Since first coming to power in 2012, Xi Jinping has preached economic reform as the way to achieve “the Chinese Dream.” Some of the reform measures have been aimed at deepening China’s financial markets and giving stock markets a greater role in financing corporate investment. Considered home to the deepest financial markets in the world, the U.S. may have just the blueprints for the kind of stock market development the Chinese government is looking to foster. Below is an overview of both the U.S. and Chinese stock markets with highlights on some of the unique differences.
- The Chinese stock markets are much younger than the U.S. markets, with the Shanghai Stock Exchange and the Shenzhen Stock Exchange going back decades, while the New York Stock Exchange goes back centuries.
- The U.S. stock exchanges are larger than the Chinese exchanges; the NYSE has a market cap of $29 trillion, while the Shanghai Stock Exchange has a market cap of $4.7 trillion.
- Stock markets in China are not heavily connected to the economy at an individual and corporate level, whereas in the U.S., the markets are very connected.
- Chinese companies are also less likely to use equity financing than U.S. companies, instead of relying on bank loans and retained earnings.
- Institutional investors play a dominant role in U.S. markets, while Chinese markets are dominated by retail investors.
- Chinese markets are primarily owned by Chinese investors, with just over 5% of shares owned by international investors; U.S. markets have a mix of local and international investors.
China’s stock markets are relatively young compared to the U.S. markets. While the Shanghai Stock Exchange (SSE) dates back to the 1860s, it only reopened in 1990 after being closed in 1949 when the Communists took power. The Shenzhen Stock Exchange (SZSE) also opened that same year.
While the Hong Kong Stock Exchange (HKG) was founded in 1891 (and Hong Kong operates as a politically autonomous region from mainland China), it first began listing the largest Chinese state-owned enterprises in the mid-1990s.
By comparison, the U.S. stock market is more than two centuries old, with the New York Stock Exchange (NYSE) evolving from the signing of the Buttonwood Agreement on Wall Street in 1792. It went through several iterations before emerging in 1863 under its current name, the New York Stock Exchange (NYSE).
Since that time, a number of other stock exchanges have risen up in the U.S. The Securities and Exchange Commission (SEC) lists 28 registered national securities exchanges, the second most important exchange after the NYSE being the Nasdaq, established in 1971.
The Stock Exchanges
- Market Capitalization: $29 trillion
- Number of Listed Companies: 2,300
- Electronic Order Book (EOB) Value of Share Trading: $14.4 trillion
- Market Capitalization: $10 trillion
- Number of Listed Companies: 3,300
- EOB Value of Share Trading: $16 trillion
Shanghai Stock Exchange
- Market Capitalization: $4.7 trillion
- Number of Listed Companies: 1,561
- EOB Value of Share Trading: $8 trillion
Shenzhen Stock Exchange
- Market Capitalization: $3.5 trillion
- Number of Listed Companies: 2,268
- EOB Value of Share Trading: $11.5 trillion
Hong Kong Stock Exchange
- Market Capitalization: $4.5 trillion
- Number of Listed Companies: 2,477
- EOB Value of Share Trading: $1.9 trillion
Role in the Economy
Despite being some of the largest exchanges in the world, China’s stock markets are still relatively young and do not play as prominent a role in the Chinese economy as America’s do in the U.S. economy.
Further, whereas U.S. companies are heavily dependent on equity financing, in China only a small percentage, often quoted around 5%, of total corporate financing is funded by equity. Chinese corporations rely much more heavily on bank loans and retained earnings.
With regard to investors, equities are a large part of household wealth in the U.S., with around 52 % of the population owning stocks. In China, property, wealth management products, and bank deposits make up a greater proportion of their investments with only about 7% of Chinese owning stocks.
Stock markets evidently play a much larger role in the U.S. economy than the Chinese economy at both the individual investor and firm levels. While this means that China’s economy remains relatively protected from disruptive ups and downs in the stock market, it also means that companies remain limited in financing opportunities, a factor that can inhibit overall economic growth.
Tool for Economic Growth?
Whereas the U.S. economy plays an important role in raising investment funding for its corporations, China’s stock market has often been likened to a casino, dominated by unsophisticated retail investors gambling their wealth rather than looking for long-term sound investments.
Some studies indicate that increasing the proportion of professional and institutional investors relative to ordinary retail investors helps to improve the quality and efficiency of stock markets. This seems to make sense as professional investors are much more adept at analyzing fundamental values instead of being motivated by fear and irrational exuberance.
While the proportion of U.S. equities managed by institutional investors stood at 62% in 2019, 99.6% of total investors in China’s stock markets were retail investors.
The unsophisticated nature of the majority of Chinese investors has been one reason that China’s stock markets have been likened to a crazy casino rather than a tool for economic growth. As China is looking to expand the depth and role of its stock markets it is going to need to change this perception in order to instill greater confidence from more professional types of investors, especially if it wishes to open its capital account to attract foreign investors.
Openness to Foreign Investment
Unlike the U.S. and every other major stock market in the world, the Chinese markets are almost entirely off-limits to foreign investors. Despite easing capital controls allowing a limited number of foreign investors to trade on the Shanghai and Shenzhen exchanges, only 5.4% of shares are foreign-owned.
China’s stock shares are divided into three separate categories: A shares, B shares, and H shares. A shares are primarily traded amongst domestic investors on the Shanghai and Shenzhen exchanges, although Qualified Foreign Institutional Investors (QFII) are also allowed to participate by special permission. B shares are primarily traded by foreign investors in both markets but are also open to domestic investors with foreign currency accounts. H shares are permitted to be traded by domestic and foreign investors alike and are listed on the Hong Kong exchange.
Even though China's stock markets are becoming more open to foreign investments, international investors remain wary of jumping in.
The Bottom Line
Despite having extremely large total market capitalizations by international standards, China’s stock markets are still quite young and play a less significant role than they do in the United States. As equity financing can be a significant factor for economic growth, China has much to gain from fostering further development of its markets. Giving greater access to foreign investors is a step towards deepening its financial markets, but the main hurdle will be overcoming investors’ lack of confidence.