Macroscope | Politics to blame for China stocks’ lost decades
Politically connected firms more likely to falsify accounts but less likely to be punished
The huge and puzzling gap between China’s great long-term economic growth and the terrible performance of its stock market is significantly explained by politics.
A new study finds a strong link between political connections and initial public offerings in China, one which is doing the average investor no favours.
Hong Zhou and Guoping Li of Beijing’s Central University of Finance and Economics find in a paper that 74 per cent of private firms which get to list under mainland IPO rules are politically connected. What’s more, those politically connected firms are also more likely to report “significant deterioration” in financial performance after listing.
“The widespread existence and ubiquitous importance of political connections in China’s stock markets suggests that to some degree, China’s stock markets have been regulated on a political connections-based regime, which may explain the poor performance of China’s stock markets,” the authors write in a paper published last month.
While the central government has come in for much press on its heavy-handed approach to going after those it deems responsible for last year’s stock market slump, the truth is that China has been disappointing equity investors for decades.
The numbers are especially striking when compared to the great growth in China’s economy.