Reform Season in China: Boosting Investor Confidence in Securities Markets
China is currently undergoing a reform season, with various government bodies joining forces to stimulate a lackluster post-Covid recovery. One of the entities taking part is the China Securities Regulatory Commission (CSRC), which recently unveiled a series of proposed measures aimed at "boosting investor confidence" within the country's volatile securities markets.
In more prosperous times, these changes would have been seen as significant, especially with Western investors desiring access to Chinese stocks. The CSRC's proposals range from extending trading hours to reducing transaction fees and even "encouraging" share buybacks by listed companies. However, in the current bearish climate, these initiatives, along with most of Beijing's other market adjustments, may seem like merely a Band-Aid solution for a much larger problem.
Logan Wright, Head of China Markets Research at Rhodium Group, echoes this sentiment, stating that these measures are not truly game-changing. He asserts that momentum-chasing retail investors will still maintain overwhelming dominance in the market.
On paper, now would be an opportune moment for Chinese individuals to invest their money into stocks and bonds. Household savings in the second largest economy have skyrocketed by approximately $7 trillion, or 60%, since the pre-pandemic year of 2020. Andy Rothman, an investment strategist at Matthews Asia, reveals this astonishing figure and highlights that many savers have lost confidence in the traditional go-to investment of real estate. Despite the lifting of zero-Covid restrictions, housing sales remained stagnant in the first half of this year. Wright comments on this phenomenon, explaining that people are diligently paying off their mortgage debts, leading to a deleveraging trend in China.
If people were to trust that stocks could secure their future, a portion of these trillions held under mattresses might flow into the securities market. However, building such trust requires more than regulatory adjustments. Diana Choyleva, Chief Economist at China-focused Enodo Economics, acknowledges that Chinese equity markets possess surprisingly efficient infrastructure. Nevertheless, they are internally perceived as akin to a casino.
In conclusion, while the CSRC's proposed measures aim to enhance investor confidence in China's securities markets, they may fall short of addressing the core issues. Building trust among investors will require a more comprehensive approach beyond regulatory tinkering. Despite efficient infrastructure, Chinese equity markets still suffer from a perception problem, being viewed more as a gambling arena than a reliable investment avenue.
China's financial markets have been on a rollercoaster ride in recent times. The iShares MSCI China A exchange-traded fund (CNYA), which focuses on onshore stocks, experienced a staggering 66% increase in value over the course of a year until February 2021. However, what followed was a complete loss of those gains.
One significant missed opportunity by the China Securities Regulatory Commission (CSRC) was the failure to relax the immediate settlement requirement for securities trades, known as the T+0 regime. Many advanced markets allow a two-day window for funds to change hands (T+2), and even the United States is moving towards a T+1 system.
Nonetheless, China is making gradual progress in improving its market structure. In February, the CSRC abolished the need for individual approval and pricing for each initial public offering (IPO). This move led to a remarkable surge in IPOs worth a staggering $31 billion in the first half of 2023, surpassing all other markets worldwide.
This hot market also provided an opportunity for promising technology companies like Nexchip Semiconductor and Semiconductor Manufacturing Electronics to raise capital independently of the state banking system, which traditionally favors state-owned enterprises. However, it is important to note that both Nexchip and SME have experienced a decline in value since their market debuts.
On the other end of China's financial spectrum, IPOs could potentially alleviate the concerns surrounding local government debt by allowing regional assets to be floated on stock markets. According to Rhodium Group's Wright, these assets may include lucrative sources of revenue such as toll roads or bridges. "Raising equity through these assets can be part of the solution," he suggests.
While these long-term prospects hold promise, reviving the struggling Chinese markets will require a significant shift in sentiment to bring back the $7 trillion in circulation and encourage new investments. The source of this boost is uncertain at the moment.
China's financial landscape is a complex puzzle with various moving parts. It will require careful navigation and deliberate actions to unlock its full potential and restore stability to its markets.
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