South China Morning Post
Comment›Insight & Opinion
Winston Mok says stock market turbulence is best tackled by leaders continuing to push for structural reform
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.
Second, help private enterprises develop more easily. Although the state may not have direct ownership in private companies, it collects corporate and personal income taxes. Most importantly, private enterprises provide most of the employment. Without the wealth generated by them, how could land value have risen so rapidly – another key revenue for the state? The state can participate more directly by levying inheritance taxes.
From the experience in the past 30 years, Beijing recognises that China’s dynamic private enterprises will define the economic destiny of the nation. Hence, a market-driven economy under the rule of law was enshrined in the leadership’s third and fourth plenums. Financial reforms should ensure that worthy companies get the financing needed to support their growth.
Third, reduce crony capitalism. Not all private enterprises are productive. From resources to real estate, friends and families of corrupt officials take more than they give to the economy. For every project unfairly claimed by these cronies, many growth opportunities were squandered. For sustained growth, subtraction may be just as important as addition. When weeds are pulled out, healthy plants bearing good fruits can flourish.
Crony capitalism is what trapped many of Singapore’s neighbours in middle income, which Singapore has overcome through the rule of law. Constraining the power of local governments, making them accountable in open processes, is key to breaking the “power-elite” alliances. In addition, the latest move to go after bribers, and not just corrupt officials, is important to keeping these cronies in check. Beijing must cleanse its portfolio of these toxic “assets”; they are really liabilities that hurt the economy and society.
With the initiatives above, Beijing will also facilitate innovations. A level playing field free from cronyism is where the spirit of enterprise will thrive. Procurement of state-owned enterprises can be directed to innovative enterprises rather than cronies.
No government can prop up the market above fundamental values. Nor will undervalued stocks long remain unrealised by the market. To build fundamental values, it boils down to good governance and good management enabled by the rule of law. Thus, the most important way for Beijing to “support” the stock market is to remain steadfast in the structural changes it has been pushing.
Winston Mok is a private investor, a former private equity investor and McKinsey consultant. An MIT alumnus, he studied under three Nobel laureates in economics