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Trade - Editor, 28 January 2008

How Should China Business Manage Its Equity? (Part 1)



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Foreign observers are not agreed on how China business should deal with a stock market crash, but there is broad consensus amongst them that such a tragic event will indeed take place! Excessive GDP growth, run-away inflation, and popular unrest because of material shortages, are some of the common failings of the China business system that are put forward by exotic soothsayers of doom. Economists and financial wizards from countries, whose currencies China business holds in most abundance, are at the forefront of the western cacophony for financial reforms. China business as well as the Beijing and provincial governments take courteous note of all the world criticisms and suggestions, but have largely held their own counsel on such matters.

It is true that illogical stock market volatility is not a national advantage for any economy, so how can China business learn from experiences in countries with the longest histories of stock exchange disruptions? Once significant numbers of citizens own stocks, drastic changes in a stock market index can affect public sentiments, though the majority of people may continue to enjoy financial security. China business has the dual advantages of stock market support options, and a favorable local business environment. Therefore, it is possible to devise new stock exchange procedures that promote stock investment rather than stock trading.

Bringing Realism to China Business

There could be innumerable views about how China business should evolve its relationships with the stock market culture. Here are seven specific suggestions to set a round of discussions rolling:

1. Stock price, like the interest rate, could be set centrally, rather than be allowed to float at the mercy of speculators. After all, private financial institutions have not been hampered by regulated interest rates, so why cannot the same logic apply to companies that prefer equity to debt? However, management accountability for earnings guidance should be a part of the stock price regulation mechanism. This would be similar to Chair people of central banks fixing interest rates depending on their forecasts of national economies.

2. Set upper limits for ownership by all categories of stake holders, following donation guidelines for politicians and their parties in democracies. This would achieve broad participation in the ownership of China business, without the construction of monopolies and manipulative controlling interests. Sole proprietors and partners, who do not want public participation in their management decisions, should raise loans against collateral, in place of equity from a stock exchange.

3. Limit the abilities of spurious stock traders and stock brokers from other countries, to meddle with stock prices in any domestic stock exchange. The China business sector is now large and powerful enough to dictate such terms! The interest rate in the United States should not be allowed to set stock prices for China business, though other Asian and Pacific countries accept such domination willingly. China business can also take the lead in asking its government to coordinate actions between central banks of all countries with which it has important trade links.

How Should China Business Manage Its Equity? (Part 2)

Trade

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