imperial 320 presentation by franklin allen: the chinese stock market

The Chinese stock market

Franklin Allen

Based on joint work with Jun Qian,

Chenyu Shan and Lei Zhu

#Imperial320

Imperial means Intelligent BusinessImperial College Business School 2

Motivation

- China’s economic growth ‘miracle’:

• GDP growth rates highest among large countries over the past 3 decades

• Size of GDP overtook that of the US in 2014 (PPP terms, IMF’s World

Economic Outlook)

• Will double the size of US around 2035 (PPP) as long as its growth rate

remains twice as high as that of the US

- Development of China’s stock market:

• Started in 1990: ‘help SOEs to privatize and raise funds’

• Stock exchanges in Shanghai, Shenzhen; plus Hong Kong

• Total market cap second largest in the world (behind US)


Buy-and-hold Returns of Major Stock Indices (1992-2014; inflation adjusted; cash dividends included)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

SSE China S&P500 US BSE SENSEX Inida

IBOV Brazil Nikkei Japan


CPI in China (1992-2014)

4

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%Ja

n, 1

99

2

No

v, 1

99

2

Sep

, 1

99

3

Jul, 1

99

4

Ma

y, 1

99

5

Ma

r, 1

99

6

Jan

, 19

97

No

v, 1

99

7

Sep

, 1

99

8

Jul, 1

99

9

Ma

y, 2

00

0

Ma

r, 2

00

1

Jan

, 20

02

No

v, 2

00

2

Sep

, 2

00

3

Jul, 2

00

4

Ma

y, 2

00

5

Ma

r, 2

00

6

Jan

, 20

07

No

v, 2

00

7

Sep

, 2

00

8

Jul, 2

00

9

Ma

y, 2

01

0

Ma

r, 2

01

1

Jan

, 20

12

No

v, 2

01

2

Sep

, 2

01

3

July

, 2

01

4

CPI

CPI


GDP Growth in Large Countries（2000-2014; inflation adjusted）

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Panel B. Real GDP in Large Countries from 2000 to 2014

China United States India Brazil Japan


Buy-and-Hold Returns of Listed Stocks in Large Countries （2000-2014; inflation adjusted; dividends included）

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Value-Weighted Buy-and-Hold Returns

China United States India Brazil Japan


Buy-and-hold Returns of Stocks vs. Bank Deposits in China（2000-2014；inflation adjusted）

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Demand Deposit 1-Year Deposit 5-Year Deposit Buy-and-Hold Stock Returns


Research Question

How to explain the difference between the Chinese economy and the A-share

market?

• We focus on these factors：

Listed firms are not representative of the economy because of the nature of the IPO process

Technical problems with the IPO process

Problems with delisting

Corporate governance issues in terms of the efficiency of large-scale investment and tunneling?


Level and Growth of Net Income of Chinese Firms by Sector

Net Income Growth

Year All SOE Non-SOE Listed Unlisted

Listed

SOE

Listed

Non-SOE

Unlisted

Non-SOE

2001 0.060 -0.033 0.168 -0.246 0.225 -0.208 -0.588 0.230

2002 0.217 0.095 0.335 0.182 0.229 0.134 0.998 0.317

2003 0.474 0.459 0.485 0.546 0.451 0.505 0.944 0.466

2004 0.424 0.350 0.480 0.448 0.415 0.473 0.257 0.493

2005 0.243 0.188 0.282 0.141 0.279 0.174 -0.152 0.302

2006 0.336 0.347 0.328 0.247 0.363 0.217 0.611 0.319

2007 0.408 0.292 0.486 0.349 0.426 0.295 0.843 0.472

2008 0.128 -0.138 0.282 -0.071 0.182 -0.089 0.044 0.294

2009 0.145 0.064 0.176 0.031 0.168 -0.018 0.311 0.171

2010 0.552 0.631 0.524 0.494 0.563 0.474 0.579 0.522

2011 0.150 0.078 0.176 0.095 0.159 0.061 0.229 0.174

2012 0.005 -0.080 0.035 -0.045 0.014 -0.036 -0.077 0.040

2013 0.104 0.000 0.137 0.420 0.054 0.439 0.353 0.128

2014 0.019 .-0.115 0.019. 0.038 -0.073 -0.010 0.220 0.034.

Average 0.233 0.152 0.279 0.188 0.247 0.172 0.327 0.283

Correlation 0.687*** 0.554** 0.643** 0.390 0.713*** 0.361 0.411 0.627**

P-Value 0.007 0.049 0.018 0.168 0.004 0.204 0.144 0.022


Listed and Matching Unlisted Firms in China （ROA）

10

0

0.02

0.04

0.06

0.08

0.1

0.12

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Listed Firm Matched Non-Listed Firm


- The evidence in the tables above suggest that the firms that are listed are not representative of

the economy as a whole

- The process for listing is different from other countries. Rather than firms with good prospects

being listed, the process has been political in nature:

• Each IPO must be approved by the CSRC

• In earlier years this took on the form of an explicit quota every year allocated to different

regions across the nation

• One of the main original purposes of the stock market was to provide funds for SOEs so firms

from mature industries with good political connections tended to be listed

- There are also technical problems with the conditions that firms must satisfy to be eligible for

an IPO such as positive earnings for three years prior to listing that lead to distorted incentives


ROA around IPO: Listed firms

0.04

0.05

0.06

0.07

0.08

0.09

0.1

0.11

0.12

0.13

-5 -4 -3 -2 -1 0 1 2 3 4 5

China US India Brazil South Africa

12


ROA around IPO: Listed vs. Unlisted Firms in China


ST Firms in China and Delisted Firms in the US


Comparison of Investment of Listed Firms: Capital Expenditure/Assets


Comparison of Listed Firms, Net Cash Flow/Assets

16


Related-Party Transactions and Cash Flows of Chinese firms

Panel A. RPT Outflow and Net Cash Flow

All SOE Non-SOE

Variable Model4 Model5 Model6

RPT Net Outflow/Assetst-1 -0.046** -0.044** -0.062

(-2.062) (-2.252) (-1.268)

Log (Total Assets) 0.000 -0.001 0.000

(-0.229) (-1.469) (0.037)

Leverage -0.065*** -0.054*** -0.078

(-4.615) (-3.650) (-1.792)

ROA 0.191*** 0.224*** 0.143*

(4.961) (4.073) (2.085)

EBIT Growth 0.010 0.011* 0.009

(1.447) (1.778) (1.030)

Sales Growth -0.004 0.000 -0.007

(-0.345) (0.074) (-0.402)

Intercept 0.038** 0.039*** -0.026

(3.242) (5.381) (-1.249)

Year Fixed Effects Yes Yes Yes

Industry Fixed Effects Yes Yes Yes

R-squared (%) 5.61 7.89 7.33

Observations 3503 2275 1228


Concluding remarks

- Disconnection between economic growth and stock market in China

- Explaining the poor performance

• Firms that are listed are not representative of the economy as a whole

• Problems with the IPO listing process;

• Problems with the delisting process

• Corporate governance problems: either investment decisions are very bad

or there is tunneling or (probably) both

- Implications:

• IPO listing process: Lowering standards, encourage the listing of more

privately owned and growth firms, administrative process => market

process

• Delisting process: Tougher regulations on delisting

• Improve corporate governance

imperial 320 presentation by franklin allen: the chinese stock market

Economy & Finance