The Hindu Business Line : What's happening `inside China's stock markets'?

"China has enjoyed its greatest period of international investor enthusiasm in history," note authors of Privatizing China. A. Besant C. Raj investigates this success in comparison to India in Unravelling the China Miracle. Sun Shuyun takes the spiritual journey into the Middle Kingdom in Ten Thousand Miles Without a Cloud. Right reads to churn up your China gyan says D. MURALI.

On November 3, Chinese stocks scaled to a five-year high. "The benchmark Shanghai Composite Index gained 0.8 per cent to 1,866.36, its highest close since September 5, 2001, when it ended at 1,868.27," says http://news.moneycentral.msn.com.

"Shares in the Industrial & Commercial Bank of China (ICBC), the country's biggest lender, rose 2.44 per cent last week to 3.36 yuan (43 US cents)," states www.shanghaidaily.com, in a report dated November 6. "ICBC received a $15-billion injection from the government to clean up its balance sheet last year," www.theglobeandmail.com reminds.

Yet, the biggest IPO (initial public offering) in history that ICBC came up with "attracted orders equivalent to twice Citigroup's market value for the 48.39 billion shares sold on October 20," writes William Pesek of Bloomberg in an article ominously titled, `China's IPO revolution may be long march to doom'.

What's happening `inside China's stock markets'? To find an answer, take a trip through the second edition of Privatizing China by Carl E. Walter and Fraser J.T. Howie, from Wiley (www.wiley.com). Chapter 1 opens with a 1992 quote of Deng Xiaoping. "Are such things as securities and stock markets good or not? Are they dangerous? Do these things exist only in capitalist systems or can socialist ones use them too?"

It was in 1992 that Jinbei Light Passenger Vehicle completed its IPO on the NYSE, thus becoming `the first Chinese company in history to list on an international market.' Five years earlier, when in 1987, SDB or Shenzhen Development Bank made `the first major public offering of shares,' subscription was less than half, from about 7,000 `investors.' At that time, "no one knew what stocks were... and a market did not yet exist." Fifteen years ago in China, the word `capital (ziben)' was still a dirty word, narrate the authors.

Though SDB's IPO was `a complete dud', it was `the match that set fire to the previously quiet market.' How so? "In March 1989, the bank announced its dividend for 1988." It was `exceptionally generous', one learns: "A cash dividend of RMB7 per share and a two-for-one stock dividend." Those who had bought the shares enjoyed a profit that was many times their investment, and the share began to appreciate in `wild street trading.' A major turning point in China's equity markets, say Walter and Howie. "After this experience, investors did not need market professionals to tell them that shares were worth (potentially) more than their face value suggested."

There was rapid growth during the 1990s. "Now, there are more than 70 million investor accounts, the overwhelming majority of which have been opened by individuals." However, China's securities markets remain relatively small, say the authors.

"The primary, or IPO market, even at its peak of nearly $20 billion in 2000, was a fraction of total bank deposits of nearly $900 billion or of annual state fixed asset investment of $450 billion." The primary market is, again, dwarfed by FDI (foreign direct investment), of $50 billion annually.

The picture that the book paints, as 2006 draws to a close and signals the accession of China to the WTO, after the five-year transition, is one of a booming economy. "With this boom, China has enjoyed its greatest period of international investor enthusiasm in history," note the authors. "But its stock markets remain the playground of institutional speculators and manipulators and have languished while its best companies flee to list abroad." Does a remedy lie in accelerating the reform process?

Advantage India

"Why has India with all the initial advantages it had over China, landed itself far behind China?" This is the question that A. Besant C. Raj analyses in Unravelling the China Miracle — A Comparative Study with India (1950-2005) from BookSurge (www.booksurge.com).

It is not as if FDI has led to China's boom, argues Raj. "As a percentage of its GDP (gross domestic product), the FDI during the year 2003 works out to a minuscule 3.79 per cent. China's domestic savings rate is estimated at 42 per cent of its GDP."

What about foreign trade as a possible driver of growth? "Given a GDP of $1,252 billion in 2002, the favourable trade balance of $30 billion is just 2.4 per cent," says Raj.

"The primary objectives of Chinese exports are threefold — first to create jobs for its people; second, to generate value added to its economy on the resources of other countries; and third, to dominate world trade." At the time of writing, Forbes reports that China's 2006 trade surplus is expected to hit $140 billion.

Is it the cost advantage where China scores over India? No, Raj would refute that too, after dissecting data of industries such as steel, computer manufacturing, and banking. For instance, he compares the numbers of SBI (State Bank of India) and Bank of China (BoC), the leading public sector bank in the Dragon Land.

As a percentage of income, employee cost at SBI is 23.36 per cent, whereas it is 28.1 per cent in BoC, he points out. Interest outgo for SBI is 46 per cent of income, as against 29 per cent in BoC, because of the low interest regime in China. In spite of the significant advantage on the interest count, the net profit is 14 per cent for BoC compared to 10.5 per cent for SBI, "indicating clearly that the cost of operations of banking is significantly higher in China than in India."

A study of importance.

On a monk's trail

Our last stop on the China thread this week is Ten Thousand Miles Without a Cloud, by Sun Shuyun, from Harper Perennial (www.harpercollins.co.uk). The book is a search for the self through the route that the seventh century monk Xuanzang took.

Rewind to 636, when after five years in Nalanda, the monk headed to south India. "The journey to Kanchipuram took Xuanzang more than a year, as he frequently stopped to study with any great master he could find," writes Shuyun.

And she goes on the monk's trail, travelling by `the Coromandel Express to Madras', and `another two hours by bus.' Xuanzang had found the place famous for precious gems and other articles, while the author found `silk, or Chinamshuka, the Sanskrit name.' Her next stop is Ajanta.

"Lost for centuries, and rediscovered only in 1819 by a British soldier hunting a tiger," narrates Shuyun. "He saw it going into a cave, and followed it." A book worth tracking, for the many hidden treasures it can offer! Just the right reads to churn up your China gyan, even as India aims to become `a global workshop'.

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