EVEN IN THE face of the current slowdown, China's annual GDP growth is motoring along at about 8%. So why are China's stock markets drifting listlessly? The two domestic securities markets, in Shanghai and Shenzhen, have barely moved in three years. Their combined market capitalization, officially some $500 billion and second in size in Asia only to Japan's, is in fact less than $200 billion when account is taken of what is actually tradable and not state-owned. Even that valuation might be generous. The country's stock markets are mired in corruption, dominated by moribund companies and manipulated by government and speculators alike.
Fraser Howie, co-author of Privatizing China – the stock markets and their role in corporate reform, elaborates on this China conundrum. "You can be bullish on the Chinese economy – GDP growth," he says. "But that tells you nothing about what to invest in. There's a disconnect between the market and what's going on in the economy."
China's domestic stock markets need fixing. Their problem lies in the history behind their formation (see box). After years of exploiting the exchanges as a source of capital for creaky state-owned enterprises, maintaining share prices at unrealistic levels and incessantly manipulatinng the market, the government has succeeded in creating domestic stock markets that are rigged, corrupt and dysfunctional.