Green, through his language skills and contacts among the securities industry, has mastered the universe in which China's stock and bond markets have emerged. His explanations as to how and why the bits fit together into the big picture will be extremely useful even to long-time China watchers.
One of the pleasures of this book is not unconnected to it being published by The Economist Group. Green, an up-and-coming China watcher at the British think tank the Royal Institute of International Affairs, has written extensively for the group on China, and they, in turn, have surely helped hone his sharp, lucid style.
It is certainly light years away from the clunky jargon favoured by many academics. Green is neither a banker nor a pure economist.
Although he went to the University of Cambridge, his range is similar to that covered in the famous course taught at Oxford: Politics, Philosophy and Economics. In China, looking only at orthodox economics is less useful than understanding the political and historical context and Green is very strong on that.
In order, the book covers the history of the stock markets, foreign investors in B shares and H shares, the investors, listed companies, regulators, future prospects and a look at the qualified foreign institutional investor (QFII) scheme, which has not yet been finalized as the book went to press.
Immediately noteworthy is his introduction, where he discusses a striking idea, namely that China's stock market, in its present state at least, is essentially pointless - when everyone is speculating and playing for short-term gains, a stock market has little economic benefit. It does not channel capital to good-quality firms or productive investments; it does not discipline managers; it wastes people's time.
Green's argument is that at such an early stage of its economic development, a stock market will find it difficult to work when something as fundamental as ownership rights are inchoate. Stock ownership requires three things: the right of the owner to control his assets, to transfer them and to profit from them. Yet these rights do not really exist in China, especially as evidenced by the very weak rights of smaller shareholders.
They are ignored at the AGM, rarely get a dividend and the company they invest in is often bled of cash by the largest shareholders. Individuals also find it very hard to get control of listed companies since the existence of majority legal and state shareholders makes it necessary to obtain government approval for any transfer.
Green's radical suggestion is a body blow to the numerous stock market supporters, both at home and abroad, who have touted them as exciting signs of China's modernization. While the ultra-modern Shanghai Stock Exchange, the building of Pudong as the new financial centre of North Asia, media coverage of China's past bull markets, the occasional emergence of a decent, locally-listed stock and the qualified excitement over QFII, have certainly made the stock market a wonderful marketing tool for the economic emergence of China, Green's analysis of its sickness nevertheless makes one wonder whether the stock market is worth it.
"Most companies performed badly after they listed and then did worse," is his pithy verdict, thanks to the overriding government desire to avoid privatization for ideological reasons when the markets opened in the early 1990s. It accomplished this by the cynical ploy of ensuring that investors could only buy a fraction of a company's shares, usually around 20%.
That ensured the government got some of the cash it wanted without having to deliver control in return. The upshot, Green writes, is that one should think of the typical listed company as a machine - a capital destroying machine. Bountiful capital, garnered from initial and rights issues, is funneled into the company. And like a very efficient machine, all the capital disappears. He quotes an academic working at Brunel University in the UK to the effect that China's listcos destroy, rather than create wealth, to the tune of an average $43 million each in 2001.
With regard to QFII, Green makes the interesting point that the foreign currency B share market for foreign investors is already a form of (failed) QFII. Although the B share market with 122 companies is much smaller than the 1200 A-share listed companies, its experience is not a good omen. Most foreign investors got out after the market bounced in response to domestic investors being able to buy shares if they had the forex to pay for it in 2001.
The problems of accounting fraud and connected party transactions that plague B shares are sadly duplicated on the main board.
His thoughts on the CSRC are also interesting. Although they are considered the Jedi Knights of the securities industry, there can be a touch of the dark side about them too. The CSRC is a huge improvement on supervision previously split between a hopelessly conflicted central bank, local governments and central legislative bodies.
Yet the CSRC is schizophrenic: despite their commitment to fight corruption, regulators must keep their ears cocked for the orders of Darth Vader in his central government office. The central government makes policies to which the clean up of the markets is secondary, such as ensuring SOEs have access to capital and that a bullish market is maintained.
In his penultimate chapter, Green provides his views on the extent to which the CSRC can become a true crime fighter and his thoughts on the future of the market. He is one of the very few finance writers on China who has the courage to raise the biggest question of all: "The overwhelming question is: in the absence of liberal democracy, what will drive the improvement of stockmarket regulation in China?"
What could drive change is financial necessity, and Green lists the numerous funding pressures on the government to move towards genuine wealth creation: the pensions deficit, non-performing loans and rising debt. According to Green, these problems are forcing the government to give up its policy of supporting SOEs at whatever cost and to encourage privatization through some variant of the state share sell-off.
This could free the CSRC to clean up bad companies, despite ties to local and central government. Crucially, Green estimates that there are sufficient good companies and genuine wealth creators out there who will welcome reforms to protect their own copyright, fire unproductive workers, and better utilize their assets.
It is an interesting argument for the defense, but not really possible to verify. The private business sector is causing concern, with its links to the party creating a nexus of corruption.
The case of Zhou Zhengyi, the Shanghai real estate entrepreneur and his links to the Bank of China (HK)'s former boss Liu Jinbao reveals many that apparent starsámay not be all they seem. And although the CSRC did clamp down last year, it is not clear how much further the government will allow it to depress share prices.
Its new chairman, Shang Fulin, seems less tough than Zhou Xiaochuan, as evidenced by his command economy style trip to Shanghai earlier this year to talk up the market.
One Shanghai fund manager, speaking anonymously, told FinanceAsia the market level of Shanghai composite index could be as low as 500, compared to the existing benchmark level of 1500, below which it is rumoured the government will not allow it to dip for long.
A further problem with Green's view is that, as he admits, the prospects for the state shares sell off, after numerous failed attempts already, are extremely bleak. The hoped-for chain reaction of privatization and better regulation would not then take place and the government would be even further dependent on continuing high economic growth to keep its head above the water.
But growth alone does not solve the problem of a capital destroying financial system. The jury is still out on how successfully China will overcome its finance sector problems. That is not the case for the verdict on this excellent book.
