Introduction
The China stock market, which is the Asia’s second largest by capitalization, is highly underdeveloped and relies on rumors for trading. The market is dominated by state-owned enterprises, which have no credible system of financial reporting and book keeping. The grim picture of this situation is evident from the multiple lawsuits that have been filed by disgruntled shareholders. Surprisingly, the state-owned enterprises are listed for political rather than economic purposes. This market is characterized by rampant insider trading and investors who hold ghost accounts with sinister share dealings. Almost all of the companies that are listed engage in abuse of stock market with the aim of making ‘dirty’ profits. The domination of shareholding by the state-owned enterprises has compromised the interests of the minority shareholders. This paper is a case study that analyses the conditions of stock markets in China, which is a typical emerging market. It also recommends reforms necessary to achieve development in China’s stock market.
Conditions needed to build up a stock market in an up-and-coming market
The markets in up-and-coming markets require more complexity to ensure efficiency. Apart from the government-appointed regulators, more reliable mediators such as investment analysts should be introduced in these markets. The private sectors should be given opportunity to participate more in the stock market since the state-owned enterprises do not necessarily finance their operations from equity or debt capital. The companies that are listed should be forced to avail accurate information to be used by both the investors and creditors. The role of institutional intermediaries should be emphasized in these markets, as they play a very critical role in ensuring a balanced market (Gao, 2002).
How these conditions compare with the situation in China
In china, the state-owned enterprises have dominated the stock market, while the private sectors only play a second fiddle – since it is very difficult to obtain capital. The financial reporting is never transparent despite the fact that there are some companies listed in the stock market. The state-owned enterprises struggle to increase their market share rather than profits. The Chinese authorities have imposed limitations on the stock market, hence making it easier for state-owned enterprises to stage-manage the market discouraging the individual investors. As such, the stock market in China has played an experimental role, at the expense of enhancing capital flow or corporate governances.
How likely is China to develop a market with fair trading?
The listed companies have practiced rampant financial fraud, and the large shareholders are wielding their control strengths at the expense of the rights of small stakeholders. To address this problem, the listed companies’ governance structure should be improved through introduction of independent director system, which will compel companies to appoint independent directors and at least one of them to be a professional accountant. This will go a long way in ensuring accountability and transparency in the stock markets (Choi & Meek, 2010).
Information disclosure is a very important issue, which directly impacts on investors’ protection and efficiency of security market. Furthermore, practice of transparency in the information disclosure is likely to attract external investors. Therefore, China should increase the number of information disclosure requirements. Also, the courts should allow the shareholders to sue their companies if they lie about their accounts.
A plan of reforms necessary to achieve stock market developments in China
The China security market focuses on the supply side, which includes listing more and better companies and forcing them to adopt better disclosure and corporate governance standards. This calls for the government to now focus on the demand side of the market. The State Owned Enterprises (SOE’s) should have independent auditors to chair their committee so they can ensure financial reporting is credible. Control of the capital should be devolved from the Government, which wastes most of it. The regulation and legal environment that foresees the stock market should be reformed, especially to robustly fight insider trading, which is being practiced in large scale. In addition, independent underwriters should replace political committees in the role of approval of IPO’s. Finally, China should invent a multi-level system and devise strategies to boost direct financing to fuel development of the bond market. It would be advantageous if the process of bond issuance is market oriented, transparent and open (Gao, 2002).
Conclusion
China’s stock market is typical of an emerging market, which is grappling with strong domination by the government at the expense of private investors. This situation is endangering the growth of the stock market because the rights of small investors are enormously trampled upon, and transparency is evidently not being practiced. The issue of financial reporting has grossly been ignored, hence putting the wealth of the shareholders at the mercy of a few dishonest and politically connected companies. The Chinese stock market needs some level of sophistication to ensure that checks and balances are put in place to guarantee security of the shareholders’ wealth. The reforms should be focused on enhancement of corporate governance and structure realignments.
References
Choi, F., & Meek, G. (2010). International Accounting. Upper Saddle River, N. J.: Pearson Education.
Gao, S. (2002). Dow Jones Indexes: China Stock Market in a global Perspective. New York: Dow Jones & Company, Inc.