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Opinion

Asian stock exchanges are getting ahead of themselves

China, Hong Kong and Myanmar's bourses have all made hasty moves recently

Opening ceremony of the Yangon Stock Exchange center in December 2015: among the bourse's five listees are banks, investment companies and a real estate developer.   © Reuters

Last week, three Asian stock exchanges proved more interesting than even the companies trading on them.

First, China scrapped foreign investment quotas in ways sure to flood Shanghai and Shenzhen with "buy" orders. Removing the $300 billion cap on overseas purchases is the most impactful opening to date.

Next came Hong Kong Exchanges & Clearing's audacious $39.5 billion bid for the London Stock Exchange. While U.K. regulators rejected the gambit, the global headlines relegated the city's pro-democracy protests to page two.

Finally, Myanmar hinted that its much-anticipated move to let overseas investors trade shares is imminent. The chatter coincided with a giant investment forum -- where I was a moderator on some panels -- that lured several hundred foreign bankers to the last of Southeast Asia's frontier markets.

On the surface, each narrative is different. In China's case, a weakening yuan and rising outflows have Beijing scrambling to attract foreign cash. Hong Kong is making a naked bid for relevance as China pulls in capital which used to go there. Myanmar seeks to catalyze growth for a bourse that currently features just five companies.

Below the headlines, all three moves provide fresh -- and worrisome -- examples of how Asia too often puts the cart before the horse.

Take China, which has steadily opened its equity markets to overseas investors. That makes sense, of course. No one doubts the second-biggest economy should play a huge role in global capital markets. Yet access to exchanges in Shanghai and Shenzhen is outpacing the domestic reforms needed to ready China Inc. for global investors.

Ideally, developing economies build credible and trusted markets from the ground up. Regulators work steadily to increase transparency, ensure companies raise their corporate governance games, craft reliable surveillance mechanisms like reliable credit rating players. Often, they view a dogged media as an ally in policing malfeasance that damages trust.

Under Xi Jinping, China has gone the other way. Since 2013, China has become more of a black box. Xi also has pursued a policy mix that confuses cause and effect -- one that reckons China can build a world-class financial system after waves of foreign capital arrives.

The 2014 Shanghai-Hong Kong connect scheme -- and one similar in Shenzhen later -- was a case in point. Xi viewed money flows as the real reform, not the heavy lifting needed below the surface to modernize the economy. China's 2018 inclusion in MSCI's widely watched indexes followed a similar pattern. So did the July opening of China's Nasdaq-like STAR market, which has seen epic price gyrations.

The global trade war isn't helping. As Chinese exports slump and growth plumbs 27-year lows, Xi's government is in aggressive credit-pumping mode. A borrowing binge does little to make China Inc. more innovative, productive or less reliant on old-economy smokestack industries.

Arguably, all Xi is doing is increasing the ways in which China could share its reckoning with global markets should his $14 trillion economy stumble.

Hong Kong is certainly stumbling, too. As growth and wages choke, now hardly seems an ideal moment for a giant acquisition. Perhaps chief executive Charles Li thinks he is betting on a distressed asset as Brexit chaos tarnishes London's brand. Hong Kong is looking rather distressed, too.

Perhaps HKEX chief executive Charles Li thinks he is betting on a distressed asset as Brexit chaos tarnishes London's brand.   © Visual China Group/Getty Images

In 2012, when HKEX bought the London Metal Exchange, proximity to China was a major selling point. Today, Beijing's encroachment on Hong Kong's laissez-faire institutions is a major drawback.

Since 2013, Xi's government has been trying to export China's opacity to Hong Kong. Recent years saw a variety of efforts to restrict personal data for company directors. That includes attempts to conceal the home addresses and identification numbers that tell shareholders who owns what and flag any conflicts of interest.

Hong Kong, it is often said, is too reliant on listings of mainland companies, some of which go public before governance practices are up to speed. Yet now Hong Kong confronts weakening economic fundamentals just as it is spreading its wings. It seems wiser to get under the economy's hood at home first.

In Myanmar's case, the problem is not potential recession. It is opening the financial system too early in the nation's development and courting boom-and-bust cycles.

The Yangon Stock Exchange opened in 2015, yet only has a market cap of $400 million. Among the bourse's five listees are banks, investment companies and a real estate developer. It is housed in a historic colonial building in the center of Myanmar's biggest city. And it is a decidedly sleepy place.

The impetus to welcome waves of foreign money is understandable. Yet modern Asian history is strewed with examples of highly promising economies opening up before their time, only to suffer a series of capital flight incidents. Vietnam, anyone?

Corporate governance in Myanmar could do with some serious tightening. The government needs to devise and pass clear laws on investor protection and counterparty risks. Myanmar also performs abysmally on the World Bank's annual ease of doing business rankings -- 171st out of 190 economies.

Nevertheless, Myanmar seems about to welcome a torrent of overseas cash to grow the market in a hurry. But then it is not alone in Asia in trying to run before it can walk.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades."

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