Casino Capital - Necessary Conditions to Develop a Stock Market

Case Study: Casino Capital

According to Choi and Meek (2011), “China has one-fifth of the world’s population, and market-oriented reforms have help generate rapid economic growth” (p. 101). These conditions of a ripe population and an emerging economy pose an opportunity to establish conditions to develop an efficient stock market. However, in a hybrid economy in which strategic commodities and industries are controlled by the state while a market oriented system governs other industries including the commercial and private section, there are inconsistencies with the decade-old stock market that is hindering this establishment of a stock market with fair trading (Choi & Meek, 2011). This paper will discuss the necessary conditions to establish a stock market in an emerging economy and compare China’s situation (as described in the case study: Casino Capital) to these conditions to analyze the likelihood of the country to develop a stock market with fair trading. Additionally, this paper will outline a plan of necessary reforms to enhance stock market development in China.

Analysis

Necessary Conditions to Develop a Stock Market

        Economies rely on stock exchanges to help businesses raise capital and provide investors with opportunities to support new or established enterprises; stock markets are financial institutions that support these activities by providing a platform for businesses to buy, sell and trade shares to capitalize enterprises (Cohen, n.d.). In an emerging economy, a necessary condition to develop a stock market is establishing financial stability by promoting healthy financial institutions. Crisis occurs for emerging economies when there is a lack of financial stability, such as institutions overextending financial support during thriving times and retracting otherwise. Another important prerequisite to developing a stock market is establishment of accounting and auditing standards that are accepted worldwide. This includes accounting that emphasizes fair presentation and full disclosure of credible company information of operational and financial conditions. Therefore, there is a need for competent professional accountants to support both the industry and auditing responsibilities. Additionally, the institution of legal structures to enforce laws, regulations and accounting disclosures and good corporate governance are needed to monitor and control the interest of stakeholders. Finally, investor confidence in market-oriented policies is a necessary condition for the development of emerging stock markets. Investors must feel confident that reporting and disclosure requirements are followed and reliable reporting is occurring.

China’s Situation Versus Necessary Stock Market Conditions

        In regards to China’s situation in comparison to the conditions necessary to develop a stock market, there are only few conditions present. Of the conditions previously mentioned, China’s accounting standards does demonstrate fair presentations. According to Choi and Meek (2011), in 2006, a new set of Accounting Standards for Business Enterprises (ASBE) were issued in a Big Bang approach to convergence in which the country’s accounting standards were aligned with International Financial Reporting Standards (IFRS).

However, depiction of China’s scenario as described in the case study, Casino Capital, demonstrate that the other conditions do not exist. In regards to the condition of establishing financial stability by promoting healthy financial institutions, the case study alludes to the lack thereof; Stephen Green of the Royal Institute of International Affairs commented about the China’s stock market “The stock market has been used to support national industrial policy, to subsidize SOE restructuring, not to allow private companies to raise capital” (Choi & Meek, 2011, p. 118). While China has established worldwide acceptable accounting and audit standards in the adoption of the IFRS, the fact that the balance sheets of Chinese companies are a joke and “the government’s official auditing body admitted that more than two-thirds of the 1,300 biggest state-owned enterprises cook their books” displays a non-conformance to full disclosure of credible company information of operational and financial conditions (Choi & Meek, 2011, p. 116). Legal support only recently occurred as China’s highest court allowed shareholders to file lawsuits against companies that disclosed untruthful information about their accounts which has generated 900 pending shareholder suits in a country with 1,200 listed companies (Choi & Meek, 2011). This alludes to the fact that legal infrastructure is not fully developed and accounting standards are inadequately implemented. Additionally, the case study mentions the long effort needed to adopt better standards of corporate governance and disclosure (Choi & Meek, 2011). Investor confidence in financial reporting is also lacking considering “China’s stock market, Asia’s second-largest by capitalization, consists of 60m mainly clueless retail investors, driven to trade almost entirely by rumor” (Choi & Meek, 2011, p. 115). Based on the fact that these essential conditions to develop a stock market are not present in China’s emerging economy, it is highly unlikely that they can establish a stock market with fair trading unless necessary reforms are instituted.