And those are trading at perennial lows, despite China's overheated, $4 trillion domestic economy, which is regarded a primary powerhouse for global recovery. The reason: Both are crammed an awful lot of smallish well-connected local players who have a fine reputation in inside trading and stock price manipulation. The market has been plagued by corruption and conspiracy.
What makes things even worse -- for investors, at least -- is the fact that the best companies in China even don't bother to offer their shares in the mainland. Instead, the country's most promising financial institutions and high-tech companies are blowing off the local exchanges entirely and opting for overseas listings in Hong Kong, New York, or London. "Chinese residents aren't getting a chance to invest in their own best businesses," says Malcolm Wood, an Asia-Pacific strategist with Morgan Stanley, baffled by this facet of Chinese capitalism.
This has led to some vehement critics at home. Western banks, these critics say, are getting into what's sure to be one of the biggest financial markets of the 21st century on the cheap. And the mainland is not short of capital. The Chinese collectively control about $2.5 trillion in household savings but have to either stuff that dough into bank deposits, that bear negative real interest now, or invest in real estate at staggering prices in bubbled domestic property market.
It would help if Beijing were to sanction more dual listings of blue-chip mainland companies in, say, Hong Kong and Shanghai or New York and Shenzhen. To get there, though, the government has to gradually unwind its massive equity holdings in the 1,400 or so companies now listed on the two mainland exchanges.
That must be done in baby steps because if the government departments and state-linked companies that hold these shares were to dump all those shares too abruptly, the markets would really tank. And the exchanges have to clean up their act. Financial reporting and regulatory oversight at the Shenzhen and Shanghai exchanges lag behind those in Hong Kong and in the West, and until that gets fixed, the smart money will stay away.
Only when the mainland has created much of an investor culture will its best companies stop departing for foreign exchanges.
