Controls May Hurt China’s Stock Market
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
Some mornings, I bet that the chairman of the Federal Reserve, Ben Bernanke, wakes up wishing he were the economic tsar of China, instead of America. Imagine the joy of presiding over a controlled economy — how effective it must be to sentence to death any corporate executive who is caught taking bribes, which happens rather frequently, or forcibly remove high-pollution enterprises to remote regions where no one will notice the foul air.
It is clear that this authority, bestowed on China’s central planners, has contributed to the country’s economic progress over the past thirty years. But there are also difficulties that come with all this control.
Take a look at the Chinese stock market, which is down 50% to 60% from its high last October. Many had hoped that the ebullience of the games would produce an Olympic rally, but the emotional high was limited to human waves rocketing around the Bird’s Nest stadium.
In an attempt to prop up the sagging stock market and reward stock buyers for holding onto their shares, the China Securities Regulatory Commission decreed last Friday that companies listed on the exchange that want to refinance must pay out at least 30% of their income to shareholders in the form of dividends. This is 10 percentage points higher than the former threshold of 20%.
Since public companies in developed countries often pay out as much as 50% of income via dividends, China’s authorities consider the current 29% average domestic payout too thin.
The China Daily, the official local English-language newspaper, said, “the new rule … will obviously improve the long-term investment environment. It will stop listed companies from raising funds insatiably from the market while not properly rewarding shareholders.”
But the China Daily and Chinese officials are overlooking the important relationship between growth and payout. China, and most of its companies, are growing at better than 10% annually. Companies enjoying booming businesses and ample reinvestment opportunities have historically paid little or no dividends to shareholders, instead plowing income back into new factories or new inventions. Dividends are a sign of maturity, and not always welcomed.
In 2003, for example, when Microsoft announced its first-ever payout, it was taken as confirmation of a slowdown in the company’s growth. Google and eBay don’t pay out dividends because they are growing too fast. And even more significantly, they don’t need to — people hold their stocks in order to participate in that growth.
It is a sign of immaturity that the Chinese consider higher cash payouts crucial to improved stock market performance. It is also a sign of how difficult it is for a centralized government to keep its hands off its capital markets. Maybe the reason that the Chinese people take a short-term view of their stock markets is that the long term in China has rarely been very satisfying.
Still, there are certainly some policies that America would do well to borrow. For instance, the cost of riding the gleaming new subway in Beijing is only 2 yuan, or about $0.30 a person. Guess what? People ride the subway. Compare that to the $2.00 fare that New Yorkers pay for a trip on our own metro. Not only is the experience far less appealing — noisier, dirtier, and chancier — it is much more expensive.
Of course, New Yorkers earn much more than the citizens of Beijing. Still, the idea of promoting public transportation through low prices (and excellent service) seems elementary. What better way to reduce air pollution and lessen our dependence on imported oil than to encourage people to leave their cars at home?
Of course, Beijing’s commitment to the subway is undermined by its policy on taxi fares, which are set incredibly low. A trip around the city costs, on average, just 11 yuan, or less than $2. Such inexpensive fares are possible in part because of the government’s price controls on oil products. Because the government has chosen to protect its citizens from the rough and tumble of skyrocketing oil prices, there is no sign locally of the conservation measures being adopted in the U.S. and elsewhere. These controls, besides allowing for cheap tax fares, have also led to energy shortages across the country.
Now that the Olympics are over, the city of Beijing is studying the mixed impact of the games on their hotel industry. As of July 12, the latest data available, 78% of the five-star hotel rooms available in Beijing were booked during the Olympics. Hotel operators were described as reasonably happy with this outcome, but owners with rooms in the four-star category were less pleased, with an average of only 48.5% of the rooms booked.
While these are strong hotel booking figures, they could have been a lot higher. It doesn’t seem to have occurred to anyone that exorbitant prices might have discouraged visitors. During the games, five-star hotels charged 3.6 times more than the year before, while the rates for four-star hotel rooms were hiked 4.6 times higher.
In a bid to overcome the occupancy challenge, a new upscale hotel that is about to open in Beijing is positioning itself at the top of the heap from the start. It is called the Pangu 7 Star Hotel. Clever, right? The same marketers have lined up some clients on Wall Street. Any day now they expect to launch the Merrill Lynch Triple-A Bonds.
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