Last month the Chinese government provided a dose of financial morphine for the stock market by halting the placement of a large number of new shares in state-owned enterprises (SOEs).
That announcement came as a relief to anxious investors hoping to gain from official support. China's gambit to appease investors in the short run by trying to support stock prices, however, may come back to haunt them.
What Chinese investors need is not more intervention, but less. The dominance of state-owned enterprises on the exchanges means that there are no real capital markets in China. Government support of the market only compounds the difficulty of trying to evaluate socialist firms. Without real owners with fully transferable shares, there can be no way to know the capitalized values of the listed companies and no way to discipline socialist managers.
A bleak profit picture will reduce the prices of those limited number of shares that can be traded on the exchanges, but most investors have no idea of the future profitability of the listed SOEs. Beijing's attempts to prop up the market will ultimately mean a sharper fall in prices when the bubble breaks. A better strategy for protecting investors is to create real value by getting the government out of the capital markets and by privatizing SOEs.
If SOEs were transformed into private companies in which individuals held saleable shares, the stock market would reflect more accurately the present values of the listed companies, and price-earnings ratios would return to normal levels. Chen Mingxing, senior researcher with the State Information Center, recognizes that fact and has recommended more rapid ownership reform. According to the China Daily's Business Weekly, "Chen said that the government should leave the adjustment of share prices to market forces, but put more effort into establishing a marketplace that is just, fair and transparent, and reforming the ownership systems at the listed companies."
By failing to create real capital markets, Beijing is missing the opportunity to take advantage of the gains to be had from specializing in ownership and risk bearing. The socialization of risk under the current system reduces incentives to innovate and create wealth. The value of firms is below what it could be if capital were free to flow to its highest-valued uses -- and there is no way to discover those uses without competitive markets -- which depend on private property rights.
Privatizing state-owned banks and allowing interest rates to be set in private capital markets would depoliticize the allocation of bank credit and increase invest-ment returns to the private sector. Allowing both Chinese and foreign investors access to China's capital markets would put China's vast pool of private savings to better use than they are now.
The benefits to China and to foreigners from liberalizing the financial sector are great: China would achieve a more efficient use of its capital and attract new investment, its people would have an important part of their human rights -- the right to own property -- protected by law and foreigners would be able to deal with private firms and offer more options to China's savers.
Improving capital freedom by securing property rights and liberalizing capital markets and capital flows will increase wealth and increase the demand for foreign goods, services and investment. As China's internal markets expand, so will its external trade. Increasing economic freedom is a win-win strategy for both China and her trading partners.
Free trade and privatization can help normalize China and transform it into a modern economy and a civil society under the rule of law. China's accession to the WTO will help move it in the right direction. The US, as the world's dominant power, must not lose sight of the long-run benefits of a firm commitment to market liberalism and capital freedom.
James A. Dorn is a China specialist at the Cato Institute.
The bird flu outbreak at US dairy farms keeps finding alarming new ways to surprise scientists. Last week, the US Department of Agriculture (USDA) confirmed that H5N1 is spreading not just from birds to herds, but among cows. Meanwhile, media reports say that an unknown number of cows are asymptomatic. Although the risk to humans is still low, it is clear that far more work needs to be done to get a handle on the reach of the virus and how it is being transmitted. That would require the USDA and the Centers for Disease Control and Prevention (CDC) to get
For the incoming Administration of President-elect William Lai (賴清德), successfully deterring a Chinese Communist Party (CCP) attack or invasion of democratic Taiwan over his four-year term would be a clear victory. But it could also be a curse, because during those four years the CCP’s People’s Liberation Army (PLA) will grow far stronger. As such, increased vigilance in Washington and Taipei will be needed to ensure that already multiplying CCP threat trends don’t overwhelm Taiwan, the United States, and their democratic allies. One CCP attempt to overwhelm was announced on April 19, 2024, namely that the PLA had erred in combining major missions
On April 11, Japanese Prime Minister Fumio Kishida delivered a speech at a joint meeting of the US Congress in Washington, in which he said that “China’s current external stance and military actions present an unprecedented and the greatest strategic challenge … to the peace and stability of the international community.” Kishida emphasized Japan’s role as “the US’ closest ally.” “The international order that the US worked for generations to build is facing new challenges,” Kishida said. “I understand it is a heavy burden to carry such hopes on your shoulders,” he said. “Japan is already standing shoulder to shoulder
Former president Chiang Ching-kuo (蔣經國) used to push for reforms to protect Taiwan by adopting the “three noes” policy as well as “Taiwanization.” Later, then-president Lee Teng-hui (李登輝) wished to save the Chinese Nationalist Party (KMT) by pushing for the party’s “localization,” hoping to compete with homegrown political parties as a pro-Taiwan KMT. However, the present-day members of the KMT do not know what they are talking about, and do not heed the two former presidents’ words, so the party has suffered a third consecutive defeat in the January presidential election. Soon after gaining power with the help of the KMT’s