China’s ‘broker butcher’ makes bold moves to breathe life into moribund stocks. Will the US$9 trillion market respond?

Last Updated on April 20, 2024 9:16 am

The six-month exodus of foreign capital from China’s US$9 trillion stock market appears to have petered out, as some foreign investors voted with their feet in response to securities regulator head Wu Qing’s push to instil market discipline. It remains to be seen whether this conviction is deeply entrenched among domestic and foreign investors.

Since Wu’s appointment as chairman of the China Securities Regulatory Commission (CSRC) in February, benchmarks tracking China’s yuan-traded onshore stocks have risen by over a tenth from their lows. Overseas investors are now taking a more favourable view of the world’s second-largest stock market because the new regulations lower the threshold for and strengthen regulations on delisting, raise the bar for new listings and strengthen oversight of high-frequency trading and the mutual-fund industry.

“We observe that the Chinese government is more determined to boost the stock market,” said Shi Jian Cortesi, a Switzerland-based investment director at GAM Investments, which has US$70 billion in assets under management.

“With the real estate out of favour, bank deposit paying very low interest rates and stock valuations at very low level, the current set-up makes stocks an attractive option for domestic investors in our view.”

Wu’s elixir for reviving the ailing stock markets is a cocktail of state intervention, strict law enforcement and tougher crackdowns on offences ranging from fraudulent listings to stock-price manipulation. While some of the measures have drawn criticism, these efforts all reflect the primary message of policymakers that the stock market exists to serve the economy and is a place for the Chinese to preserve their wealth.

Despite these gains, Chinese stocks remain undervalued, reflecting in part the investor hesitancy.

Chinese stocks have become cheaper over the past decade. The CSI 300 Index, which tracks 300 of the country’s largest stocks, is valued at 11 times 2023 earnings, cheaper than the past decade’s average of 12.2 times, according to Bloomberg data. In comparison, the multiple for the S&P 500 Index in New York is 22 times and that for Japan’s Nikkei 225 is 21 times, the data showed.

This year’s rally has been driven mainly by China’s national team, a tongue-in-cheek term for state owned entities including the investment unit of the sovereign wealth fund. HSBC Qianhai Securities estimates that the team has poured about 438 billion yuan (US$60.5 billion) into exchange-traded funds (ETFs) which has helped support markets over the past eight months.

Market operators and regulators are typically responsible for ensuring the smooth operation of financial exchanges, and usually refrain from directing the market’s rise or fall. That is not the practice in China, where a dearth of investible options has turned the stock market into the biggest source of capital appreciation by default for the country’s 220 million individual investors.

Despite the potential moral hazard, Wu believes in this approach, proclaiming in his first press conference since taking the reins that state intervention was necessary and justified in times of “market dysfunction”.

Wu did not respond to requests for an interview. His focus on investor protection has impressed the market. The CSRC has issued a slew of draft rules seeking to raise the bar for company listings and tighter oversight of high frequency trading. It has also launched on-site inspections of mutual funds to strengthen the management of the industry.

The watchdog has pledged tougher new listing rules, especially for companies that have not turned profitable, as well as more on-site inspections of listing candidates’ financial records. It is also seeking to moderate the supply of new shares while encouraging share buy-backs and dividend payouts to enhance shareholder returns.

CSRC announced five additional steps to bolster Hong Kong’s market late on Friday.

“Most investors are likely to cheer CSRC’s efforts over the past month to replicate Japanese and South Korean regulators’ recent initiatives to improve corporate governance and close deep valuation discounts,” said Steven Sun, head of research at HSBC Qianhai Securities in Shenzhen. “The CSRC’s new regulatory framework could help to achieve better liquidity supply-and-demand dynamics and drive a gradual market re-rating.”

These improvements could help lift investor sentiment while attracting foreign investment flows, although much also depends on the lingering property crisis and consumption trends in the world’s second-biggest economy.

“Delisting more companies and tightening IPO requirements is designed to increase the quality of companies on the mainland bourses to attract long-term capital and protect domestic investors,” said analysts at Everbright Securities in a report.

The note said that in the medium-term, the government is pushing for companies to issue share buy-backs and increase dividend payout ratios.

UBS Group said the trade on stocks with high dividend yields would be still a winning strategy in the second quarter after the tactic had been in play over the past year. Big-capitalisation companies would probably outperform small ones because of their high earnings visibility and potential inflows from long-term capital, it said. The Swiss bank expected earnings for the companies on the CSI 300 Index to rise 8 per cent this year, outpacing last year’s 3 per cent growth.

Everbright analysts said buy-backs and dividends will be an important policy factor, as increasing the value of equity markets can improve household wealth effects, which in turn encourages consumption as an offset to the negative wealth effects from falling property prices.

Wu’s image as a hawkish regulator stands in sharp contrast with his predecessor Yi Huiman, whose policy approach seemed to be milder. Wu, a veteran financial industry regulator, gained the sobriquet of “broker butcher” for spearheading the closure of more than 20 insolvent domestic securities firms in the aftermath of the 2008 global financial crisis. Before taking the helm at the CSRC, he spent time as chairman of the Shanghai Stock Exchange and as vice mayor of the metropolis. As vice-mayor, he worked under the current premier Li Qiang, who approved Tesla’s wholly foreign-owned Gigafactory in Shanghai when he was the city’s commissar.

Source : SCMP

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