Stock markets continue to be a depressing drag

In this prolonged stock market drought, many rainmakers are chanting the same old prayers beseeching government salvation.

It's not that their prayers have fallen on deaf ears. In the past several months, the government has taken monetary and fiscal measures that were seen as bullish to the stock market. But share prices have remained depressed despite the occasional spurts.

To the dismay and embarrassment of many stock analysts and self-styled investment gurus, Shanghai Composite Index, the most widely followed market indicator, cut through many layers of what they touted as "rock bottom" levels like hot knife through butter.

Now, the index, around 2,115, is expected to test the so-called "diamond bottom" of 2,100, and fewer and fewer people are saying that line of defense would hold.

Well, save your prayers. The real cause of the stock market malaise lies not in government policies, but in the perceived incapability of many listed companies, particularly the State-owned monopolies, to create shareholder value through innovative deployment of resources and generate quality and sustainable growth in earnings, dividends and share prices.

Explosive market demand for a vast variety of goods and services in the past automatically created shareholder value especially for corporations that have a monopolistic, or near-monopolistic, control over supply in the key economy sectors, including energy, telecommunications, transport and banking. But room for future growth from a much larger base than before are becoming more and more restricted.

Economists love to talk with pride that China has overtaken the United States as the world's largest market for mobile phones, automobiles and, yes, luxury goods. Right, China also has more Internet users than any other country.

But such data don't sound so exciting to astute analysts and suave investors worrying about market saturation, especially at a time when the economic growth prospect is clouded by the nagging debt crisis in Europe and stuttering economic recovery in the US.

Most worrisome to investors is the declining rate of growth in domestic spending with consumers tightening their purse strings, which could eventually lead to a fall in demand for goods and services.

The corporate sector seems ill prepared for a downturn in its traditional businesses other than making new acquisitions to generate more profits, irrespective of the rate of capital return. The need for new capital to finance such acquisitions has led to a flood of new scripts in the stock market while corporate profitability remains in doubt. This has the result of dragging down share prices of the issuing companies, and ultimately the index.

Many frustrated investors, and some stock analysts, have been wondering openly why the stock markets in the US, Germany and France have outperformed the one in China despite the country's stronger economic performance. The answer seems obvious. Despite economic woes, the corporate sectors in those countries, especially the US, have posted strong gains, thanks, at least partly, to globalization.

Apple is everybody's favorite example. Thanks to the stewardship of its late chairman Steve Jobs the company has become a legend in the creation of shareholder value through innovation and globalization.

Business leaders in China have been talking about the need for restructuring for years. But little progress appears to have been made. Tried as hard as they may have, most mainland banks continue to derive the bulk of their earnings from interest income that is dependent on the artificial spread between the official lending and deposit rates. And investors are beginning to ask how many more mobile phone and broadband users the telecom giants can expect to sign up in coming years.

It is widely reported that 10 of the worst performing blue-chip stocks on the Shanghai bourse lost a combined 12 trillion yuan ($1.88 trillion) in market value in the past five years, earning them the unflattering epithet of the "10 nastiest wealth destruction machines".

Managements of these companies and many others are doing exactly the opposite of what they are paid to do. It's hard to imagine that further cuts in bank interest rates or reduction in stock transaction levies can restore investors' confidence in them.

(China Daily 08/18/2012 page5)