Investors are wary for a reason.

How to Get Chinese to Buy Stocks

Adam Minter is a Bloomberg View columnist. He is the author of “Junkyard Planet: Travels in the Billion-Dollar Trash Trade.”
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The Chinese government wants individual investors to return to the country's long-ailing stock markets, and it's using state-owned media outlets to browbeat them into doing so. According to a Bloomberg News report yesterday, Xinhua news agency has published at least eight articles this week extolling the virtues of Chinese equity investing. Stories have hailed a recent mini-bull market that might signal the end of a three-year period during which Shanghai's Composite Index lost a world-beating $460 billion in valuations.

If the government really wants to get Chinese to buy stocks, though, it needs more stories like this one, detailing the arrests of several financial journalists for conspiring with PR companies to slant coverage of companies for money. Probably the biggest impediment to more Chinese entering the stock market is the sense that the system is rigged, tainted by insider trading, fraud and corporate governance issues. Until punters are convinced that those issues are being addressed seriously, they're likely to remain wary.

The problem isn't just garden-variety fraud. With reason, average Chinese believe they have no chance competing against an unholy alliance of corrupt government officials and their well-connected friends in the private sector. Take the insider-trading scandal that engulfed state-controlled Everbright Securities, one of China's largest brokers, in the summer of 2013. Everbright was found to have unwound a position it had taken as a result of a computer error -- without disclosing the error. In response, China's Security Regulatory Commission punished the firm with a 523 million yuan ($85 million) fine, and forced the resignation of the firm's president.

Rather than reassuring investors, the relatively light fine and clearly staged resignation only reminded Chinese of the politicized show trials that the regime stages to eliminate enemies. Despite the spectacle of fallen corrupt politicians being paraded before the cameras on a near-daily basis for several years now, Chinese have regained very little confidence in their government. A few token prosecutions of powerful executives will hardly change more minds.

This is a serious problem for leaders in Beijing, as they seek to rebalance how Chinese invest their growing piles of cash. The traditional destination -- housing -- is in a slump, and the dodgy, guaranteed-return investment products that have long been popular in China are Ponzi schemes waiting to collapse. That leaves stocks -- which many Chinese see as an outright gamble. (In a typical, albeit admittedly unscientific November 2012 online poll, a quarter of respondents complained that they'd lost more than half of their investments, despite a booming economy.)

There is some evidence that the Chinese government is now taking the credibility of its equity markets seriously. In late December, China's State Council, the nation's top governing body, issued a call to "enhance the protection of small investors' rights and interests." The body outlined several areas needing additional attention, including information disclosure, supervision and law enforcement related to existing law, investor education, and the need to promote investor-rights organizations. No specific policy mechanisms or funding were included in the statement (like other State Council opinions, it's a policy outline). Issued at the most senior level, however, the edict indicates a clear interest in changing public perceptions.

That's a long-term project, one that will require more than newspaper come-ons and occasional prosecutions. It's going to take time and a shift in how Chinese investors feel about their much-maligned government beyond just the securities regulators. Of course, a bull market would help, too.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Adam Minter at aminter@bloomberg.net

To contact the editor on this story:
Nisid Hajari at nhajari@bloomberg.net