Thursday, 3 May 2012

Chinese GDP-Stocks Market Paradox




Everyone knows that China has one of the largest gross domestic product growth rates, but is everyone aware that the Chinese stocks actually do not match up with these rosy growth rates?

The Chinese securities regulator announced new stock listing rules over the weekend as it tried to end a decade of lousy stock returns.  There seems to be paradox common to most emerging markets, that the high GDP growth often carries an underperforming equity market with it.  For example, China’s 2011 GDP was four times its figure in 2010; however, the Shanghai Composite Index only rose about 46% over the past decade.  Why is this happening?

First, China’s stock market is not mature enough.  In fact, it was only established two decades ago, so we cannot expect it to behave like other long-established markets in developed countries.  Second, as with many developing countries, there is the problem of legal and political problem, i.e. corruption.  A 2002 study of China’s stock market by Dow Jones Indexes highlighted the problem of insider trading in China.  Investors who could gain in the Chinese stock markets used to be the powerful ones who could obtain state-critical information before the public.  Now, with the securities regulator’s vow to destroy all insider trading, reform IPO system and introduce more institutional investors, we hope to see the Chinese stock market mature soon and become another exciting hub of investments.

~Sophie Tam

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