More Capital: Just What China’s Securities Markets Don’t Need

The Garage in the Hutong

China’s insurance companies, loaded with capital that needs to be invested someplace that offers either some security, relatively decent returns, or both, have now been authorized by the government to start pouring their capital into China’s A-share market.

Certainly, adding institutional investors into a market of largely unsophisticated punters could bring some much-needed stability into the markets, and would also create a class of investor theoretically able to compel better governance and transparence among listed PRC firms.

Apart from the macro-economic benefits, however, one has to wonder whether Chinese insurers as businesses are likely to benefit from the new regulation. Remember, these firms make the investments in order to secure their premiums and make a healthy profit from their investment. The abnormally high P/E valuations of Chinese issues, combined with a low level of transparency and governance, tends to argue that – in the short term at least – putting a significant portion of their capital into the A-share market will put that capital at risk. And putting too little capital in would fail to stabilize the market sufficiently to raise A-shares to investment grade.

Additionally, the government looks likely to retain controlling ownership of nearly all of the issues in the near- to medium-term, thus reducing whatever leverage the insurers would have over the companies and their governance. The government could essentially vote its shares and overrule the insurers.

What makes much more sense is to take steps to compel local securities markets to be more competitive, and give them the wherewithal to do so. Increasing the percentage of state-owned enterprises traded on the bourses, raising the limits for equity investment by insurers, and implementing (and enforcing) the highest international standards of governance (to be phased-in over a 3 year period) would do much to address the fundamental issues in the market. In the meantime, pouring institutional capital into an overpriced market with shareholders restricted to trading 30% the outstanding shares of 1,500 questionably-governed companies on a bourse that behaves more like The Las Vegas Strip than Wall Street is simply throwing good capital after bad.