I. V. VAKHRUSHIN

Candidate of Economic Sciences

Key words: China, stock market, global crisis

Despite the turmoil of the global financial crisis, the stock market of China (Shanghai and Shenzhen exchanges), in terms of market capitalization*, essentially shares the 2nd-3rd place in the world with Japan. So, in June 2010, it ranked 3rd ($3.07 trillion)¹ after Japan ($3.1 trillion)², but before that sometimes came out on the 2nd place. The largest national stock market, which is several times larger than all others, remains the United States ($11 trillion) ³.

The key feature of the development of the Chinese stock market is to take advantage of the entire experience of Chinese economic transformation, which consists in a gradual, well-planned reform of the economic system under strict state control.

THE BASIS IS THE CORPORATIZATION OF STATE-OWNED COMPANIES

The formation of the Chinese stock market was based on the mechanism of corporatization of state-owned companies with the allocation of 3 different segments of shares (non-market shares of the state, non-market shares of legal entities and market shares).

This approach allowed the Government to retain a controlling stake in the absolute majority of listed companies.

As a result, the Chinese stock market is characterized by a high concentration of ownership in the share capital of companies.

As a rule, in countries with this type of equity market, the national economy is dominated by debt financing of the economy (including bank loans and bonds), since controlling shareholders are not interested in selling shares, leading to a reduction in their ownership share, and resort mainly to loans.

The high share of non-market shares makes the indicator of the market capitalization of the Chinese stock market largely artificial, not reflecting the real role of the market in financing the economy.

However, the free market capitalization of the equity market (the free float level), which reflects the share of free-float shares in the total number of issued shares, is higher in China than, for example, in Russia (in 2008, 28.5% and 18%, respectively) ^.4

The industry structure of the Chinese stock market, as well as the country's economy as a whole, is diversified with a predominance of manufacturing enterprises.

Despite the significant absolute volume of the Chinese stock market, the country's financial market as a whole has a debt nature, which is manifested in the dominant role of bank lending and government securities (bonds) in financing the national economy.

CRAFTY NUMBERS AND STOCK MARKET "BUBBLES"

The Chinese stock market is a market for private investors with its inherent speculation and high degree of volatility**.

Private investors, according to official data from China's stock market regulator, the Securities Market Management and Control Commission (SEC), dominate the investment structure. However, some foreign researchers believe that official statistics may not reflect the objective role of the population and the role of the latter may be significantly exaggerated.

Nevertheless, given that the Chinese economy is leading in the world in terms of national and private savings, as well as the extremely high investment activity of the Chinese population, domestic financial resources for the stock market are very significant. So, in 2008, 139 million people were registered. investment accounts (total on the Shanghai and Shenzhen Stock Exchanges).

The number of real investors in the stock market may be significantly lower for a number of reasons:

- many investors open accounts simultaneously on both exchanges and thus fall into a double account;

- a large number of accounts were opened for participation in electronic lotteries during the payment process.-

* Capitalization of the stock market - the total market value of securities traded on the market (editor's note).

* * Volatility - an indicator that characterizes the scale and frequency of fluctuations in stock quotes.

Research Institute of Initial Public Offerings-IPO (Initial Public Offering): thus, in some cases, retail subscribers to shares are identified in conditions where the demand for the placed shares is many times higher than their supply. Most of the lottery winners sold all their subscribed shares in the first days of trading at a guaranteed profit;

- many institutional and large private investors open investment accounts using personal documents of random citizens to implement large speculative and manipulative schemes. The number of such accounts can reach tens of millions. By some estimates, each major stock market player owns an average of approximately ⁵⁰⁰ illegal accounts5.

However, the potential for private equity investment is huge, and ordinary investors are willing to risk their savings in the pursuit of speculative profits. In this sense, the Chinese stock market can be described as "people's".

On the one hand, the existing volume of the stock market, which is regulated by the state, is not able to meet the investment potential of the population; on the other hand, in conditions of extremely low bank deposit rates, the stock market is the only source of significant investment income.

Thus, the demand for securities is many times higher than their supply, as a result of which the formation of "bubbles" in the Chinese stock market is a frequent cyclical phenomenon.

Due to the permanent high demand for shares on the part of the population, the growth of quotations is mainly due to speculative expectations and is only slightly related to the performance of listed companies.

Thus, stock prices are rapidly breaking away from their real, economically reasonable price, which is reflected in the growth of the P/E* ratio to extremely high values.

In these conditions, in an extremely "overheated" market, the bubble breakout is caused solely by psychological factors of behavior of retail investors who are not experienced in financial matters, and can be triggered by negative market news, rumors or unfavorable expectations, with the beginning of profit-taking on the "domino principle" and a deep drop in the market.

AMERICAN STYLE, BUT TOUGHER

When building the system of regulation of the Chinese stock market, the American model was adopted as the basis, characterized by the presence of a special regulatory body and a system of strict rules and regulations.

However, China has a more rigid and centralized stock market regulatory system than the United States. This is reflected in several key aspects::

- The ECB is the only subject of regulation of the securities market of the People's Republic of China, while in the United States, individual states can perform certain functions in this area;

- the processes of issues and public placements of securities are subject to high centralization and state planning, which is reflected in the regulation of the volume of the stock market, based on a long-term strategy for its development. In practice, this is implemented in the IPO volume quota system by setting an aggregate investment quota for the stock market. At the same time, the ECB is the decisive authority in the selection process of companies applying for securities placements.;

- The ECB exercises direct control over the activities of all professional participants in the securities market and auxiliary infrastructure facilities (mass media, auditors, lawyers) through an extensive licensing system. At the same time, self - regulatory organizations (SROs) - stock exchanges, professional associations-are such only on formal grounds, but in fact they are directly controlled by the ECB.

China has also implemented the American principle of separation of commercial and investment banking (the so-called Chinese wall, in which commercial banks are prohibited from making investments and operations on the stock market).

Despite the fact that some restrictions on the operations of commercial banks with securities have already been lifted (in particular, they are allowed to create subsidiaries for conducting stock business), at present, securities companies (essentially broker-dealer companies) occupy a virtually monopoly position in the market. They are divided into universal companies (performing the entire range of operations on the securities market) and brokerage companies (their activities are limited to brokerage operations**).

Most universal securities companies were established by the State (mostly provincial governments) and are now state-owned joint-stock companies. The largest of them have a significant capitalization.

During the 2001-2005 Chinese stock market recession, the com sector-

* P/E ratio (Price-Earnings Ratio), price/profit ratio or "multiple of profit" ratio - the ratio of the company's market capitalization to its annual profit (editor's note).

** Brokerage services are provided by a company that acts as an intermediary between buyers and sellers in the markets and receives commissions for transactions (editor's note).

The securities division fell into disrepair and the government was forced to reorganize and consolidate it. A number of companies were liquidated and a series of mergers and acquisitions took place. As a result, the total number of companies in the country was just over 100, which led to a significant increase in the concentration of their capital.⁶

THE LONG ROAD TO FREE CIRCULATION

The Chinese stock market has a complex structure with a division into types of shares depending on their target orientation (however, according to the law, all shares are ordinary).

Thus, type A shares make up the majority of the company's share capital. They are issued and quoted in RMB and are intended for domestic investors. Among the representatives of foreign capital, only qualified foreign institutional investors can purchase them within the quota established by the regulator.

Type B shares were originally intended for foreign investors, are purchased for US dollars, and are quoted in yuan. Since 2001, domestic investors have also acquired the right to purchase them. However, this segment of stocks has not developed significantly, is characterized by low liquidity and accounts for only about 10% of the stock market.

Type H shares are intended for investors in Hong Kong (Hong Kong Special Administrative Region) and are listed on the Hong Kong Stock Exchange. They are issued and quoted in Hong Kong dollars. Their share in the structure of the largest joint-stock companies in China is quite significant.

The same applies to N, L, and 5 shares listed on the New York, London, and Singapore Stock Exchanges, respectively.

Type A shares are the mainstay of companies ' share capital, making up the vast majority of it.

They, in turn, are divided into 3 categories.

In the process of corporatization of state-owned enterprises in the capital structure, approximately equal proportions are allocated to state shares that express the share of ownership of the latter (owned by state property bodies or provincial governments) and shares of legal entities owned by parent companies and co-founders of listed companies. These two types of shares are not traded on the public market.

Only shares of the third type - individual (market) shares-are put into open circulation and become an object of market investment.

Such a structure of share capital has led to distortions in the pricing of shares. The Chinese government has come to the conclusion that overcoming the segmentation of the stock market is a necessary condition for its successful development.

As a result, since 2005, a long-term reform of share capital has begun, the goal of which is to gradually convert non-market shares into market shares, with compensation provided to the owners of market shares (investors are compensated for losses as a result of a fall in the value of shares caused by a significant increase in the number of shares on the market). At the same time, the main form of compensation is the transfer of a part of convertible non-market shares, based on the ratio established on a contractual basis between all interested parties.

The reform is planned in such a way that converted blocks of shares are blocked for a long time and enter the market in small parts. In general, the consequences of the reform have not yet emerged.

However, presumably in the long term, the reform will result in the privatization of a significant part of state-owned blocks of shares and, consequently, a significant increase in the level of free float (free circulation). on the Chinese stock market.

"BUBBLES", "BUBBLES"...

China's stock market, despite its 20-year history, remains mostly closed to foreign investment, due to factors such as the limited convertibility of the Chinese yuan and the closed capital account of the country's balance of payments.

As a result, the market is largely isolated and protected from international financial shocks. This was particularly evident during the 1997-1998 Asian financial crisis, during which the Chinese stock market suffered the least.

The large-scale decline of the Chinese stock market in 2008 began six months before the global financial crisis and was mainly due to internal factors, the key of which was the "bubble" of the Chinese stock market, which provoked a massive sale of shares by investors against the background of growing psychological expectations of the upcoming collapse of quotations. The fall in the key stock indexes of the Shanghai and Shenzhen Stock Exchanges in 2008 reached almost 70%⁷.

An important internal factor in the market decline was the specific psychology of economic behavior of Chinese investors.

Based on market statistics, Chinese researchers have identified psychological motives in the behavior of Chinese investors that cause the growth and fall of the stock market. Thus, the formation of a market "bubble" is associated with such factors as greed, envy and the desire to speculate. The "bubble deflation" is in turn driven by fear, lack of confidence, and investor frustration.

The study concluded that a prolonged "bear market" in China is inevitable, which was also supported by the global financial crisis, which has affected almost all stock markets since September 2008.

During the acute phase of the international financial crisis, Chinese corporations in export-oriented industries suffered significantly.

The Chinese Sovereign (state) Investment Fund (China Investment Corporation) and state-owned commercial banks suffered losses of about $300 billion. They were forced to write off a significant part of the shares and bonds of American financial institutions (including the failed Lehman Brothers, AIG (American Investment Group), state mortgage agencies Fannie Mae and Freddie Mac). The relative share of Chinese joint-stock banks ' investments in US securities was low, which allowed them to avoid serious financial difficulties during the crisis. Nevertheless, the Chinese banking system experienced a liquidity crisis, but much less than in other countries (including Russia).

After the beginning of the global financial crisis, in order to maintain the stock market of the PRC, its regulator, the Securities Market Management and Control Commission, used tax incentives: exemption from stamp duty of exchange transactions for the purchase of securities, exclusion from the tax base of personal income tax and corporate income tax of income received in the securities market. papers.

Measures were also taken such as increasing the permitted volume of the own portfolio of securities of financial intermediaries (securities companies), simplifying the procedure for repurchasing shares of listed corporations by their parent companies, and introducing a temporary moratorium on IPOs.

WILL "ABROAD" SAVE YOU?

To partially solve the problem of excess liquidity associated with the enormous size of the PRC's gold and foreign exchange reserves (currently they amount to about $2.4 trillion), the ECB has attempted to transfer the investment activity of domestic investors to foreign stock markets, i.e., to encourage Chinese citizens to buy shares listed on foreign stock exchanges.

For this purpose, the Qualified Domestic Institutional Investors (QDII) mechanism has been established in China. Chinese securities companies that have received this status are allowed to make investments and provide brokerage services to Chinese citizens on foreign stock markets. In the period up to 2007, the QDII license was issued to 23 institutional investors represented by Chinese and foreign brokers. They offered investors 262 investment products with a total value of $5.84 billion.

These products are based on securities traded on the Hong Kong, Singapore, Tokyo and London Stock Exchanges. It is also expected to open the US stock market to Chinese investors.

However, according to data from the Shanghai Asset Management Advisory Center, less than 5% of investment products of this type were profitable, while all the others showed losses of at least 50%. To a large extent, such dynamics are associated with the crisis state and the fall of most foreign stock markets.

Against this background, Chinese investors have shown a cautious attitude towards new investment products. According to the survey, 88% of respondents said that they do not expect the positive dynamics of foreign stock markets, while 71% of respondents deny the possibility of acquiring foreign shares.⁸

STOCK MARKETS HELD OUT

Overall, 2009 was a successful year for the stock market

China. Key stock indexes showed steady growth, accompanied by significant fluctuations.

However, a significant correction in the indices occurred in August 2009 due to the overvaluation of stocks and growing rumors about the termination of government financial injections aimed at supporting the stock market.

Important financial and macroeconomic factors that determined the dynamics of the stock market in 2009 were indicators of the financial stability of the national economy (in particular, the government's policy of maintaining the budget deficit at 3%, and the domestic public debt at 20% of GDP); the People's Bank of China's (PBOC) policy of broad credit expansion (the volume of the national bank loans issued in 2009 exceeded ^{9 trillion yuan ($1.3 trillion), an increase of 5 trillion yuan over the same period in 2008.9}

On the other hand, measures aimed at overcoming "overheating" and reducing speculative transactions in the real estate market became important factors of pressure on the stock market in the second half of 2009.

By order of the banking regulator-the Chinese Banking Supervision Commission, the largest banks, as key players in the mortgage lending market, increased the minimum installment on repeated mortgage loans for the purchase of additional housing to 40%, increased the interest rate on repeated mortgage loans by 10% above the base loan rate, and increased the minimum period of ownership of a primary real estate object, during which if the sale of this property is taxed from 2 to 5 years.

Moreover, one of the largest players in the mortgage market, Bank of China (Bank of China), has reduced the discount on primary mortgage loans from 30% to 15%. Banks are required to reject loan applications from individuals who purchase homes for investment and speculative purposes. They are also advised to stop issuing loans to real estate developers if it turns out that the latter are accumulating land or deliberately delaying the sale of real estate.

Additional factors of pressure on the stock market were also: IPO activity in the last quarter of 2009, which led to a sharp increase in the total supply of shares on the market, as well as growing expectations of a tightening of monetary policy, which were largely justified in early 2010 as a result of the NBK's decision to increase the rate of mandatory reserve payments of banks by 0.5% (to 15.5% for large and 13.5% for medium-sized and other banks) Such an increase was made for the first time since June 2008 ¹⁰

The growth of quotations of issuers of the banking sector (issuing securities) is expected to be restrained by the January decision of the banking regulator to introduce quotas on the volume of loans issued by major banks in order to suspend the credit expansion of banks. Thus, the annual quota for the Industrial and Commercial Bank of China (1C BC) was 850 billion rubles. RMB ($124.6 billion), China Construction Bank - $ 750 billion. RMB ($110 billion), Agricultural Bank of China ($700 billion). RMB ($102 billion), Bank of China (Bank of China) - 600 billion. RMB ($88 billion). The head of the banking commission, Liu Mingkang, said that banks were asked to reduce lending from a record $1.4 trillion issued in 2009 to $1.1 trillion by the end of 2010.

These measures should prevent further overheating of the real estate market, where price growth in 2009 was 7.8%.

IN PURSUIT OF ADVANCED MARKETS

For some cooling of the stock market, the financial authorities of the country decided to introduce a tax on income from transactions

with non-traded (non-marketable) shares.

Following this, at the beginning of the current year, 2010, the ECB announced its intention to allow margin trading in the near future, in which the client attracts additional borrowed funds from the broker in accordance with the established leverage ratio (leverage), as well as to allow short sales of shares, in which the client borrows securities from the broker. securities for sale on the market with the obligation to return the same amount of securities after a certain period of time. Thus, with short sales, the calculation is made for a decrease in the stock price. The decision of the regulatory body to allow margin trading and short sales has been prepared for implementation for several years.

It is assumed that at the initial stage, margin trading and short selling services will be provided by several major securities companies (CITIC Securities, Haitong Securities, China Everbright Securities). Then the range of such companies will expand.

In the near future, it is also planned to introduce index futures - futures contracts*, the underlying asset for which is the value of the corresponding stock index.

These measures are expected to have a significant stimulating effect on investor activity and contribute to the growth of the stock market11.

With a certain degree of probability, it can be judged that the new trend in the Chinese stock market is gradually becoming the entry of companies with inflated placement prices (i.e., the prices at which the initial sale of shares to investors is carried out) during IPOs. As a result, in the first trading sessions, the quotes on their shares rapidly decrease and turn out to be lower than the placement price.

Several similar cases have already taken place on the Shanghai Stock Exchange, in particular, with industrial companies China Erzhong Group Deyang Heavy Industries, China XD Electric Co., with securities companies China Merchants Securities, China Everbright Securities¹². Such precedents have occurred despite the fact that in China, the regulatory authorities clearly control, in the course of established regulatory procedures, that the placement prices during the IPO are not inflated. This primarily applies to issuers preparing "people's IPOs", as the trust in the stock market of all citizens depends on them. So far, such placements in China have not brought losses to citizens and, as a result, disappointments in the stock market, unlike in Russia, where "people's IPOs" are often accompanied by inflated placement prices. In any case, such precedents do not help attract new retail investors to the market, but on the contrary, they repel burned market participants for a long time or forever.

ELECTRONIC VENTURE CAPITAL INCENTIVE

An important event for the Chinese stock market was the opening of an over-the-counter electronic trading platform for innovative growth companies, created on the basis of the Shenzhen Stock Exchange and called ChiNext.

* Futures (futures contract) (from the English futures - the future in plural. including) - a standard futures exchange contract for the purchase and sale of the underlying asset, at the conclusion of which the parties (seller and buyer) agree only on the price level and delivery time. For a long time, it was used only for trading agricultural products. Since the early 1970s, the subject of futures trading has been currency, and then a whole range of other financial products, including stock, or exchange-traded indices-composite indicators of changes in the prices of a certain group of securities, for example, shares of the largest companies (approx. ed.).

This market is largely built on the principle of the American NASDAQ exchange and is actually its analog. Trading started on ChiNext on November 1, 2009.

The first issuers to receive a listing (the process of registering a company's shares on the stock exchange, including them in the quotation list and allowing shares to be traded on the stock exchange) were 28 companies. They represent various industries: pharmaceuticals, biotechnologies, information technologies, energy-saving technologies, telecommunications, electronics and medical equipment manufacturing, etc.

Currently, the number of listed companies has grown to 50. The total capitalization of shares traded in the trading system for 3 and a half months of its existence increased 41 times to 187 billion. RMB ¹³.

The main purpose of creating such a trading system is to attract venture capital through the stock market to finance newly created innovative companies that need a significant amount of start-up capital.

Unlike the main exchange markets in Shanghai and Shenzhen, ChiNext requires issuers to be listed with less stringent requirements for their financial condition (for example, there is no requirement for continuous profitability of the company over the past three years, which is impossible for most young innovative companies).

The first day of trading on ChiNext was marked by a huge rush of investors. All companies, without exception, showed a huge increase in quotations, the minimum growth was 75%, the maximum-210%. Trading volume on the first day was a record $ 2 billion. RMB, which is about 1/6 of the average daily exchange turnover of the Shanghai Stock Exchange ¹⁴.

ChiNext provides an automatic system for limiting fluctuations in quotations: when the price of an individual share changes by 20%, trading on it is suspended for half an hour; an additional half-hour ban on operations with the paper is imposed in the event of a 50% change in its value. Finally, if the share price fluctuates up to 80%, operations on it are immediately suspended and resumed at 14.57 local time, 3 minutes before the closing of trading on ¹⁵.

* * *

The main performance indicators of the Shanghai and Shenzhen Stock Exchanges increased significantly in 2009 (see table).

Given the above data, as well as the favorable forecast for the development of the Chinese economy and the pronounced cyclical nature of the Chinese stock market, we can assume that the market will demonstrate long-term growth, striving for the previously achieved maximum indicators.

Table

Source: World Federation of Exchanges / / 2009 Market Highlights - http://www.world-exchanges.org

¹ China becomes world's third largest stock market: securities regulator - People's Daily Online, 19.06.2010 - http://english.peopledaily.com.cn/90001/90778/90859/7030782.html

² Economic Times // India Times. 19.06.2010 - http://economictimes.indiatimes.com/articleshow/6068129.cms?prtpage-1

³ http://east-west.com.ua/content/kitai-oboshel-yaponiyu-po-kapitalizatsii-fondo-vogo-rynka 20.07.2009.

⁴ In Russia: NAUFOR data / / Finance, N 43 (229), 2007. For China: ECB data - www.csrc.gov.cn

^{Wong Sonia M.L.} 5 China's Stock Market: A Marriage of Capitalism and Socialism. // Cato Journal, Vol. 26, No. 3, 2006, p. 419.

⁶ China Securities Regulatory Commission Annual Report (2007), p. 16 - www.csrc.gov.cn

^{Shujie Yao, Minjia Chen.} 7 Chinese Economy 2008: A Turbulent Year amid the World Financial Crisis. - The University of Nottingham, China Policy Institute, February 2009.

⁸ Asia Times Online. China takes stock in crisis. Wu Zhong, Oct. 8, 2008.

⁹ ChinaPRO: The volume of loans issued in China increased - 15.12.2009 - http://www.chi-napro.ru/rubrics/1/3190

¹⁰ Bloomberg: China Raises Banks' Reserve Ratio to Cool Economy http://www.blo-omberg.com/apps/news?pid-20601087&sid=ahHL2F10BqD0

^{Yi Xianrong.} 11 Stock market facing vital changes. China Daily, 2010 - 01 - 14

¹² http://www.chinapro.ru/rubrics/14/3493/

¹³ http://www.szse.cn/main/chinext/scsj/jbzb/

¹⁴ http://www.rbcdaily.ru/2009/11/02/world/439637

¹⁵ http://www.chinadaily.com.cn/bizchi-na/2009 - 10/31/content_8876963.htm

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