Stock Market of China and USA - Essay Example

Stock Market of China and USA Comparsion and Contrast America is reaping what it has sowed over the last two decades. So convinced did successive US administrations become that the stock market was the only efficient way to allocate capital in the economy that they blew away virtually every safeguard within the financial system. Financial systems, just like political systems, require checks and balances to ensure that no part of the system becomes too powerful. But US policy-makers, driven by an ideological belief in the virtues of unfettered free markets, sat idly by as capital markets, and the investment banks that dominate them, systematically eroded every attempt to control them.For 20 years America has been borrowing unprecedented quantities of money to play its stock-market casino. Even after the latest falls, the US stock market is worth 120 per cent of GDP, compared with 40 per cent for much of the 1980s, and far above its previous peak of 72 per cent in 1972. Meanwhile, the US trade deficit stands at a record 4 per cent of GDP; no country has ever been able to sustain a deficit on this scale for long. The US currently absorbs 64 per cent of all global capital flows to finance its deficit. Capital has been sucked out of the rest of the world, including many developing countries, to enable America to indulge itself. It is no coincidence that Citicorp, the giant US bank, has its largest branch outside New York in Buenos Aires. For years Americans deluded themselves that they were actually making this money rather than borrowing it. With the ever-rising stock market fuelling the illusion of wealth, they embarked on an orgy of personal spending, building up an average credit-card debt of $7,000 per household and allowing the proportion of their incomes saved to fall below zero for the first time since the 1920s. But now the casino has closed for business, and America finds that it has run out of chips. And then there is China. This year its economy will grow by 8 per cent, and with the vast majority of its GDP dependent upon domestic trade, it remains well insulated from the downturn in the global economy. Moreover, earlier this month China joined the World Trade Organisation, a momentous event utterly eclipsed by events in America. With the United States spiralling into recession and distracted by its war on terrorism, much of Asia will now look to China to lead it out of its slump. A new economic superpower may be about to emerge. The embryonic Chinese stock markets have attracted much attention because of that countrys rapid economic growth and the desire of foreign investors to participate in potential growth at the ground floor level. Beginning in 1978, the goal of Chinas economic reforms was to transform the economy from a centrally-planned economy to one that was market-based. Accordingly, state-owned enterprises were authorized to issue a predefined mix of five classes of shares: shares owned by the state, legal person shares, employee shares, class A shares, and class B shares. A small group of Chinese firms also were authorized to issue shares that are listed and traded overseas, such as H-shares traded in the Hong Kong Stock Exchange and N-shares which are traded on the New York Stock Exchange. State shares, legal person shares, and employee shares are not tradable. About two-thirds of all outstanding shares are not publicly tradable. Only class A and class B shares are authorized for public trading on the two major Chinese stock exchanges: the Shanghai Stock Exchange (SHSE) and the Shenzhen Stock Exchange (SHZE) which were established on December 19, 1990, and April 3, 1991, respectively. Whereas class A shares were open for trading upon the establishment of the two exchanges, class B shares were offered for trading some years later (Nixon). According to the Shanghai and Shenzhen Stock Exchange Fact Book (2004 edition), the overall Chinese stock market capitalization has increased from RMB 10.92 billion on December 31, 1991, to RMB 1752.93 billion on December 31, 1997, and further to RMB 3705.55 billion as of December 31, 2004. Despite this tremendous growth, the Chinese stock markets still lack the depth and maturity of stock markets in developed countries. As observed by Green (2003), Chinas market capitalization as a proportion of its GDP was about 45 percent, whereas the corresponding figure for the United States was over 300 percent. Moreover, Chinese stock markets are influenced by exogenous shocks resulting from the governments market intervention policies and from sudden changes in governmental stock-market regulation. As discussed by Su and Fleisher (1998) and Green (2003), these shocks result in greater speculative activity on the Chinese stock exchanges, resulting in significantly higher stock market volatility. For the purposes of this research, we analyze the index of daily stock prices for all class A and class B shares trading on both the Shanghai and Shenzhen stock exchanges. We analyze daily data for the Shanghai stock market index for class A shares from December 19, 1990 to June 27, 2005, representing a total of 3567 observations, and for class B shares from February 21, 1992 to June 27, 2005, representing a total of 3268 observations. Similar data for the index of class A shares trading on the Shenzhen exchange are analyzed from April 3, 1991 to June 27, 2005, representing a total of 3476 observations, and for class B shares from December 19, 1995 to June 27, 2005, representing a total of 2295 observations. This attempt to blame the terrorist attacks does not bear scrutiny. America has been heading for a nasty recession all year. The cynical timing of these latest company announcements adds greatly to the short-term dangers, fuelling investor panic, but they make little difference to Americas long-term prospects. The state of the US economy is dire, and it is dire today for exactly the same reasons as were true three weeks ago. America has only itself to blame for the predicament it finds itself in. It is paying the penalty for two decades of uncritical faith in the stock market. For the second time in 100 years, it has sacrificed economic stability to the greed of the financial community. Surveying the carnage wreaked upon the US economy in the aftermath of the 1929 stock market crash, Franklin Delano Roosevelt observed, `We have always known that heedless self-interest was bad morals; we know now that it is bad economics. But there are some lessons, it seems, that we are destined never to learn. An American recession need not cause the whole world to crash Economists have long warned that the world economy could not fly for ever on the single engine of American demand. A one-engined plane is more likely to crash. With its housing market blighted and its consumers growing fearful, America now faces a mounting risk of recession. The good news, however, is that the world has found some powerful new engines in China and other emerging economies.The power of this new motor is startling. For several years, emerging Asian economies have accounted for more of global GDP growth than America has. This year China alone will for the first time accomplish the same feat all on its own (at market exchange rates), even if American growth holds up. Of course, this silver lining has its cloud. A sharp slowdown in China now would have much nastier global consequences than in the past, and the Chinese economy has weaknesses. But it does not look like getting into trouble over the next couple of years (article)--the period in which America looks as though it may be feeble. If China can keep flying high, it will help keep the world economy safe (Balsara). Work Cited Balsara, Nauzer J., Gary Chen, and Lin Zheng. "The Chinese stock market: an examination of the random walk model and technical trading rules." Quarterly Journal of Business and Economics, 2007. Nixon, Simon. "How America Went for Broke." Spectator 287.9034, 2001. Read More