Global and Domestic Chinese Stocks - Term Paper Example

Number Semester Global and Domestic Chinese stocks and markets performance Introduction The economy of China performance from the 1980s has been tremendous. According to IMF statistics, China is on the point of overtaking U.S and be the biggest global economy in PPP abbreviated as Purchasing Power Parity. This is incredible by the fact that its GDP was not exceeding 10% of US in 1980. In terms of PPP, it will be twice the GDP of US by the year 2035 on condition a mean rate of growth is maintained at a minimum level double the one of US. The stock market of China was established of 2 domestic stock exchanges. These stock exchanges are as follows: Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE). The stock market has grown rapidly over the years from the commencement of big firm’s addition in the last few years. Moreover, at the present more than 80% of the overall capitalization of Hong Kong Stock Exchange (HKSE) market that abides to the US rules and regulations and is open to the outside investors. This is in consistence of China as a mainland creating a market of H share. Putting together the listed firms on the list and in trade in these 3 exchanges, the stock exchange of China is the 2nd biggest worldwide, just following the markets of US equity. On the other hand, the equity market of China has become substandard, in particular in comparison to the GDP growth. In December 31, 1991 since as per December 31, 1990 there was barely any listed stock. Ironically, the composite of Shanghai has the most terrible performing index globally. The big question here is; how is it that the world rapidly evolving economy with a realistic growth rate factor of GDP being 8 since the year 1991, gives a bad performance in the stock market. I can say not much research on this has been done to address this big question. This is then, is the aim of this paper. When USA had problems, investors began searching for new markets, in which there would be high probability of earning cash. In the last 30 years China has shown growth economically, though its stock market shows bad results in performance. Consequently, this has caused attraction to quite a number of investors. In spite of its quick growth economically, Chinese stock market fails to show any significant improvement. Moreover, Chinese stock market got particular features that ought to be done analysis and assessment by those wishing to invest. The stock market of China was no go zone for a given period due to the unique characteristics of its market that had cut down its market integrity. I believe this market has been influenced by the globalization processes and so might be isolated easily from the international markets. Following assessment on trend of China stock market and factors influencing this stock market, it’s easy to conclude the integration of China stock market. This way we can consider external or internal aspects affecting the indices of China. Subsequent to financial crisis worldwide the majority of global stock market indices declined. This financial crisis was widely spread and systematic in all worldwide stock markets. From this effect as an external factor, Chinese stock market underwent a big fall. This is despite the fact that most global markets have bounced back after being in a better level before the crisis. This thus means recovery of Chinese stock market is not fast enough to pull through swiftly. Aim: To make a complete analysis of economics aspect influencing Chinese stock market and the trending of the indices of Chinese stock market. 2. Literature Review 2.1 Review the paper titled: The best performing economy with the worst performing market This paper is identical to my paper in aspect of China’s stock market discussion, in showing it is vital to note that this market and its growth vary from the other worldwide and domestic markets. This is the reason Chinese stock market has exceptional characteristics. In accordance to Wong (2006), differentiating 3 distinctive characteristics of Chinese stock market that resulted to its fast growth is interesting and unique. However my paper will check on the governance and ownership of the China stock exchange. This is where the national government mostly utilized the stock market as a vehicle of fundraising where it funded enterprises owned by the state. This resulted to the majority of enterprises on the list being controlled by the state with just about 33.33% of the equity capital of enterprise being sold to private shareholders in the IPO abbreviated as Initial Public Offerings. Secondly, Chinese stock market grew through a reticent fiscal management. This way my paper will lay focus on the ownership structure and stock firm performance. 2.2 Review the paper titled: Price difference between A-share and H-share in segmented Chinese Stock markets: influencing factor analysis using cluster analysis and panel data model This paper is identical to mine in that it checks how the government has influence the performance and ownership of the stock market. Fiscal despotism was formed by blend of governmental measures and flow of capital controls on global wealth the central government imposes to reduce possible competition in various monetary benefits. Thirdly, Chinese stock market was created in a fragile official structure that gave little protection to the shareholders. The other significant similarity between my paper and this is that both used panel data model in analysis. My paper differs from this in that this focuses more on the different kinds and features of Chinese shares. According to Malkiel (2007), the most distinct characteristic of Chinese stock market is different kinds of China’s share in an alphabet soup. At this junction, more focus is laid on 3 most imperative kinds. There is the A share accessible for buying by nationals of China, although so much restricted to only overseas nationals that have obtained a Qualified Foreign Institutional Investor abbreviated as QFII quota. Therefore, the market of A-share has been in actual fact blocked from foreign investors and its worth is for the most part influenced by the individual investor actions of China. “A” shares are sold and bought on the stock exchanges of Shanghai and Shenzhen (Stock Exchanges). “B” shares – which are possessed more often than not in terms of HKD or in USD – were at first intended just investors from outside countries, other than from March 2001 retail domestic investors were permitted to buy and sell these shares also. Then there is the popularly known H share that is the Chinese companies stock that is listed on the Stock Exchange of Hong Kong and is in agreement of the current statements of accounting in accordance with global standards of accounting. The H shares are accessible to the worldwide community of investors. Despite the fact that the nationals of China have reduced limitations to a certain level, there is just restricted chance for nationals of China to invest in overseas markets and for global investors to carry out transaction using the market of” A “share. This stock market segmentation leads to making the market of China exclusive. 2.3 Review the paper titled: China’s stock market trends and their determinants and analysis using market indices This paper is similar to my paper in that it’s analyzing the market trends and determinants of the China stock market. According to Luo et al (2009) stock market analysis of China demonstrated anomalies presence in stock market of China. The author, together with prior academic authors, also concentrated on the exceptional stock market structure of China. This stock market has undergone a fast development and has a vital role in the development and growth of the economy of China from the start of the Shenzhen and Shanghai Stock Exchange in the early years of 1990s. However my paper shifts from this paper in that it checks more on the stock market ownership and performance of this China stock market. In the late years of 1990s, companies on the list of the stock market were largely big enterprises owned by the state otherwise abbreviated as SOEs, with the exception of over 50% fifty of their shares that would not trade and ought to be detained by the government due to the policy of the government on proprietorship constraints. By the end of 1990s, even more private companies were put on the list of stock market. Conversely, the stock market of China is still immature and underdeveloped. 3. Estimation Methodology The provision of Empirical Findings helps in presenting the descriptive statistics for the dependent and independent variables used in the present study. The Empirical Findings helps in the identification of suitable variable critically analysed in research using set of statistical methods, determining the relation between variables, analysing data through descriptive analysis and drafting results of the analysis. As defined earlier in the chapter the research strives to obtain relationship between ownership structure and firm performance in Global and domestic stock market of China. All these areas are discussed below with variables identified, specific empirical model implemented and concluding empirical results presented. Panel data is used to analyse the impact of ownership structure on Chinese stock market firm performance. Fixed effects regressions models are employed. The analysis is done using two measures of performance including Tobin’s Q and return on assets (ROA). The impact of Stock Market specific variables such as leverage, GDP growth and firm size, as well as corporate governance variables such as board size, number of executive directors on the board and number of independent directors on the board are controlled for. The empirical model is used to examine the relationship between ownership structure and firm performance in GCC countries, using the following 2 equations: Tobin’s qit = α it + β1it Board size it + β2it Executive directors it + β3it Independent directors it + β4it Managerial ownership it + β6it Government ownership it + β7it Institutional ownership it + β8i foreign ownership it + β9it Concentration ownership it + β10i Size it + β11it Leverage it + β12it GDP growth it + ε it (1) Where variables: The dependent variable (Tobin’s q) is the ratio of the book value of total assets minus the book value of equity plus the stock market value of equity to the book value of assets. Independent variables are board characteristics, ownership structure and financial characteristics. See Table 2 for exact definitions for variables. ROAit = α it + β1it Board size it + β2it Executive directors it + β3it Independent directors it + β4it Managerial ownership it + β6it Government ownership it + β7it Institutional ownership it + β8it foreign ownership it + β9it Concentration ownership it + β10it Size it + β11it Leverage it + β12it GDP growth it + εit (2) Where variables: The dependent variable (ROA) is the Net income/Total assets. Independent variables are board characteristics, ownership structure and financial characteristics. The philosophical context of the research design is Positivism. According to Salkind (2010), under Positivism doctrine, scientific process of human reasoning is the most suitable method of research design. The two main ingredients of Positivism are experience and transparency (Gartrell and Gartrell, 1996). The transparency is the extent to which the data can be verified. The application of empirical research design requires developing a robust empirical model. This empirical model will be responsible in measuring the relationship between variables under consideration in the research and a suitable set of historical data extracted from trusted sources. These are the two main pillars of empirical research design according to Sorenson (2002). 4.0 Summary statistics for the Data The objective of the research design is to concentrate on the ownership structure of Domestic and US based Chinese Stock Markets. For the purpose of clarity and simplicity, a sample size of Domestic and US based Chinese Stock Markets. The population sample has active equity market and sample comprised of stocks representing both the 2 markets in different places. Our sample includes listed Chinese stock exchange firms from 2006 to 2013. The data analysis is performed by using SAS that has comprehensively produced descriptive analysis of the data showing statistical analysis of the variables under consideration and measuring coefficient of variables being considered in study. The data analysis is expected to produce meaningful outcomes that would make eminent contribution in economic literature and market shared governance structure through cross-sectional analysis approach. Read More