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.
