BANGKOK -- It was only on Dec. 19, 1990 that Shanghai's equity market reopened after a four-decade hiatus. This revival was accompanied by the establishment of a new exchange in Shenzhen. Although considered "capitalist," these markets are not quite like others. One of their original purposes was to provide capital for state-owned enterprises needing fast cash for reform, a legacy that persists today.
"This is a gambling house without rules," Wu Jinglian, a prominent Chinese economist, said about China's markets during a state-run television program in January 2001. The now famous line created an uproar at the time, but according to a 2010 biography, Wu's first reference to China's stock markets resembling unregulated gambling houses was made in 1995.
The whole point of the provocative analogy was to draw investor attention to rampant unfair practices in mainland bourses, that take place with little interference from regulators. Wu, now 85, reiterated the argument in November at a Beijing forum, as the latest equity bubble was forming.
China's equity market has evolved, including the opening of two small-cap sections in Shenzhen -- the small and medium-sized enterprise board and ChiNext, representing startups. But major players remain predominantly state-owned. The top 10 shares by market cap in Shanghai as of July 10 are all state-owned, including oil giant PetroChina and megabank Industrial and Commercial Bank of China.
This may be one reason why the benchmark Shanghai Composite Index does not seem to reflect the real economy. When economic momentum was reignited following a 2003 SARS-related stagnation, the index stayed around the 1,000-point range, despite growth of around 10%. A recent spike in the index since last autumn coincided with a continued weak economy, witnessed in the recent announcement of 7.0% growth for the April-June quarter.
As around 80% of trade is done by retail investors, Wu's worry has always been for "ordinary investors left in a disadvantageous position." He has once again sounded the alarm, calling for stringent market regulations to combat insiders cashing in on illegitimate gains.
Chinese regulators have shown their willingness to fight fraud such as insider trading, at least on the surface. "We must ensure retail investors have fair access to information," Xiao Gang, chairman of China Securities Regulatory Commission, said at the recent opening ceremony of the retail investor protection hotline in Beijing. He added that "if there is no fair market environment, it is impossible to guarantee vitality."
However, a month after Xiao's public boast about fighting corruption, the head of the CSRC's department supervising public offerings, Li Zhiling, was expelled because of her husband's alleged involvement in insider trading. Such events are not rare: Li Liang, then head of CSRC's investor protection bureau and an architect of ChiNext, was charged by the Central Commission for Discipline Inspection last December.
The Chinese Communist Party's Central Propaganda Department recently issued a demand to all domestic media to "meticulously report the economic accomplishments and situation of the first half and ... echo the bright prospects for China's economy." Censorship seems to trump fairness in the country's press.
China's equity market is not fully open. Theoretically, ups and downs should not matter much to nonmainland investors with little exposure. Used quotas of limited access mechanisms, namely the two qualified foreign institutional investor schemes -- QFII and Renminbi QFII -- and the Shanghai-Hong Kong Stock Connect, amount to roughly $160 billion. That is less than 2% of the combined market capitalization of the Shanghai and Shenzhen markets, at the end of May.
However, as more damage is done to domestic balance sheets of Chinese retail investors, one consequence might be decreased consumption. If so, this would hit product sales and travel-related expenditure.
Chen Cheng is 30 and lives in Dalian. He entered the equity market in May. So far, he has lost about 100,000 yuan ($16,105). He secretly diverted the money from his savings to buy a flat in preparation for marrying his sweetheart. He asked, "How should I tell her about this loss?"
The love-struck man is not alone in feeling the pinch.
Nikkei staff writer Daisuke Harashima in Dalian contributed to this story.