where the right of investors as consumers in the capital market should be guaranteed, instead of focusing on the interest of the producers or financiers. This will eventually lead to a healthy market and encourage the participation of investors as well as prevent fraudulence.
The continuous strengthening of U.S. stocks and the strong economic growth are inseparable with the mature system. It is not an accident that U.S. stocks can maintain its decade-long bull market, and the weakening of U.S. stocks will not happen overnight. Such resilience is also a reflection of the U.S.’s “soft power” and global influence. In contrast, China’s stock market is not only facing weaknesses in the capital market, but also shortcomings in economic development. ANBOUND has previously pointed out that China’s development in the future will depend more and more on the capital and capital market development. The importance of building a good capital market will become more apparent in the future, which is determined by China’s developmental stage. It is an urgent task for China now to focus on improving the shortcomings in its economic development, especially that of the stock market.
Of course, the improvement and development of the stock market requires efforts in all aspects, including the improvement of the Securities Law, the strengthening of supervision, the registration system, and the establishment of a delisting system, and so on. This is not only the responsibility of the China Securities Regulatory Commission, but also the responsibility of the entire financial supervision system, as well as that of the economic development policy and the legal departments. From the perspective of think tank researchers, the construction of the stock market, which is an important aspect of the capital market, is actually a problem of designing the right solution.
This mainly has to do with changing the thinking and solving the problem of market transparency from the perspective of safeguarding investors’ rights. This is not only the establishment of a new version of solution to address the increase in the market, but also to resolve the issue of stockage. This also requires the strengthening of the supervision system and the improvement of the legal system as basic guarantees. At the same time, from the perspective of market construction, a multi-level equity market system is the basis for the healthy development of the A-share market.
In addition, from the perspective of enterprise development, a friendly market and policy environment will also be indispensable. The shortcomings of the stock market are actually the shortcomings of the market system, and good market rules and the environment are required conditions for direct investment.
Final analysis conclusion
Compared with the ten-year bull market of U.S. stocks, the downturn and lingering of China’s A-share market reflects that China’s stock market is a shortcoming of the capital market and economic growth. It is an urgency for China to further reform and innovate to make up for the defects of the system in order to realize its growth potential.
Founder of Anbound Think Tank in 1993, Chen Gong is now ANBOUND Chief Researcher. Chen Gong is one of China’s renowned experts in information analysis. Most of Chen Gong’s outstanding academic research activities are in economic information analysis, particularly in the area of public policy. Wei Hongxu, graduated from the School of Mathematics of Peking University with a Ph.D. in Economics from the University of Birmingham, UK in 2010 and is a researcher at Anbound Consulting, an independent think tank with headquarters in Beijing. Established in 1993, Anbound specializes in public policy research.