Research Report by
Sheldon Gao, PhD.
Senior Director, Dow Jones
DOW JONES INDEXES
CHINA STOCK MARKET IN A GLOBAL PERSPECTIVE
China’s stock market has experienced amazing growth since establishing its two
exchanges in 1990, although the growth has been uneven and irregular, and the
market remains in the early stages of its development. This report seeks to identify
the key characteristics of China’s market and how they combine to form the most
dynamic and intriguing developing market in the world.
The current structure of China’s market is one of its key obstacles to further develop-
ment. There are very few stocks that would fit the definition of “blue-chip” trad-
ing on China’s mainland exchanges. Whereas most developed markets are domi-
nated by a limited number of large-cap stocks, China’s market is cramped by a
multitude of small-cap stocks. This feature allows for increased speculation and
higher turnover for both investors and indexes, among other problems.
A related matter is the reliance of China’s market on external expansion, that is,
expansion through the issuance of new shares rather than the appreciation in
value of existing stocks. Since these shares generally do not experience sustained
growth, often because of market manipulation, they contribute to the dominance
of smaller size stocks in China’s market. Ultimately, the current structure is a
major obstacle to the creation of viable index-related products in China.
Another issue is the fact that, despite the tremendous growth of the stock market,
China’s companies are not operating at a high level of profitability. They are
plagued by poor earnings and low dividend yields. China’s companies need to
increase their profitability if they are to compete in global markets.
Finally, government seems to have too much influence on the market. It keeps a tight
control on the issuance of IPOs, and, as a result of widespread government hold-
ings, many listed companies in China