I could not believe what i am reading here. We have a built in bias to extract money from 'investors' to support marginal businesses owned by the State. Better, the State is the only supplier of such investments. What could possibly go wrong? It becomes impossible to run.
This crash is going to end up with stocks trading at a deep discount to the real breakup value of the assets as happened during the Great Depression in the USA. Worse it is bleeding off private savings at the same time as it becomes likely that the Banks themselves will need a complete restructuring.
The potential for chaos and destruction has only begun. How is the government going to keep the music playing?
China is now facing its greatest challenge. Making this work will be a textbook for the topic.
Pillaging the savings from small speculators to enrich state-owned enterprises
By He Qinglian | July 12, 2015
In recent months, having been encouraged by the state, millions of ordinary Chinese have put themselves at risk of losing everything by gambling in the stock market. The catastrophic results are unfolding daily. Actually, since its inception, China’s stock market has been under the control of the Chinese Communist Party (CCP) that has regarded the market as a kind of “ATM” for filling the coffers of state-owned enterprises (SOEs) and lining the pockets of their CEOs, while draining the savings from small speculators.
During his term in office, former Premier Zhu Rongji stated, “The stock market needs to help lift SOEs out of poverty.” The CCP set a goal of pulling SOEs out of poverty within three years via use of the stock market. It then went about it by listing a group of poorly managed, and even unsustainable, SOEs on the stock market. With this direction, stock reform and listing of stocks was limited to SOEs for a long time, while privately owned enterprises had little chance of obtaining any public funding.
The stock market needs to help lift SOEs out of poverty.
— Zhu Rongji, former Chinese premier
Encouraged by government policies, SOEs used the stock market to get funding. Subsidiaries of parent companies became “ATMs” that brought in streams of cash. Thus, China’s stock market achieved “100 years of progress in just 10 years.”
According to Chen Dongsheng, chairman of Taikang Life Insurance Co., Zhu Rongji made a big decision to allow all enterprises to be listed on the stock market. Furthermore, the capital market reform was clear back then, the goals were set up for each province, and all wanted to implement it. This is how China’s capital market came into being, Chen said. But from the beginning it was arranged to provide funding to solve the financial difficulties of SOEs. And today it’s the same, he said. Why can’t we manage our capital market well? It’s because SOEs are listed on the stock market if the premier says so.
Stock Market Money-Laundering Machine
One important reform of China’s SOEs is the so-called management buyout provision. The outside world thinks of this as executives using their power to split up state assets. But high-level CCP officials and their families, who were senior executives of SOEs, were among the biggest beneficiaries of this reform.
Xi Jinping recently ended the good old days of SOE executives. In the past two years, CCP authorities have repeatedly stressed the Party’s ultimate leadership of SOEs, and in November 2014 the State Council Leading Group of SOE Reform was implemented.
Since many SOE executives were dismissed during the anti-corruption campaign after the CCP’s 18th National People’s Congress, many SOE executives worried that holding shares would be classified as corruption. They hastily cashed in their shares. By Oct. 17, 2014, executives of China’s listed companies had substantially reduced stock holdings and cashed in 47.43 billion yuan (US$7.68 billion). In the first six months of 2015, SOE executives cashed in another 500 billion yuan (US$81 billion)—a record in history. It shows how these executives have made use of SOEs and the stock market as their money-laundering machines.
Executives have made use of state-owned enterprises and the stock market as their money-laundering machines.
Draining Shareholders’ Investments
Since 1992, China’s stock market has experienced more than 10 rounds of big ups and downs. All-in-all, more Chinese stock investors lost than gained, but a lot of people keep on gambling in the market.
In 2008, the A-share market dropped more than 70 percent. According to a survey of over 25,000 investors across China by Shanghai Securities News, more than 90 percent of shareholders lost money, with over 60 percent of them losing more than 70 percent of their stock value. Only 6 percent of the investors said they made a profit.
In 2013, China’s stock market was called the worst performing stock market in Asia. According to a survey published by sina.com in January 2014, about 65 percent of shareholders lost money in 2013. The living standard of 32.2 percent of investors significantly dropped because of their stock market gambling, with 9 percent saying they were facing difficulties.
During the first six months of 2015, Chinese investors’ losses were tremendous. In the last two weeks of May, the market lost 13.26 trillion yuan (US$2.148 trillion), amounting to an average loss of 147,000 yuan (US$23,814) per investor—or nearly three times the average national annual income, according to data published by “How Much Stock Market Investors Lost in H1 2015.”
China’s Stock Market Differs From the West
China’s stock market has no long-term investors, only speculators. Nobody cares about the actual operating situations of listed companies. People only care whether stock prices are going up. Stock values are therefore completely unrelated to a company’s business performance and financial condition. Stock markets in the West have short-term speculators too, but they also have long-term investors. Business conditions and profitability are the basis of stock prices in the West.
China’s stock market has always been rigged in favor of state-owned companies and Party officials who take advantage of asymmetric information and political power.
In addition, the CCP manipulates the stock market. It uses various policies to regulate ups and downs in the stock market, whereas the U.S. government only acts as a caretaker of the stock market, with mature regulations in place.
Throughout the world, only China’s stock market lets down the majority of its investors.
China’s stock market has always been rigged in favor of state-owned companies and CCP officials who take advantage of asymmetric information and political power. They have thus been able to enrich themselves at the expense of novice speculators. These are the characteristics of an “extractive economy,” which serves a totalitarian dictatorship.
This is an abridged translation of He Qinglian’s article published on her personal blog. He Qinglian is a prominent Chinese author and economist. Currently based in the United States, she authored “China’s Pitfalls,” concerning corruption in China’s economic reform of the 1990s, and “The Fog of Censorship: Media Control in China,” which addresses the manipulation and restriction of the press. She regularly writes on contemporary Chinese social and economic issues.