Monday, June 15, 2015

2015-05 Book Review

Book Review:  Privatizing China, by Carl Walter & Fraser Howie

When a book is written by insiders that shatters existing myths about a certain subject, it is worth reading.  Privatizing China is such a book.  It combines statistical data and analysis into a very enjoyable read on the subject.

Although the book is titled Privatizing China, the authors make it very clear from the beginning:  “In China, the market is operated by the state, regulated by the state, legislated by the state, and raises funds for the benefit of the state by selling shares in enterprises owned by the state” (p. 4).  The authors discuss both the financial and political implications of reforms.

The narrative on China’s financial market is that Chinese savers are fueling China’s market capitalization to be the largest in Asia, if not the world.  As of the book’s publication, official market capitalization figures put China second only to Japan in Asia.  The author’s point out that “if, however, market capitalization is calculated using the prices prevalent in the mergers and acquisitions market in China, China’s markets are only as large as Malaysia’s.  Big difference” (p. 16).  Overvalued tradable shares are being used to value non-tradable shares, thus inflating market capitalization.

The other myth that the authors deconstruct is that of widespread stockownership amongst the general public.  The authors show with data from multiple sources that reports of stock ownership by private citizens are either double counting, counting inactive accounts, or counting fraudulent accounts.  Instead of being an investment opportunity for the middle class, the Chinese stock market is mostly made of large insiders that have vast influence over the market.

One contradiction with this reasoning appears in another part of the text.  The authors claim that the reason A-shares are overvalued is because the average household has very little other investment opportunities.  The authors compare this situation with investors that can buy H-Shares, who have access to almost any kind of investment in different markets (p. 178-179).  If individual investors barely make a dent in the A-Shares market, why would it matter if they have limited alternatives?  Because Chinese individual investors have limited options, it seems as though they should be over-represented in the stock market.

Privatizing China was written by insiders, but tells a different story than the usual narrative.  It backs up statistics with outstanding analysis.  If the book is still available new, buy it new.