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November 10, 2005
Why China’s Stockmarket Lags
If you want to understand in one short sentence why China’s stock market has been one of the worst performing over the last several years, in spite of tremendous overall economic growth in the country, consider the following:
"Listed companies regard the funds raised from the market as their income, which is a wrong concept and seriously impairs the companies' competitiveness," Jin said.
This quote is from Jin Bei, vice director of the Chinese Academy of Social Sciences industrial department, commenting on a report released by CASS finding that China’s listed companies continue to be "less competitive," on the whole, than unlisted companies.
Going public in China, according to Jin, is regarded as a milestone, which, after being achieved, lessens the pressure for most efficient use of capital.
In our view, China’s entrepreneurial dynamism is largely driven by private companies. Consequently, that’s where the best overall investment opportunities reside.
Jin’s suggestion for reform is to demand that companies going public regard the act as "getting into debt" than merely a privilege.
Unfortunately, such a cultural shift of viewpoint is very difficult to demand; going public does not automatically mean that management sees themselves indebted to perform on behalf of their new shareholders.
That’s a lesson we’re still trying to get through the heads of some corporate managers in the United States, so I can understand why it’s particularly difficult in China.
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