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On August 17, China Securities Regulatory Commission (CSRC) announced the preparation of a package of reforms aimed at restoring the confidence of Chinese and international financial institutions, as well as revitalizing investment and stimulating the growth of domestic trade. Over the past few months that were marked by rather weak economic growth, investors began to lose confidence: according to data published by the Institute of International Finance (IIF), in the first half of August, international wealth management companies sold Chinese securities for a total of $3.7 billion.
The measures announced by the CSRC commission will have to address the country’s economic and financial problems after a slow recovery from last year’s severe pandemic restrictions.
In particular, one of the possibilities to be considered is “extending trading hours for China’s stock and bond markets.” In addition, the regulator promised to “reduce transaction fees for brokers” and “will encourage buybacks of its own shares – mainly listed on the Shanghai STAR Exchange – to help stabilize prices for Chinese securities.” Finally, the CSRC “will help financial traders keep pace” with IPOs and debt refinancing deals.
“We want to encourage state-owned companies and large private companies to participate more actively in mergers and acquisitions (M&A),” a spokesman for the regulator told Chinese media.
According to some rumors, the CSRC’s package of measures may also include a possible reduction in stamp duty on securities transactions.
In terms of growth dynamics, the Chinese stock market is now far behind other major stock exchanges. Since the beginning of the year, the CSI 300 index that includes stocks listed on the Shanghai and Shenzhen stock exchanges has fallen 2%, while the S&P 500 index has gained almost 14% over the same period.
And while the regulator has merely stated that it is currently only “considering” taking measures to “revive” China’s financial markets, some representatives of investment banks with offices in Beijing and Shanghai said that the analysis of the traditional “evasive language of the Chinese authorities” makes it clear that the CSRC is going to “approve these measures as soon as possible.”
The possible extension of trading hours for stocks and bonds was called a “fundamental” decision by investors. In an interview with the British newspaper Financial Times, an employee of one of the largest brokerage companies in China said that “the extension of the trading session is something that could really affect traders’ mood.”
Prior to this, on July 24, an emergency meeting of the Politburo of the Central Committee of the Chinese Communist Party was convened in Chairman Xi Jinping’s presence to analyze the state of the economy and decide on urgent actions against the threat of recession. The Supreme Body of the People’s Republic of China said that “the Chinese economy is facing new difficulties and new challenges.” At the heart of the problems are “insufficient domestic demand, difficulties in the operation of some enterprises,” as well as a “tense and complicated” international environment.
The recent escalation of tensions between Beijing and Washington did not help to boost the Chinese economy: on an annualized basis, between April and June 2023, China’s GDP grew by 6.3%, which is well below the growth forecast of 7.3%.
Statements by Chinese political leaders have brought China’s biggest structural problem into focus: the export-based economy that is starting to experience acute shortage of domestic consumption.
It is Chinese foreign trade that is also beginning to cause more and more concern. In January-June 2023, trade between China and the United States decreased by 14.5% compared to the same period last year, falling to $327 billion. The decline was particularly hard on US exports to China, which fell 17.9% to $239 billion. China’s exports to the United States also declined, but to a much lesser extent: in the first half of 2023, Beijing exported goods and services to America for a total of $87.9 billion (-3.7%).
At the same time, trade between the PRC and the Russian Federation is growing, and the export of Chinese cars, machinery, and technological equipment is increasing. According to data published by Forbes, in the first six months of 2023, the value of “Chinese automobiles, machines, and processing plants that were exported to Russia amounted to $31.5 billion, which is almost twice the amount for the same period in 2022.”
Of course, the current situation in the Chinese securities market is not the first time when Chinese financial markets faced the problem of capital flight. A similar situation occurred at the end of 2022, when the government’s brutal “zero Covid” policy to prevent incidence increase resulted in $7.9 billion of stocks and bonds being dumped on the market, which is twice the current amount.
In recent months, China’s economic data has come under the scrutiny of international analysts, who are beginning to openly doubt Beijing’s ability to get the Chinese economy back on its feet. The biggest international investment banks are further fueling the fire of doubt by claiming that this year China could fail to reach its 5% growth target.
China’s concerns are creating tension in Asian stock markets and beyond: the MSCI Asia Pacific equities index (excluding Japan) fell to 495.03 last week, the lowest level recorded since September 2022.
The construction industry that for many years was driving the economic growth in China has long been “in the minus column,” which also contributed to the aggravation of the financial crisis. On August 6th, the Chinese construction industry giant Country Garden announced that “the payment of dividends on bonds in the amount of $22.5 million will be canceled.” In addition, it was stated that “there are also problems with payments on three issues of bonds intended for the domestic market of China.” Per analysts, the default of Country Garden, China’s largest real estate group, could be “inevitable.”
Country Garden was founded in 1992 by former farmer Yang Guoqiang. The rise of the company coincided with the world’s largest construction boom. Its success has become a symbol of significant economic growth, the Chinese economic miracle.
Problems in the construction industry provoked a chain reaction: the largest investment fund Zhongrong International Trust found itself in a very difficult situation.
And now Beijing has acknowledged that revitalizing the economy will be a difficult but doable undertaking. “The recovery will be a bumpy and tortuous process, but ultimately Western critics will be refuted,” said Wang Wenbin, Chinese Foreign Ministry spokesman, stressing that “China, no matter what, will continue to be a source of strength for the growth of the entire global economy.”
