A healthy bourse needed to drive long-term growth

For Chinese investors who have been expecting introduction of more international institutional investors to boost the domestic stock market, it is disappointing that Morgan Stanley Capital International has again delayed adding Chinese shares to its benchmark emerging markets index.

One year after last summer's stock crash, Chinese shares are still struggling to have a solid foothold. But the poor performance of the Chinese stock market should not be made an excuse to deny its long-term significance to both the Chinese economy and investors at home and abroad.

In retrospect, it seems wise for Morgan Stanley to have deferred inclusion of Chinese A-shares in one of its key indices last June just as the benchmark Shanghai Composite Index peaked at 5,178.19. With the Shanghai index still struggling below 3,000 nowadays, an early Morgan Stanley nod would have done little to China's integration into the global market by prematurely exposing global investors to the tumult of China's stock market.

Yet a move to make Chinese stocks a bigger part of the global portfolio is inevitable.

Morgan Stanley's decision to delay the inclusion of Chinese shares in a key index tracked by international institutional investors who may inject tens of billions of dollars into the world's second-largest stock market should therefore not be interpreted as a vote of no confidence. Instead, it should be seen as an urgent call for greater efforts to repair and revive the Chinese stock market.

A well-functioning stock market is needed more than ever to help revitalize domestic private investment, a key growth engine for consumer-oriented innovation and service.

As growth of private investment in this country drastically slowed to 3.9 percent in the January-May period from an already weak 5.2 percent in the first four months, policymakers should reconsider developing a healthy stock market that can effectively raise funds for future innovators.

The country's over-reliance on loans from banks, which favor State enterprises over private companies, has unfortunately increased over the past year as the rout of the Chinese stock market has suppressed initial public offering.

The domestic stock market is a useful channel for Chinese companies, especially private ones, to raise funds for their expansion and therefore it cannot be allowed to dysfunction any longer, especially because private investment that accounted for 62 percent of the country's total investment in the first five months is cooling off at an alarming pace. In the short term, moderate investment growth is crucial to China's attempt to arrest the ongoing economic slowdown. In the medium and long run, robust investment growth in the private sector will largely determine the speed and success of China's economic transformation to embrace consumption-led and innovation-driven growth.

Besides, as the Chinese economy is set to overcome the daunting challenges of "middle-income trap", a healthy stock market for Chinese people to invest and make profits has become a necessity.

Admittedly, the current regulation and performance of the domestic stock market is far from satisfactory. By causing huge losses to tens of millions of domestic investors, the stock crash last summer has more or less complicated China's progress toward a high-income society.

The increasing concentration of household wealth in the red-hot housing market also highlighted the rising risk of lack of alternative investment channels for Chinese families. It is quite apparent that more investments in the housing market will only make it harder for innovators and manufacturers to survive, let alone thrive.

These domestic reasons are enough for policymakers to launch a comprehensive overhaul of the domestic stock market. The higher demand international institutional investors place for the openness and transparency of the Chinese stock market is just another nudge for deepened reforms to build a healthy stock market in China, a global growth engine that no one can afford to bypass.

The author is a senior writer with China Daily. zhuqiwen@chinadaily.com.cn