Painstaking governance reforms the better way for China to 'support' its stock market

Many Chinese investors lost their shirts in the stock market recently. Not only do they need to overcome greed and fear, but they should also learn to be a bit more patient. A more rational investment horizon is measured in years, not weeks or months.

A good role model is Beijing - the extraordinary investor of our age. From 1978 to last year, the Chinese economy has grown by a factor of more than 170. From a low base, its star performer, Shenzhen, has multiplied almost 10,000 times. This is all the more remarkable when you consider Beijing started with very little capital. As the ultimate entrepreneurial state, Beijing leveraged outside capital, initially from Hong Kong, to kick-start its economic renewal.

This was achieved partly by pruning state-owned enterprises, which once dominated the economy. Many were closed or privatised. Replacing them are private enterprises, which now constitute the bulk of the economy, except in selected sectors such as resources and financial services, which remain strongholds of the state.

Guangdong and Zhejiang provinces, with the most vibrant private enterprises, have grown more than 300 times since the late '70s. By contrast, the state-dominated economy in the northeast continues to stagnate. In this next stage of growth, Beijing is pushing for innovations through start-ups. While they may well provide new impetus for growth, there are significant values in Beijing's existing "portfolio" waiting to be realised. Thus, it may achieve surer growth through the following steps.

First, improve governance of state-owned enterprises. While state-owned, these enterprises are often hijacked by their managers for their own gains. Recent audits show widespread leakages of values to crony companies controlled by or related to these managers. The real issue, then, is not ownership but governance and management. Top management are often political appointees, not always the most qualified managers.

In contrast, the Singapore government acts as a professional institutional investor to maximise the value of its shareholdings. It appoints the best men and women to lead its government-linked companies, quite often foreigners. These companies - Singapore's state-owned enterprises - operate like private companies.

China's state-owned enterprises are usually only half as efficient as their private counterparts. If they could be more efficiently managed, their market values would see marked increases. By improving the governance of these firms, Beijing will fulfil its fiduciary duty for the people to realise value for their benefits. Just as important, instead of abusing their market power, from banking to telecommunications, the state-owned companies must be regulated to provide quality services at competitive prices - to be catalysts, not hindrances, to the nation's economic growth.