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The Chinese Security Exchange Market

Running head THE CHINESE SECURITY EXCHANGE MARKET 1

TheChinese Security Exchange Market

TheChinese Security Exchange Market

Thesecurities exchange markets play an imperative role in the economy ofdifferent countries across the globe. The largest economies in theworld also double up as having the most vibrant security markets withthe exception of China. Over the years, various internationalcompanies with their roots in China have opted to trade in NYSE andHKSE as opposed to the China Mainland market. Some of the firms thathave shown the lack of interest in the Chinese securities exchangeinclude Alibaba and Tencent. This paper demonstrates the reason forthe exit of the companies as well as recommending the most effectivesteps that CRSC should take to make the securities marketcompetitive. The Chinese market shows negative prospects forinternational companies due to the increased state control,unfavorable IPO listing and lack of management risk tools forinvestors.

Discussion

Inmy opinion, the Chinese security exchange is not prioritized in theeconomic development of the country. The rationale for this is thatkey companies do not take part in the trading and it is dominated bystate agencies (Allen &amp Shen, 2011). Most of the countries incomeemanate from direct foreign investments, government’s investment inbig projects, indirect government support, local government supportand trade alliances. A fluctuation in the market does not reflectsignificantly in the securities’ market.

Thisis unlike in other countries like Japan, United States and the UnitedKingdom where a fall in the security exchange market resonates in theentire economy (Yu &amp Cheung, 2013). The lack of prioritizationand poor development does not attract investors from the publicsphere (Allen &amp Shen, 2011). The rationale for this is that theyare skeptical of the market that is not controlled by companystrategies and predictions. For example, Alibaba and Tencent aregiant companies with an international face. They would rather selltheir shares in markets that are not regulated by the government. Inthe New York Security Exchange, firms trade without much interferencefrom the government.

Secondly,the Chinese stock exchange is unfavorable to the big companies forits increased government control. The state owns More than 50% of thefirms listed on the stock exchange market. This subject the market tovolatility since the process is not efficiently set (Allen &ampShen, 2011). The rationale for this is that the government takescenter stage to protect its firms from competition at thedisadvantage of the private firms. Most of the companies opting forNYSE and HKSE are competitive enough to match the governmentinstitutions.

Sincethey are privately owned, the other players shy to enter into amarket with players who cast they dice behind the curtain (Yu &ampCheung, 2013). Additionally, the government efforts are perceived bythe investors as an outright move to channel funds to its projectsthrough influenced prices. Furthermore, the government control makespositive signaling impossible. Investors project increased sales ofshares in the market when they implement changes in their operationsand intensify their growth.

Investorslook at the vibrancy of firms and projected growth when tradingshares. For example in the New York Stock Exchange, more than 80% ofthe firms are privately owned. Therefore, the efforts they put intheir growth have a direct impact on the position of their listing(Allen &amp Shen, 2011). Alibaba, Tencent and other internationalcompanies of repute are skeptical of their efforts playing asignificant role in improving their position in the stock market. Italso explains why they enlist in the NYSE and HKSE where they canfind others that match their status.

Additionally,the Chinese stock market does not manage investors’ risks. Thismakes the mobility for short sales, and trading future financesimpossible. This makes the investors skeptical when making tradingdecisions. In highly unpredictable and controlled markets like China,it is necessary to shield the companies from risks. Theunavailability of risk management tools discourages the investorsfrom listing their companies.

Anotherreason that drives away companies to other well-developed stockmarkets is the dominance of retail investors in the Chinese market.This contributes highly to market volatility and instability. Thesmall companies are unpredictable, and their growth rate cannot bewell projected. However, in 2008, the Chinese market showedimprovement in attracting large-scale investors. However, the marketis poorly developed compared with others in the world. According tothe IMF, China is the second-largest economy after the United States(Allen &amp Shen, 2011). It is therefore expected that its stockmarket should match that of New York. The current concentration ofretail investors in the Chinese stock market stands at 44.4% comparedwith 70% and 80% in Hong Kong and New York Securities Exchangerespectively (Allen &amp Shen, 2011). Institutional investorsincluding Alibaba and Tencent are well established, and they haveroots across the globe. Therefore, they may not find it beneficial todeal with numerous risks and instability in a market dominated bysmall retail investors. The NYSE and HKSE are more stable, and theyemploy investor risk management tools including short sales andfuture finances.

TheChinese market is also unfavorable because the Initial PublicOffering it provides is different from the international standardsalthough there have been slight changes. For instance, theunderwriters in China determine the price ad they do not bear anyrisk after investors subscribe to the IPO. In the internationalmarkets, the institutional investors declare their process andquantity by virtue of their own analysis, expectations, andrelationship with brokers. As mentioned, the companies project growthin their stock market prices and demand for their shares if they putin place measures to intensify production.

Theycan, therefore, influence their brokers and underwriters to determinethe most appropriate price. On the same note, the underwriters in theChinese securities market do not undergo any form of risk even aftersetting the price. However, in other dominating markets like NYSE andHKSE, the underwriters have to employ their sales and analyticalskills when setting the price of IPOs because they are not shieldedfrom any risk. The final price settled by all the parties, therefore,reflects the trend in growth. The volatility of the market reducesgreatly, and the ability of companies in other international marketsto predict the market attracts large companies that even have theirroots in China.

Changesthat can be effected in the Chinese Securities Market to make it moreEffective

Althoughthe Chinese authority has made significant efforts to improve itsstock market, it largely lags behind the international standards(Piotroski &amp Wong, 2012). Considering the economic potential ofChina, there are various efforts that can make the marketcompetitive. First, the government should ease its control byproviding a conducive environment for private investors. Forinstance, in 2007, 65% of the listed firms in the stock exchange werestate-owned and private companies were not allowed to list theirshares. Since then, the government has not made any significantefforts to address the issue. The dominance of state-owned agenciesmakes the investors shy, and they perceive it as a way of thechanneling funds by the government. The move will also allow theincrease the share of market capitalization from private investors(Kang, Shi &amp Brown, 2008). Currently, more than two-thirds ofthe capitalization come from state agencies. Escalating the number ofcompanies in the market can encourage investors and put it alongsideNYSE and HKSE.

Secondly,the Chinese stock market should develop investment tools to manageinvestors’ risks. The applications would reduce the marketvolatility. The tools that can favor the market include shortselling, margin buying, and equity contracts. In 2007, the statecouncil introduced the trading in financial futures. However, theChinese Future Financial Exchange delayed the implementation, andthis made the market to suffer a blow (Allen et al., 2013). The toolsare likely to attract the local companies especially theinstitutional ones that have their roots in China. Additionally, theeconomy of China being the second largest economy in the world, theimplementation of the risk investment tools can attract other firmswith an international interest.

Thirdly,the stock market through the government should avoid protecting thebanks and other state agencies from the bond competition. Theinfluence of the government agencies makes China lack a substantivemarket for bonds. When compared to the international markets, Chinaremains an outlier. For instance, China’s trading forms 35.3% ofthe GDP. This is way low compared to other countries like the UnitedStates, Korea, and the United Kingdom. In the US, the stock marketforms 185.5%, in Korea, it constitutes125.1% and 140.5% and theUnited Kingdom (Allen &amp Shen, 2011). Should there be a strongbond market, the large players will navigate the Chinese market andtake advantage of the intense economic growth.

Conclusively,the Chinese stock market is incomparable to others that are criticalin the international market for its government dominance, lack ofinvestor risk management tools and over-reliance on retail investors.Giant companies including Alibaba and Tencent are finding the marketunfavorable for its high volatility and instability. Due to the highdominance of government firms, the investors fear that the price ofshares may be set to benefit the government and not as a reflectionof the companies’ efforts to intensify their growth. The lack ofrisk management tool including short sales, future financial andmargin sales makes it difficult for companies to penetrate themarkets without incurring non-precedent losses. Since China is one ofthe world’s biggest economies, there are various aspects that canbe implemented to make it competitive. The government should reduceits control and avoid over protecting the firms allied to it. Inaddition, the trading of IPO should not be left at the Liberty of theunderwriters who do so without incurring any risk. The market shouldembrace the trend in the international market that us theunderwriters to the task of analyzing the patterns before settling onthe price since they are also susceptible to risks. Finally, theimplementation of the recommendations given to the Chinese FutureFinancial Markets should not be delayed any further to facilitate asmooth and rapid transformation. The sell developed NYSE and HKSE canbe instrumental models since they attract international companies asa result of their favorable listing conditions.

References

Allen,F., Qian, J., Shan, S. C., &amp Zhu, J. L. (2015). Explaining thedisconnection between China’s economic growth and stock marketperformance. In ChinaInternational Conference in Finance, July(pp. 9-12).

Allen,W. T., &amp Shen, H. (2011). AssessingChina`s top-down securities markets(No. w16713). National Bureau of Economic Research.

Kang,Y., Shi, L., &amp Brown, E. D. (2008). Chinesecorporate governance: history and institutional framework(Vol. 618). Rand Corporation.

Piotroski,J. D., &amp Wong, T. J. (2012). Institutions and informationenvironment of Chinese listed firms. In CapitalizingChina(pp. 201-242). University of Chicago Press.

References

Yu,M. &amp Cheung, J. (2013). IPO reform and history: The past, presentand future. AsiaPacific Research.