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Information is power for investors too

By Hong Liang (China Daily)
Updated: 2009-01-06 11:17

While putting stock market recovery at the top of their New Year's wish lists, many Chinese investors may have wondered what had goaded them into this bear trap in the first place.

If you need to ask, you should study the lengthy paper on market transparency, or the lack of it, published by the research center of the Shanghai Stock Exchange in July 2008. Although the paper didn't directly link the information gap to the creation of the asset bubble that imploded last year, destroying many billions of yuan of personal wealth, at least on paper, it cited several extreme cases to illustrate how easy it was to whip up a buying frenzy with misinformation.

Despite efforts by the watchdog agency and the stock exchanges to enforce the disclosure requirements, public information released by the listed companies is often inadequate and sometimes misleading. This shortcoming has made it difficult for investors to evaluate the earnings potential of a listed company and make an informed investment decision.

The report bluntly declared that "low-quality and sub-standard earnings forecasts are commonplace despite repeated warnings" by the authorities. Some companies, it said, failed to disclose "internal control assessments according to existing regulations," and when they did, important information was often deliberately omitted.

Because of the lax requirement on disclosure of corporate governance, most listed companies provided token information that were basically meaningless to investors, the report noted.

Many listed companies define "material information" as "good news," which they disclosed, but often after someone had made a profit from inside information, the stock exchange study noted. The "bad news," according to the study, was seldom given.

"In all, (stock market) disclosure is far from perfect," the report said. The quality of corporate disclosure and market transparency are "at a low level," it said.

Underscored by the government's massive economic stimulus package, the stock market will, no doubt, recover. The consensus of market insiders, including stock brokers and institutional investors, is that the stock market will pick up by the second half of 2009.

But having its inefficiency and irregularities so brutally exposed in the grossly exaggerated boom and bust cycle in the past two years, the stock market obviously needs to shape up before it can fully regain investors' confidence. A recent survey by the official stock exchange journal suggests that many investors have lost interest in stock investment. They indicated that they were waiting for a recovery to recoup some of their losses before calling it quits.

The regulatory authorities and the stock exchanges are obviously keen on enhancing market transparency, which is essential to ensuring market efficiency and adequate protection of investors' interests.

The crux of the problem lies not so much in the inadequacies of the rules and regulations, but rather in what the stock exchange report noted as the lack of "a disclosure culture." In more mature markets, listed companies operate under much closer scrutiny of the investing public. In Hong Kong, top executives of listed companies understand that a "no comment" to press enquiries can raise suspicions of wrongdoings in the minds of many investors.

Of course, there is the need to tighten the disclosure rules and strengthen the enforcement of those rules. But in a free market, it is far more important to raise the investing public's awareness of its right to information under the disclosure regulations.

"Media and public opinion should become an effective tool to monitor listed companies and ensure fair disclosure," said the exchange report.