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China's stock exchanges and 'Millionaire Yang' mark 30 years of pride, fascination with Communist-style capitalism

Zhang Shidong and Daniel Ren in Shanghai shidong.zhang@scmp.com
·10 min read

Yang Huaiding was an unknown 40-year-old warehouse keeper at a Shanghai steel factory earning 51 yuan (US$7.80) a month in 1990. Today, he is fondly known as "Millionaire Yang" in the folklore of China's stock market.

The Shanghai native made his first million from dabbling in the initial batch of eight stocks soon after the local bourse came into operation in December of that year, prompting him to devote himself to full-time trading.

"You could say the stock market offered me a new career path," said Yang, who at 70 has experienced at least three boom-and-bust cycles - the 1997 Asian financial crisis, the 2008 Lehman Brothers collapse, and the 2015 domestic market crash. "Those hefty profits in the early days inspired me to make the switch."

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The birth of China's stock market 30 years ago is a source of pride and fascination for the nation and its participants. At US$10.6 trillion, the market capitalisation has grown from scratch to become the world's second largest in that span, behind the US whose history on Wall Street dates back to May 1792. Yang's rags-to-riches tale is also an inspiration to 175 million individual investors who dream of landing the same windfall.

China's experiment with the stock market came late in 1990, when the Shenzhen stock exchange came into operation on December 1 and Shanghai got its own 18 days later. It was a mechanism to convert abundant household savings into cheap capital, more often than not for cash-strapped state-owned factories on the verge of bankruptcy.

Shanghai, the birthplace of banking group HSBC Holdings and insurer AIG Group, was given the nod over Beijing for political reasons. The capital was still reeling from the student-led demonstrations that preceded the Tiananmen Square crackdown in June 1989.

The rented ballroom at the Astor House Hotel, on the Shanghai bund overlooking the Huangpu River, was the exchange's first trading floor, put together by then-mayor Zhu Rongji and his team barely a year after being assigned the task. It was also there that Yang scored some of his early stock winnings.

Yang Huaiding, one of China's pioneer stock traders, is a source of inspiration for the nation's 175 million retail investors. Photo: Baidu

"I was confident that shares of Shanghai Vacuum Electron Device were a good buy at that time because they were undervalued based on the cash dividend stream," said Yang, who bought thousands of shares in the state-owned television tube company at 80 yuan, and got out at 800 yuan before the stock hit 2,000 yuan.

"It was a gambling game 30 years ago," he recalled. "Unfortunately, a lot of retail investors still treat stocks as a form of gambling today."

It was not until seven years later that the Shanghai stock exchange moved into its new building in the bustling centre of Lujiazui financial district. In its midst are the gleaming 632-metre Shanghai Tower, the world's second-tallest skyscraper, and other landmarks such as the Shanghai World Financial Center and Jinmao Tower.

A night view of the Lujiazui financial district in Pudong, with the Shanghai Tower and the Shanghai World Financial Center, and the Shanghai Stock Exchange in the middle. Photo: Imaginechina

The formation of the two stock exchanges marked the rise of China's Communist-style capitalism, and its emergence from being a local factory for global manufacturers like Apple, Nike and Coca-Cola, to an economic powerhouse in its own right. The changes cut across industries, sizes and values.

Today, there are 1,784 listed companies in Shanghai and 2,341 in Shenzhen, with a combined market value of 69.4 trillion yuan (US$10.6 trillion), surpassing the previous peak recorded in 2015, and versus 2.94 trillion yuan in 2002.

China's economic transformation has also altered the industry make-up to reflect its new economic structure. Technology and biotech companies account for 7.3 per cent of the market capitalisation in Shanghai since the Star Market was created 17 months ago. In Shenzhen, the ratio has increased to 10 per cent from 6.4 per cent in 2013.

Never mind that only two of the eight market forerunners from 1990 - Shanghai Yuyuan Tourist Mart and Shanghai Feilo Acoustics - have survived, while others evolved or were restructured. Today, China is home to three of the world's 20 most valuable companies: Tencent Holdings, Alibaba Group Holding and Kweichow Moutai.

Top 15 IPO Venues (Year to September 15, 2020). SCMP Graphics

Four of the 10 wealthiest people come from the internet sector, led by Jack Ma of Alibaba and Pony Ma Huateng of Tencent, according to Hurun's China Rich List. In its inaugural list in 1999, the ranking was dominated by industrialists and property tycoons such as Liu Yonghao and Li Xiaohua.

Such stock market riches, and the potential for more, are a magnet for global fund managers who saw a decade of dire, new-normal low returns after interest rates sank to near-zero after the onset of global financial crisis in 2008.

Global fund managers including BlackRock, Invesco and Morgan Stanley Investment Management collectively owned 2.8 trillion yuan worth of onshore stocks as of September 30, or 4 per cent of capitalisation, according to the central bank. In 2003, UBS Group made the first foreign investment in China's stocks, officially kicking off overseas inflows.

The initial trickle turned into a gush as the Stock Connect conduit fuelled inflows. The programme was first mooted in 2012 in a Shenzhen teahouse meeting between the bourse's five senior executives and Hong Kong's stock exchange chief Charles Li Xiaojia. The Shanghai connect was launched in November 2014, while Shenzhen followed two years later.

MSCI, an index compiler, included Chinese onshore stocks for the first time in 2018 by giving them a 4.1 per cent weighting in its Emerging Markets Index. At FTSE Russell, Chinese stocks took up 5.2 per cent weight in its All World Index, the largest after those from the US and Japan.

The US-China rivalry, however, has thrown a spanner in the works. More than 20 Chinese companies will be removed from their global stock and bond indices from this month by FTSE Russell, S&P Dow Jones Indices and MSCI, following a ban on trading and investing by Americans from next year.

For stock market operators, the pull and push factors have brought on additional responsibility to protect investors, said Que Bo, a deputy general manager at Shanghai Stock Exchange. As new challenges come thick and fast at home and abroad, more needs to be done to raise the bar on the quality of listing, he added.

China's two main stock market operators trailed their Hong Kong rival in tweaking rules to woo the nation's top-notch companies, some of which already trade in the US and are facing possible expulsion because of tightening audit and regulatory scrutiny.

Hong Kong revised its listing rules in April 2018 to embrace companies with no profit track record and those with dual-share class structures and unequal voting rights among its founders and common shareholders. The landmark reforms brought home this newspaper's owner Alibaba, JD.com and NetEase via secondary listings.

Bourse operators were also slow to delist the rotten apples in their fold to protect investors. Pump-and-dump schemes remain rife and a bane to the market, fomenting some of the nation's infamous stock market crashes.

"I do not buy the idea that China's stock market is a platform to support company growth or generate fortunes for investors," said Zhang Wei, a retail investor who started trading stocks in 1994. "Many small investors have lost money."

The authorities have long been criticised for being too lenient, partly to protect the interests of state shareholders. It was not until 2001 that Shanghai Narcissus Electric Appliances became the first company to be delisted. Still, fewer than 200 have since been booted out.

"Going forward, the Shanghai exchange will deepen the reforms of the key systems, such as delisting and nurturing long-term investors," said Que, the bourse official. "We'll be active to build a rule-abiding, transparent, open and dynamic capital market."

Raising the quality of listed companies is one of the major tasks assigned by policymakers to the stock-market regulator. Both the Shanghai and Shenzhen exchanges this week unveiled a new set of tougher rules for public consultation, specifying new delisting thresholds for revenue and market cap, among others.

While the Shanghai and Shenzhen exchanges have made efforts to reflect more new-economy companies in their gauges, the episode involving Ant Group remains a bitter experience for many investors in terms of sudden twists in regulations.

The nation's biggest digital payment service provider had to scrap its record-breaking initial public offering just two days before its planned debut on November 5, because of sweeping changes governing domestic online lending and anti-competition behaviour.

The race between Shanghai and Shenzhen can only heat up. The boundary used to be well-defined; Shanghai courts bigger and more established companies in the old economy, while Shenzhen nurtures smaller growth companies in fledgling industries.

Since the inception of the Star Market in July 2019, the tech board in Shanghai has taken on the mantle of market reforms. It hosted seven of the 10 biggest initial public offerings (IPO) this year, setting a model for overhauling the main board in the future.

The tech board today counts 205 companies with combined market capitalisation of 3.2 trillion yuan. Chip maker Semiconductor Manufacturing International Corp, or SMIC, its biggest IPO, is also the most valuable among them.

The Star Market allows the listing of unprofitable companies and those incorporated overseas under a registration-based system. The system puts the vetting power in the hands of the exchange, and IPO applications are evaluated based on disclosure instead of earnings projection.

Fundraising has been singled out as a major task for the stock market operators, as outlined by China Securities Regulatory Commission chairman Yi Huiman in its 2021-2025 plan. Its purpose, however, is not to bail out state-owned enterprises, but to grease the wheels of China's transition into an economy that is more reliant on technology and consumption for growth.

"The government has ramped up the infrastructure of the capital market since 2018," said Xu Kang, an analyst at Huachuang Securities. "The emphasis in this round of market reforms is the increase in direct financing to facilitate industry upgrade and transformation."

Chinese retail investors will need to "upgrade" too, said Yang, the pioneer stock trader. The days when punters could get rich overnight on the casino-like local stock market are history, he added.

"To play it safe, I only buy into blue-chip stocks like banks now for stable returns" of about 10 per cent, he said. "With my experience in trading, my advice to small investors is to buy on fundamentals and valuation, or to invest in professionally-managed funds. Stock investing is a high-risk game."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.