Recently, the Shanghai Composite Index has been re-emerging after a brief period of 2,900 points. It is an indisputable fact that the valuation of the a** market is too low, but the reasons for this phenomenon are seriously underunderstood. Although there are many suggestions for bailing out the market, most of them do not touch the essence of the problem - how to value the A** field? What is the reasonable level?
Liu Qiao, Professor of Finance at Guanghua School of Management, Peking University, Li Shangchen, Postdoctoral Fellow at the Centre for Financial Innovation and Development at the University of Hong Kong, and Zhang Zheng, Professor of Finance at Guanghua School of Management, Peking UniversityHe wrote the latest work in 2024** "Theoretical Exploration and Policy Implications of the Valuation System with Chinese Characteristics", which provides an in-depth analysis of this issue. According to the researchers,The fundamental reason for the low valuation of the A** market is the pricing logic and valuation concept that is currently prevalent in the A** market; To repair and improve the valuation of A-shares, we must reconstruct the valuation system of A** market, and then form a reasonable valuation level of A-shares.
The main ideas and arguments of this paper are taken from the latest work of the three authors in 2024** "Theoretical Exploration and Policy Implications of the Valuation System with Chinese Characteristics".
*Investment is an important part of residents' property income**. There are more than 2 accounts opened in China's a** field200 million, of which there are more than 50 million active accounts, ** ups and downs affect thousands of households, and are closely related to residents' willingness to consume and spending power. As the Shanghai Composite Index has fallen below 3,000 points, 2,900 points, and 2,800 points, various suggestions on how to boost the index have been released, such as suspending IPOs, overthrowing the registration system, canceling the short-selling mechanism, and so on; At the policy level, measures such as suspending the lending of restricted shares and requiring state-owned enterprises to strengthen market value management have also been introduced. Undoubtedly, to boost investor confidence in the short term, we must reverse the decline.
It is an indisputable fact that the valuation of the a** field is too low. According to data on January 30 this year, the average price-to-earnings ratio of the constituent companies of the Shanghai Composite Index is only 1196 times, while the average price-to-earnings ratio of Dow Jones Industrial Index companies is 263. The market valuation of A-shares is much lower than that of U.S. stocks; Another similar set of comparisons shows the same conclusion: the average price-to-earnings ratio of GEM companies is 2321, while the average price-to-earnings ratio of the Nasdaq, which is also made up of growing companies, is 436 times. Although there is a consensus on the low valuation of A-shares, our understanding of the reasons for the low valuation of A** market is seriously insufficient. Although there are many suggestions for bailing out the market, most of them do not touch the essence of the problem - how to value the A** field? What is the reasonable level? In fact, only by deeply understanding the valuation logic of the A** market and the root causes of the valuation deviation can we find the correct measures to repair or even improve the valuation of the A** market in a targeted manner.
We believe that the fundamental reason for the low valuation of the A** market is the pricing logic and valuation concept that is currently prevalent in the A** market; To repair and improve the valuation of A-shares, we must reconstruct the valuation system of A** market, and then form a reasonable valuation level of A-shares. Especially in the medium and long term, in order to give full play to the pivotal function of the capital market to support the high-quality development of the real economy, it is the key to achieve a reasonable valuation of the A** market.
The significance of achieving a reasonable valuation of the a** field
One of the most important functions of the capital market is discovery, that is, the market formed through the trading behavior of buyers and sellers, which helps to achieve a more efficient allocation of resources, and then brings investors reasonable returns that match the risks they take. If the market deviates from the fundamental value for a long time, the lack of this discovery function will bring about the distortion of the relationship between supply and demand, causing inefficiency or even failure of resource allocation, and this process is often accompanied by large fluctuations in the financial asset market, bringing risks to the real economy and the financial system, and bringing losses to investors.
The ** Financial Work Conference held at the end of October 2023 made arrangements for "accelerating the construction of a financial power", requiring "effectively strengthening high-quality financial services for major strategies, key areas and weak links", especially guiding more funds to flow to key areas and node industries to promote high-quality development. It is very important to promote the high-quality development of finance and better play the role of the capital market as a hub. If the signal of the A** market is sensitive (for example, the valuation is reasonable), the A** market can become an important channel for resource allocation and policy transmission, and at the same time give investors a reasonable return. The key is to explore the path of financial development with Chinese characteristics, improve the quality of capital market service supply, and establish a valuation system that is highly compatible with the concept of Chinese-style modernization and the characteristics of China's economic growth.
The prevailing market valuation system of the A** market basically takes the maximization of the value of shareholders' equity as the business goal of the enterprise, emphasizing the value that can be reflected in the form of money (pecuniary value), so it pays more attention to the growth and financial performance of listed companies. In the long-term tracking analysis of China's listed companies, we find that the average return on investment capital (ROIC) of China's A-share listed companies is only 3%-4%, while the average ROIC of U.S.-listed companies has remained above 10% for a long time. Therefore, according to the current market valuation logic, the high valuation of A-shares needs to be based on sustainable growth (reflected in high price-earnings ratio), and the narrative that companies generally maintain sustainable growth after listing has long been repeatedly falsified by the market. In this case, what is the reasonable valuation level of the a** field?
More importantly,At present, the prevailing valuation system does not reflect the outstanding characteristics of the economic development paradigm of China's "** market", and the multiple connotations of "value" are not fully reflected in the valuation formation process. In China's current institutional background and development stage, in addition to the value of shareholders' equity, enterprise value also includes other dimensions of value, for example, the value obtained by direct stakeholders such as company employees and creditors from the enterprise through wages, taxes, interest, etc.; Listed companies are better and stronger, driving the coordinated development of large and medium-sized enterprises in the upstream and downstream of the industrial chain, consolidating the micro foundation for high-quality economic development, and contributing to the employment of the enterprise, local taxation, and overall economic growth. The value of these dimensions is not directly reflected in financial indicators such as return on equity (ROE) or ROIC, and the classical market valuation system does not give sufficient attention and corresponding valuation premiums to the relevant companies. However, these values embody the people-centered development philosophy of Chinese modernization, and are highly consistent with the characteristics of China's economic development. "High-quality development should achieve a return on investment, a profit for the enterprise, an income for employees, and a tax revenue, and fully reflect their respective contributions according to market evaluation. ”（2021）。The market valuation system that reflects the characteristics of high-quality development should give the value of these dimensions a sufficient market valuation premium in order to form a reasonable valuation level. Only in this way can we give full play to the function of the capital market to effectively lead the allocation of resources through the discovery of the most important products, and allocate more and better financial services for the sectors and fields that create these values. This is the proper meaning of building a financial power with Chinese characteristics and supporting high-quality development with finance.
A reasonable valuation system should include the "social value" of the enterprise
To reconstruct the valuation concept and pricing logic of China's capital market with Chinese characteristics and Chinese values, the important question that needs to be answered is: in addition to the value of shareholders' equity, what dimensions of value should be included in the market pricing range? How should these values be measured? In recent years, the classic market valuation system has begun to repair the relatively narrow understanding of the connotation of corporate value, and gradually incorporate environmental, social, and governance (ESG) into the investment strategy and corporate evaluation system. However, at present, the capital market has not formed a unified understanding of the definition and scope of ESG. The measurement is also mainly subjective evaluation, and there are often obvious differences in the evaluation results of different evaluation systems. Moreover, it is still unclear whether better ESG performance will lead to an increase in the fundamental value of companies and a premium in market valuations. Ambiguity and uncertainty in definitions, scope, valuation methodologies and rating results make ESG values unable to adequately reflect the Chinese characteristics of the valuation system and the special value of Chinese assets.
First, China's economic and social development adheres to the people-centered value orientation and emphasizes the universality of development. Under such a concept of development, the value of stakeholders beyond the value of shareholders' equity is an important component of enterprise value, which should be included in the market valuation system to reflect the people's nature. Equally important, China's economic development model is characterized by a combination of promising and efficient markets: through the Five-Year Plan and industrial policies, resources are allocated to nodal industries and key areas that drive economic and social development. The technological changes and impacts that occur in node industries and key areas are transmitted and amplified through the production network, forming a spillover effect, driving the emergence of a large number of upstream and downstream market players, and producing a multiplier effect on the overall economy, while a large amount of investment in these key industries and fields has brought about the growth rate of total factor productivity and promoted the development of the overall economy. It is of great significance to incorporate the multiplier effect of enterprises on the overall economy through the production network into the market valuation: the return on capital of investment in node industries and key areas is not necessarily high, which may lead to underinvestment, and the inclusion of the multiplier effect in the valuation can give enterprises enough returns higher than the return on capital, which can motivate more funds to invest in these areas and effectively solve the problem of insufficient investment.
Based on the above two considerations,We introduce the variable social value of the enterprise as sufficient statistics of the value part with Chinese characteristics in the market valuation system, which is reflected in the multiplier effect on the overall economy formed by the value created by the enterprise for all stakeholders multiplied by the transmission and amplification of the enterprise through the production network. The social value of enterprises is a part of the value of "Chinese characteristics" that is highly consistent with the requirements of Chinese modernization and the characteristics of China's economic development, and needs to be included in the market valuation system.
The A** field valuation system completely omits the social value of the enterprise
Our empirical research shows that companies with high social value have better fundamental value (in the form of higher ROE, stronger financials, ability to ride out cycles, etc.). A company's pursuit of social value helps to build social capital and trust, is resilient in the face of volatile market conditions such as the financial crisis, faces less litigation risk and lower financing costs, and is more likely to be supported by important stakeholders when pursuing transactions that have a significant impact on the value of the company, such as mergers and acquisitions.
More importantly, under the growth paradigm of China's "** market", enterprises with large social value are more likely to be located at the node of China's economic production network, have a long industrial chain, and have a greater role in stimulating the overall economy. Existing research also shows that the industrial policy is more inclined to the node industries in the production network, which is an important reason for the strong economic growth of China after the reform and opening up. In addition, enterprises with large social value are more likely to pursue a balance between economic and social interests, and form a better balance between short-term value and long-term returns, development and security, growth and stability.
High social value companies deserve a valuation premium to give investors higher returns. However, the A** field valuation system completely "misses" the pricing factor of corporate social value. Our findings show that holding high social value companies can lead to an annualized alpha rate of up to 8%-10% and significantly increase the market valuation of the company, and that the excess rate of return due to social value cannot be explained by existing pricing models. Since the excess rate of return of high social value companies cannot be explained by fundamental factors such as risk level, it indicates that there is a serious valuation bias problem for high social value companies in the A** field, resulting in the general low valuation of these companies. This valuation deviation is more prominently reflected in large enterprises, central state-owned enterprises, value-oriented enterprises, and high-dividend yield enterprises. To put it another way, the value of listed companies in the node industry is more likely to be undervalued by the market, and investing in such companies can help repair the market valuation.
In the above figure, after controlling the influence of the company's or ** characteristics, the A-share listed companies are divided into two groups, high and low, according to the value of the company's social value, and the corresponding market capitalization-weighted portfolio (monthly adjustment) is constructed, and the cumulative return index of holding for 1 month is calculated. As shown in the chart, the market value of high social value companies increased by nearly 5 from 2003 to 20215 times (from 1 to 6.)5)), while the market value of low-socially value companies has only increased by more than 2 times; Moreover, since 2009, including the stock market crash in the second half of 2015, the capital market performance of the high-social value portfolio has been significantly better than that of the low-social value portfolio, indicating that the investment strategy constructed according to the social value of the enterprise can pass through different market cycles. This empirical fact once again shows that investors have not included corporate social value in their valuations, so a portfolio consisting of a portfolio with a large corporate social value will lead to a higher yield. The above chart also shows that the difference between the high and low combinations has widened since 2019, indicating that the mispricing of corporate social value in China's ** market has not improved in recent years.
How to repair and improve the valuation level of A** field?
It is a long and continuous process to reconstruct the valuation system of the A** market, inject Chinese characteristics and tap Chinese value, which requires simultaneous efforts from the investment side and the listed company side. On the investment side, it is necessary to take effective measures to actively change the investment philosophy and valuation logic of investors, and enhance the scale and influence of investors who pay attention to the social value of enterprises and their influence on market pricing. At the same time, on the side of listed companies, we will actively change the business philosophy and perception of value connotation of listed companies, transform the company's strategy, operation and management thinking into the track of creating social value, and provide the market with investment targets with certainty, safety and high-quality development requirements. The logic behind the valuation system with Chinese characteristics that supports high-quality development is not only valuation repair, but also value creation. To reshape the A-share valuation system, it is necessary to recognize the efficient interaction and mutual cultivation of long-term funds and high-quality assets that recognize social value.
Specific policy initiatives include:
First, objective, adequate and complete information disclosure is the premise of effective pricing in the capital market. At present, most of the financial statement information of listed companies in China is related to financial performance, and non-financial performance information is not systematically disclosed. To this end,Information disclosure related to corporate and social values should be further standardized and strengthenedFor example, the position of the industry in which the listed company is located and the information on its first-chain industrial chain, the contribution of the listed company to stakeholders, and the social value of the enterprise. Disclosure and emphasizing the importance of this information in valuation will help investors pay more attention to enterprises and sectors that create social value, tap the intrinsic value of enterprises with high social value, and construct valuation methods that fit the characteristics of enterprises, so as to repair the valuation of such enterprises, and help enterprises create greater social value, forming a positive cycle and mutually reinforcing mechanism.
Second, investors are the main body of market pricing, and the main reason for the low market valuation of high social value enterprises is the valuation deviation of investors, especially institutional investors, on social value. Therefore,Investor education should be strengthened and professional institutional investors should play a role as a bridgeGuide institutional investors to pay more attention to the value creation process of enterprises for various stakeholders in the investment and research process, dig out relevant information about the role of enterprises in the production network, deeply understand the room for medium and long-term valuation improvement of enterprises with high social value, and increase the net value of enterprises with high social value, so as to repair their valuations.
Third, the logic of the valuation reshaping of high social value enterprises lies in the fact that compared with other enterprises, they can provide deterministic excess returns based on the medium and long-term dimensions, so that the reshaping of the valuation system needs to continue to make efforts from the investment side, on the one hand, increase the guidance of medium and long-term funds such as insurance, pension, social security, annuity, etc., so that they can better match with high social value enterprises with low valuation and good fundamentals, so that a positive cycle can be formed between listed entities and medium and long-term funds, and the support of medium and long-term funds for reasonable valuation will be enhanced; On the other hand, there is a need to vigorously cultivate long-term funds that are willing to give high premiums to social value. Specifically, broad-based index products can be developed based on the social value of enterprises, such as related ETFs. As high social value enterprises have a higher return on investment at this stage, the promotion of relevant index products has strong feasibility. This type of index product focuses on investing in listed companies with high social value, which can not only promote the valuation repair of high-social value enterprises with low valuations, but also enable related enterprises to be held by investors who pay more attention to social value for a long time, thereby helping the long-term development of enterprises and social value creation. When the scale of long-term funds such as the index continues to increase and accounts for a certain proportion of the market value of the entire Chinese market, the pricing logic of China** may change, and social value will become an important part of the valuation premium of related enterprises**.
Fourth, it is related to the aboveAs a basic policy tool to support the development of the capital market with Chinese characteristics, it can be funded by the government to establish a level standard to directly support those listed companies with large social value and low valuations, so as to repair the valuation deviation.
Fifth,A-share listed companies should be encouraged to take the initiative to "upgrade" their corporate strategy and operation management around the creation of social value, so as to improve their own quality and investment value. Specifically, it is embodied in increasing investment in areas that create social value, continuously improving the sustainability and core competitiveness of enterprises, paying attention to the continuous excavation of their own value, strengthening efficient and normalized interaction with the market, and continuing to convey their own development concepts and values to the market, so as to allow investors to better understand the intrinsic value of enterprises. This is the core essence of market value management in the new development stage.
Sixth,Strengthen systematic and continuous research on the valuation system of listed companies with Chinese characteristics. The Chinese characteristics of the valuation system are presented differently in different industries and different types of enterprises. Based on the perspective of production network and stakeholder value, we propose a relatively simple and feasible dismantling idea and measurement method to define the connotation of "value" in valuation, which is different from the ESG system. What we propose is a common logic, emphasizing that the connotation of "value" in valuation needs to be defined in a targeted manner according to the concept of economic development and the development model. In the process of building a social value-based A-share valuation system, it is necessary to avoid a one-size-fits-all approach, and in the future, it is necessary to combine the characteristics of different industries and different types of enterprises to build differentiated valuation and pricing logic. For example, for companies related to carbon neutrality, should the reduction of greenhouse gas emissions be reflected in the scope of "social value"? Similarly, if the innovation investment of science and technology enterprises has positive externalities, should it also be quantified and reflected in the measurement of "social value"?
Epilogue: There's nothing more dangerous than answering the wrong question correctly
At present, there is no convincing causal link between the proposals to overthrow the registration system, suspend IPOs, and cancel the short-selling mechanism in the market and the repair and improvement of the valuation of the A** market. The real problem with China's A** market is that there has been no effective pricing mechanism. These short-term measures may provide a short-term boost to the index, but they will not help establish a reasonable valuation level for the A** market, for example, should the Shanghai Composite Index be reasonably valued at 3,000 points, 4,000 points, or even 5,000 points?
As mentioned above, the starting point of the policy should be to cultivate and introduce long-term funds that are compatible with the "Chinese characteristics" and "Chinese values" of China's listed companies, such as focusing on investing in high social value listed companies, broad-based index ETFs, and value-led institutional investors with a new valuation system. Establishing these long-term mechanisms is the right answer to the right question.
References
**。On Grasping the New Development Stage, Implementing the New Development Concept, and Constructing a New Development Pattern [M] *Literature Press, 2021, 215-216