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It’s reform season in China. Various arms of the government are mobilizing in a campaign to juice a lackluster post-Covid recovery. The China Securities Regulatory Commission pitched in Aug. 18, with a long list of proposed measures to “boost investor confidence” in the country’s volatile securities markets.
In better times, with Westerners clamoring for access to Chinese stocks, this might be a big deal. The CSRC floated changes from longer trading hours and lower transaction fees, to “encouraging” share buybacks by listed companies. In the current ultrabearish environment, such moves look, along with most of Beijing’s other market tweaks, like putting a Band-Aid on a gunshot wound.
“There’s nothing really game-changing here,” says Logan Wright, head of China markets research at Rhodium Group. “You’ll still have overwhelming dominance of momentum-chasing retail investors.”
On macroeconomic paper, now would be a perfect time for Chinese investors to pour money into stocks and bonds. Household savings in the No. 2 economy have mushroomed by 60%, or about $7 trillion, since prepandemic 2020, says Andy Rothman, an investment strategist at Matthews Asia.
Many savers have lost confidence in the go-to investment of recent decades, real estate. Housing sales were flat in the first half of this year, despite the lifting of zero-Covid restrictions. “People are paying down mortgage debt as fast as they can,” Wright says. “The story in China is deleveraging.”
Some of those mattress trillions might head into stocks, if people trusted them to secure their future. Building that trust will take more than regulatory fiddles, though. “Chinese equity markets actually have surprisingly efficient infrastructure,” says Diana Choyleva, chief economist at China-focused Enodo Economics. “But internally they are perceived more like a casino.”
That perception tends to be self-fulfilling. The
iShares MSCI China A
exchange-traded fund (ticker: CNYA), which tracks onshore stocks, rose by two-thirds in a year to February 2021, and has lost it all since then.
The CSRC also whiffed on a change that could be meaningful to global institutional investors, Wright adds: easing China’s requirement that securities trades be settled immediately, a so-called T+0 regime. Most developed markets allow two days for funds to change hands (T+2); the U.S. is shifting toward T+1.
That said, China is inching toward improved market structure, and not always inching. In February, the CSRC jettisoned its system of approving every initial public offering individually and signing off on pricing. Domestic markets responded with a world-beating $31 billion worth of IPOs in the first half of 2023.
The hot market allowed promising tech companies like
Nexchip Semiconductor
(688249.China) and
Semiconductor Manufacturing Electronics
(688981.China) to raise capital outside of a state banking system that favors fellow public-sector enterprises. “Everything over the last several decades has been designed to funnel savings into state-owned companies,” Rothman remarks. (Nexchip and SME have both lost value since their market debuts.)
At the other end of China’s financial spectrum, IPOs could ease the worrisome burden of local government debt by floating regional assets on stock markets, Rhodium’s Wright says. “The local government funding vehicles may manage assets that have a return, like a toll road or bridge,” he says. “Raising equity in these will be part of the solution.”
Those are prospective long-term benefits. Reviving flailing Chinese markets will first require a positive mood shift to get that $7 trillion back in circulation, and/or investment. Where that comes from is hard to say.
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