Dramamine must be in short supply in Shanghai. The launch of China’s new Nasdaq-like market generated swings wild enough to have punters reaching for motion sickness remedies.
Yet the volatility that marred the first week of trading for the Shanghai Stock Exchange’s Science and Technology Innovation Board, awkwardly acronymed STAR, reminded the world why China isn’t ready for prime time.
The STAR market is a stellar idea. It’s long grated on Beijing that the nation’s most important disruptors don’t list at home. Look no further than Jack Ma taking Alibaba public in New York or Ma Huateng and his Tencent cofounders selling shares in Hong Kong. Robin Li’s Baidu also made a beeline for the US, becoming the first mainland company added to the Nasdaq-100 index.
China’s initial experiment in wooing tech superstars – Shenzhen’s ChiNext – is an abject disappointment 10 years on. Now, Shanghai’s new bourse aims to put a Chinese spin on an old Silicon Valley maxim: Go big and stay home.
The nausea and dizziness suffered by punters so far, though, spotlights President Xi Jinping’s penchant for putting the cart before the proverbial horse when it comes to financial reform.
Typically, developing nations take an if-you-build-it-they-will-come approach to constructing stable and trusted markets. Under Xi’s leadership, Beijing has pursued a policy of figuring China can go about building credible markets after capital arrives.
And so far, Xi’s gamble has largely paid off. China’s longer-term growth trajectory and promise as an innovative powerhouse often drowns out today’s quirks and deficiencies.
The 2014 Shanghai-Hong Kong stock connect scheme saw untold billions of dollars of capital zooming China’s way. The same with the International Monetary Fund’s 2016 move to add the yuan to its top five currencies basket. MSCI’s 2018 decision to include mainland shares in its widely-tracked indices was seen as a major reform all its own.
But nothing about these steps and others makes China a more transparent or conventional place to invest. Economists who bet China’s 2001 inclusion in World Trade Organization would break its state-capitalism model were proven wrong. Ditto for geopolitical observers who were so convinced the Internet would have the Communist Party on the run.
China’s “Good Housekeeping” seals from global institutions is following this pattern. Nothing about stock through-trains to the mainland or MSCI and IMF inclusion is making Chinese markets more transparent and shareholder-friendly – or the economy more environmentally responsible. Nothing about these steps solidifies the financial system, strengthens corporate governance or lets traders decide where the yuan exchange rate is heading.
Nothing about them accelerates the shift in growth engines to innovation and services from exports. Nothing about these developments weans China off the stimulate-at-all-costs treadmill shackling it with a crushing debt load. The speed with which US President Donald Trump’s tariffs knocked China off-balance spotlights the vulnerabilities imperiling Asia’s biggest economy.
And nothing about these advances makes state finances sounder, China’s shadow-banking menace any less of a threat or corruption any less endemic. In fact, the Xi era since 2012, with its assault on the media and control of cyberspace, made China even more of a black box, financially-speaking.
It’s against that backdrop that Shanghai’s STAR market made its chaotic debut. Granted, the market deserves considerably more time to prove itself as a stable platform for providing investment capital. It’s entirely possible that six months from now punters will be singing the bourse’s praises.
Yet the epic rallies on Monday – with the index’s 25 members surging anywhere from 85% to 400% – and stumbles in the days afterward, smacked of financial amateur hour. Adding to the sense of absurdity: several STAR companies aren’t new to punters or pure tech plays.
Case in point: China Railway Signal & Communication Corp., whose shares surged far beyond its offshore shares. Its STAR debut on Monday saw its price jump 110% into the speculative stratosphere. Or take Western Superconducting Technologies, which gets the vast amount of its total revenue from forging titanium alloy.
Worse, perhaps, it’s hard to see many of STAR’s initial 25 companies giving Amazon, Apple or Facebook competition, never mind homegrown successes Alibaba, Baidu or Tencent. Might it have been better for the Shanghai exchange to wait six months and put forth a more promising roster of tech disruptors?
China has bigger problems, of course. Thanks to Trump’s trade war it’s growing at its slowest pace in 27 years – 6.2% in the first quarter. Trump’s assault on Huawei Technologies, meantime, raises prickly questions about the headlines bearing down on China’s most successful tech companies.
Huawei is merely the most obvious example of the geopolitical intrigue impeding China’s prospects heading to 2020. It’s also a microcosm of why China Inc. isn’t ready for prime time. Just ask any investigative journalist trying to discern who, or what owns the smartphone giant. The debate rages, as Christopher Balding of Fulbright University Vietnam details in a recent report on the many myths of who’s really running the show at Huawei. And odds are it’s not founder Ren Zhengfei, Balding argues.
No one doubts that China should play a massive role in global capital markets commensurate with its size. But if access to its markets outpaces domestic reforms, all China is doing is expanding the transmission mechanisms should its US$14 trillion economy hit a wall. No amount of Dramamine would help calm markets as China’s troubles go global.