Reforms needed for stock market efficiency
The slowing down in China, the world’s second largest economy, caused global panic. Is it a short-term or a long-term plunge? Sitao Xu, Chief Economist of Deloitte China, gave the answers. Ariana Perez and Ecem Hepçiçekli report.
Shanghai Stock Market benchmark index has now fallen by nearly 40 per cent from its mid-June peak.
During the summer period, what happened in China’s stock exchanges signalled a big challenge and affected many countries. “The slowing down won’t be for a long time but we need some fundamental market-based reforms,” said Sitao Xu, the Chief Economist of Deloitte China.
According to Mr Xu, the stock market in China is very inefficient. It’s not playing a significant role in terms of helping companies raise money. Also, consumers have only a small percentage of shares traded on China’s main stock market: 7 to 10 per cent compared with 30 per cent in the United States.
“That’s China’s weakness because in order to take the economy to next stage, you must have a well functioned stock market. But in the short term, it’s also China’s strength,” stated Mr Xu.
Last week, the on-going slowdown gained speed and China’s economy experienced a very rapid reduction, which caused world stock markets to close sharply down. The latest data showed that activity in China’s manufacturing sector during August contracted at the fastest rate in three years. According to Mr Xu, China’s position with the International Monetary Fund (IMF) is very asymmetric and it must be adjusted. He explained that, in the past few years, China made some adjustments but they are still well below where they should be.
“In general, we need to ease restrictions in capital control, so people in China can invest more freely abroad. At the same time, those who are coming to China should face much fewer restrictions,” he said.
Another fundamental reform should be changing the companies being listed to improve corporate governance.
He emphasised companies are being listed in the stock exchange by an approval system, something he stressed needs to be changed. “Of course this approval system had resulted in corruption. That’s a serious problem, but I think the government has recognised that,” Mr Xu said.
“So, naturally, the government is trying to be a populist by supporting the market. We have to think this very hard, we have to confront the problem head on.”