Zhang Junkuo

After nearly a decade of growth, China's stock market has made great progress in terms of the number of listed companies and the scale of trade. However, if we look at the effectiveness of the stock market, we can find that our stock market has major shortcomings in many aspects. These shortcomings are prominently demonstrated in the disorderliness of the market, the rampant illegal speculations, some listed companies are in collusion with the intermediary institutions to practice fraud, the interests of small interests are being seriously harm, the frequent skyrocketing and slump in the prices of stocks which are often in great fluctuation. Therefore, they have a serious impact on the basic functions of the stock market to raise the effectiveness of capital resource allocation and promote the improvement of the operation of enterprises.

Statistical data of China's two stock exchanges since their establishment indicate that the overall quality of the listed companies has been falling year after year. According to the latest annual reports of the listed companies, the overall performance of the listed companies continued to decline in 1998. The number of losing companies rose to 87 in 1998 from 41 in 1997 and their total deficit rose to RMB11.184 billion yuan from RMB 4.754 billion yuan in the previous year. Of the companies whose profits on the books, most (83%) were strapped due to lack of cash flow and 56% of all the listed companies failed to offer dividends. Worse still, the earlier the companies were listed, the worse their conditions were. In a situation in which most companies seriously lack the momentum of growth, stock prices are still high, supporting a 30-fold and even higher average profitability (P/E). This has made many companies not worth investing, surviving only to act as the devices of gamble and speculation. If these problems stay for too long, they will bring a fatal blow to the capital market. At a time when large numbers of residents are entering the stock market, drastic fluctuations of the stock market may also affect social stability. Therefore, it is necessary to conduct an in-depth analysis of the root causes and take effective measures to solve these problems.

First, the guiding principle for capital market development must be fundamentally changed.

The development of China's capital market is faced with many problems. But in the final analysis, these problems are related to the understanding of the capital market and the guiding principle for capital market development. If the guiding principle is not clearly defined, the measures to be taken could be ill-conceived or they can only be regarded as a temporary solution instead of a fundamental one. Sometimes, they could even lead to a result in direct contravention to the subjective wish.

For long, there have been all kinds of seemingly correct views on why China should develop capital market. At the early stage of the stock market, the reform to transform state-owned enterprises into joint-stock companies was regarded as being identical with speculations. As a result, the stock market became a ground for some people to reap windfall profits by illegal means, such as "manipulation" or "control" the prices of the stock market. In recent years, another prevailing view believed that the development of capital market was designed to allow the state-owned enterprises to raise funds from the ordinary people so as to alleviate their own difficulties and shake off poverty. The practice in recent years has fully proven that practices based on this view are extremely harmful. Not only the state-owned enterprises can not alleviate their difficulties by luring money through listing, but they will eventually ruin the entire capital market.

The fundamental goal for China to develop the stock market is to change the old mode that allocated capital resources through administrative orders and replace it with a mode that allocates capital resources through market. In an effective stock market, the stock prices change with the changes in the enterprises' potential profit-making abilities so as to direct the flow of capital. Therefore, an effective stock market is conducive to the optimization of capital resource allocation and the effective operation of the corporate control structure.

In short, in order to promote the healthy development of the capital market, all measures to be taken should help the stock market to perform its functions of discovering prices and optimizing capital resource allocation. It is not advisable to allow some short-term considerations or partial interests to misguide the development of the stock market.

Second, an equal fund-raising environment should be offered to all kinds of enterprises.

Competition on an equal footing is the primary essence of the market economy. A sound capital market can only be established with the joint participation by and equal competition between all kinds of enterprises.

However, China's stock market has all along adopted a principle of "tilting toward the large and medium-sized state-owned enterprises". Up to now, most of the companies listed on the two stock exchanges are the state-owned enterprises recommended by the local governments or the competent departments of the central government. The non-state-owned enterprises can hardly have an opportunity to be listed despite their excellent performance. A few non-state-owned enterprises are listed only after they have paid huge prices to purchase the "empty shell companies" that have very little net assets or even no net assets at all. This practice clearly is contrary to the principles of the market economy and should be immediately corrected.

Of course, different companies have different features. They differ greatly from each other in industrial specialization, business scale and profit making. Not all the companies can meet the requirements for being listed on the stock exchanges or want to be listed on the exchanges. But they all need their own direct channels for fund raising and their own ground for the flow of their stock rights. The stock exchanges spontaneously established by various regions in various names can not play the role of optimizing capital resource allocation due to the poor quality of their listed companies and the chaotic nature of their trading. They even harbor serious potential crises. Therefore, it is absolutely necessary to bring them under control. But from a mid- and long-term point of view, a market of multi-tier stock exchanges is not only indispensable for the growth and improvement of the stock market itself but also is a pre-requisite for promoting corporate optimization and reorganization. In this sense, we suggest that experiments be conducted on all types of over-the-counter trading. At the same time, active attitude should be taken toward the establishment of the "second block" market in the inland and toward the utilization of the "venture block" market in Hong Kong. Accordingly, conditions should be created for the realization of the two efforts.

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