China’s A share market is large, deep, volatile and dominated by retail investors, of which some 7% are rumoured to be illiterate. Capitalized at US$9 trillion, it contains many companies that are severely overvalued, inefficiently run, and that spare little thought for minority investors. While many have no investor relations contacts or even websites, a great number also have no member of senior management that speaks a foreign language, which makes communication with foreign investors near impossible. Gary Greenberg, Head of Emerging Markets at Hermes Investment Management asks, should such a market become part of a benchmark for global investors?
At a US$9 trillion market capitalization, Chinese A shares should not be ignored, but clearly governance standards have to rise. However, China is in many ways a world unto itself. Most of China’s corporate, provincial, and national debt is owed to itself, and much of China A shares’ equity is owned by Chinese entities, often a municipality or a province. In fact, the most influential person in management in a Chinese company may not be part of the management at all: he (usually a “he”) is a representative of the Chinese Communist Party. As a result, conflicting loyalties are very much a factor, under the surface.