Unlike other men of my ilk, businessmen from an earlier time, I’m not usually afraid of regulation. The issue, I suppose, is that I’ve worked with businessmen before, and am fully aware of the tricks, loopholes, and workarounds that people who have been entrenched in the corporate world for long enough will employ to raise profits, often at the expense of employees, consumers, and even share holders. My experience has taught me to be weary of human nature and those who repeat over and over that they should be trusted. I heard the analogy once that compared a perfectly unregulated market to perfectly unregulated streets. We’re all good drivers, right? So why do we need traffic lights and speed limits?
However, even I have to admit that there are times when things go much too far. I’m referring here to China.
Now, while I’m grateful to the giant communist nation for providing the United States with loan after loan for years now, I find it hard to assimilate the concept of financial growth with a heavily state-regulated market. I think one of the most obvious examples of this is the recent one-year hiatus on IPOs imposed by China that ended earlier this month.
I think it’s incredibly wise to allow more IPOs as it’s a valuable tool to improve capital allocation and promote individual business within a country in which the majority of its citizenry lives below the poverty line. However, the overly cautious way by which the state approves IPOs continues to choke their potential to grow and hurts the ability of business owners to develop new products and improve services throughout the country.
Part of the problem is that most IPOs are granted to State-Operated Enterprises (SOEs), who are also often given more capital from the Chinese government in order to keep them both afloat and ahead of the game. Couple that with a tendency of the Chinese government to take steps to ensure an unerringly stable market based on manipulation of capital, and you have general low performance for purely private enterprises and a market with strength based on the ability of the government to keep it from fluctuating.
While it is a good thing that IPOs are once again being allowed in China, they are so heavily regulated that even after a year with none, we are unlikely to see a lot of IPOs in 2009, and the ones we do see are likely to be owned at least in part by the Chinese government and given a manufactured leg up which makes it impossible to gauge their real worth. When people ask me about regulation, “But where does it end?” my answer can now be to point to China and say, “Before it starts to look like that.”
