Home Economy China’s stock exchange marks 30 years of Communist-style capitalism

China’s stock exchange marks 30 years of Communist-style capitalism

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Yang Huaiding was an unknown 40-year-old warehouse keeper at a Shanghai steel factory earning 51 yuan (US$7.80) a month in 1990. Today, he is fondly known as “Millionaire Yang” in the folklore of China’s stock market.

The Shanghai native made his first million from dabbling in the initial batch of eight stocks soon after the local bourse came into operation in December of that year, prompting him to devote himself to full-time trading.

“You could say the stock market offered me a new career path,” said Yang, who at 70 has experienced at least three boom-and-bust cycles – the 1997 Asian financial crisis, the 2008 Lehman Brothers collapse, and the 2015 domestic market crash. “Those hefty profits in the early days inspired me to make the switch.”

The birth of China’s stock market 30 years ago is a source of pride and fascination for the nation and its participants. At US$10.6 trillion, the market capitalisation has grown from scratch to become the world’s second largest in that span, behind the US whose history on Wall Street dates back to May 1792. Yang’s rags-to-riches tale is also an inspiration to 175 million individual investors who dream of landing the same windfall.

China’s experiment with the stock market came late in 1990, when the Shenzhen stock exchange came into operation on December 1 and Shanghai got its own 18 days later. It was a mechanism to convert abundant household savings into cheap capital, more often than not for cash-strapped state-owned factories on the verge of bankruptcy.

Shanghai, the birthplace of banking group HSBC Holdings and insurer AIG Group, was given the nod over Beijing for political reasons. The capital was still reeling from the student-led demonstrations that preceded the Tiananmen Square crackdown in June 1989.

The rented ballroom at the Astor House Hotel, on the Shanghai bund overlooking the Huangpu River, was the exchange’s first trading floor, put together by then-mayor Zhu Rongji and his team barely a year after being assigned the task. It was also there that Yang scored some of his early stock winnings.

“I was confident that shares of Shanghai Vacuum Electron Device were a good buy at that time because they were undervalued based on the cash dividend stream,” said Yang, who bought thousands of shares in the state-owned television tube company at 80 yuan, and got out at 800 yuan before the stock hit 2,000 yuan.

“It was a gambling game 30 years ago,” he recalled. “Unfortunately, a lot of retail investors still treat stocks as a form of gambling today.”

It was not until seven years later that the Shanghai stock exchange moved into its new building in the bustling centre of Lujiazui financial district. In its midst are the gleaming 632-metre Shanghai Tower, the world’s second-tallest skyscraper, and other landmarks such as the Shanghai World Financial Center and Jinmao Tower.

The formation of the two stock exchanges marked the rise of China’s Communist-style capitalism, and its emergence from being a local factory for global manufacturers like Apple, Nike and Coca-Cola, to an economic powerhouse in its own right. The changes cut across industries, sizes and values.

Today, there are 1,784 listed companies in Shanghai and 2,341 in Shenzhen, with a combined market value of 69.4 trillion yuan (US$10.6 trillion), surpassing the previous peak recorded in 2015, and versus 2.94 trillion yuan in 2002.

China’s economic transformation has also altered the industry make-up to reflect its new economic structure. Technology and biotech companies account for 7.3 per cent of the market capitalisation in Shanghai since the Star Market was created 17 months ago. In Shenzhen, the ratio has increased to 10 per cent from 6.4 per cent in 2013.

Never mind that only two of the eight market forerunners from 1990 – Shanghai Yuyuan Tourist Mart and Shanghai Feilo Acoustics – have survived, while others evolved or were restructured. Today, China is home to three of the world’s 20 most valuable companies: Tencent Holdings, Alibaba Group Holding and Kweichow Moutai.

Four of the 10 wealthiest people come from the internet sector, led by Jack Ma of Alibaba and Pony Ma Huateng of Tencent, according to Hurun’s China Rich List. In its inaugural list in 1999, the ranking was dominated by industrialists and property tycoons such as Liu Yonghao and Li Xiaohua.

Such stock market riches, and the potential for more, are a magnet for global fund managers who saw a decade of dire, new-normal low returns after interest rates sank to near-zero after the onset of global financial crisis in 2008.

Global fund managers including BlackRock and Invesco Morgan Stanley Investment Management collectively owned 2.8 trillion yuan worth of onshore stocks as of September 30, or 4 per cent of capitalisation, according to the central bank. In 2003, UBS Group made the first foreign investment in China’s stocks, officially kicking off overseas inflows.

The initial trickle turned into a gush as the Stock Connect conduit fuelled inflows. The programme was first mooted in 2012 in a Shenzhen teahouse meeting between the bourse’s five senior executives and Hong Kong’s stock exchange chief Charles Li Xiaojia. The Shanghai connect was launched in November 2014, while Shenzhen followed two years later.

MSCI, an index compiler, included Chinese onshore stocks for the first time in 2018 by giving them a 4.1 per cent weighting in its Emerging Markets Index. At FTSE Russell, Chinese stocks took up 5.2 per cent weight in its All World Index, the largest after those from the US and Japan.

The US-China rivalry, however, has thrown a spanner in the works. More than 20 Chinese companies will be removed from their global stock and bond indices from this month by FTSE Russell, S&P Dow Jones Indices and MSCI, following a ban on trading and investing by Americans from next year.

For stock market operators, the pull and push factors have brought on additional responsibility to protect investors, said Que Bo, a deputy general manager at Shanghai Stock Exchange. As new challenges come thick and fast at home and abroad, more needs to be done to raise the bar on the quality of listing, he added.

China’s two main stock market operators trailed their Hong Kong rival in tweaking rules to woo the nation’s top-notch companies, some of which already trade in the US and are facing possible expulsion because of tightening audit and regulatory scrutiny.

Hong Kong revised its listing rules in April 2018 to embrace companies with no profit track record and those with dual-share class structures and unequal voting rights among its founders and common shareholders. The landmark reforms brought home this newspaper’s owner Alibaba, JD.com and NetEase via secondary listings.

Bourse operators were also slow to delist the rotten apples in their fold to protect investors. Pump-and-dump schemes remain rife and a bane to the market, fomenting some of the nation’s infamous stock market crashes.

“I do not buy the idea that China’s stock market is a platform to support company growth or generate fortunes for investors,” said Zhang Wei, a retail investor who started trading stocks in 1994. “Many small investors have lost money.”

The authorities have long been criticised for being too lenient, partly to protect the interests of state shareholders. It was not until 2001 that Shanghai Narcissus Electric Appliances became the first company to be delisted. Still, fewer than 200 have since been booted out.

“Going forward, the Shanghai exchange will deepen the reforms of the key systems, such as delisting and nurturing long-term investors,” said Que, the bourse official. “We’ll be active to build a rule-abiding, transparent, open and dynamic capital market.”

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Massive cyberattack grows beyond US, heightening fears as it hits targets worldwide

Russia was “pretty clearly” behind a devastating cyberattack on several US government agencies that also hit targets worldwide, Secretary of State Mike Pompeo said on Friday, as the list of victims worldwide continues to grow, heightening fears over computer security and espionage.

“There was a significant effort to use a piece of third-party software to essentially embed code inside of US government systems,” Pompeo said on The Mark Levin Show.

“This was a very significant effort, and I think it’s the case that now we can say pretty clearly that it was the Russians that engaged in this activity.”

The breaches of US government agencies, first revealed by Reuters on Sunday, hit the Department of Homeland Security, the Treasury Department, State Department and Department of Energy. In some cases, the breaches involved monitoring emails, but it was unclear what hackers did while infiltrating networks, cybersecurity experts said.

Trump has not said anything publicly about the intrusion. He was being briefed “as needed”, White House spokesman Brian Morgenstern told reporters. National security adviser Robert O’Brien was leading interagency meetings daily, if not more often, he said.

“They’re working very hard on mitigation and making sure that our country is secure. We will not get into too many details because we’re just not going to tell our adversaries what we do to combat these things,” Morgenstern said.

Microsoft said late on Thursday that it had notified more than 40 customers hit by the malware, which security experts said came from hackers linked to the Russian government and which could allow attackers unfettered network access.

“While roughly 80 per cent of these customers are located in the United States, this work so far has also identified victims in seven additional countries,” Microsoft president Brad Smith said in a blog post.

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