“With real estate falling out of favor, bank deposits offering minimal interest rates, and stock valuations at very low levels, the current scenario presents stocks as an appealing option for domestic investors in our assessment.”
China Securities Regulatory Commission (CSRC) Chairman Wu Qing participated in a press conference during the National People’s Congress (NPC) in Beijing, China on March 6, 2024. Photo by Reuters
Wu’s strategy to rejuvenate the struggling stock markets involves a combination of state intervention, stringent law enforcement, and stricter crackdowns on various offenses such as fraudulent listings and stock-price manipulation. While some of these measures have faced criticism, they all underscore policymakers’ core message that the stock market serves the economy and provides a means for Chinese citizens to safeguard their wealth.
Despite these efforts, Chinese stocks remain undervalued, partly due to investor hesitancy.
Over the past decade, Chinese stocks have become more affordable. According to Bloomberg data, the CSI 300 Index, which monitors 300 of the country’s largest stocks, is valued at 11 times the earnings of 2023, cheaper than the average of 12.2 times over the past decade. In contrast, the S&P 500 Index in New York is valued at 22 times earnings, and Japan’s Nikkei 225 stands at 21 times, as per the data.
The recent market upsurge has been primarily fueled by China’s national team, a term humorously used for state-owned entities, including the investment arm of the sovereign wealth fund. HSBC Qianhai Securities estimates that this team has injected around 438 billion yuan (US$60.5 billion) into exchange-traded funds (ETFs), bolstering market stability over the last eight months.
While market operators and regulators typically ensure the smooth functioning of financial markets without intervening in their fluctuations, the practice differs in China. The scarcity of investment options has made the stock market the primary source of capital appreciation for the country’s 220 million individual investors by default.
Despite the potential risks involved, Wu advocates for this approach, asserting in his first press conference as the head that state intervention is essential and justified during periods of “market dysfunction.”
Wu, who prioritizes investor protection, has garnered praise from the market for his focus in this area. The CSRC has introduced a series of draft regulations aimed at elevating the standards for company listings and enhancing oversight of high-frequency trading. Additionally, it has initiated on-site inspections of mutual funds to strengthen industry management.
The regulatory body has committed to stricter new listing regulations, especially for non-profitable companies, along with increased on-site inspections of listing candidates’ financial records. It also aims to regulate the supply of new shares, promote share buy-backs, and encourage dividend payouts to enhance shareholder returns.
“Most investors are likely to applaud the CSRC’s recent initiatives to mirror the efforts of regulators in Japan and South Korea to enhance corporate governance and reduce significant valuation gaps,” said Steven Sun, head of research at HSBC Qianhai Securities in Shenzhen. “The CSRC’s updated regulatory framework could improve liquidity dynamics and lead to a gradual market re-assessment.”
These enhancements could uplift investor confidence, attract foreign investments, contingent on factors like the ongoing property crisis and consumption trends in the world’s second-largest economy.
“Increasing the quality of companies on the mainland stock exchanges to attract long-term capital and safeguard domestic investors,” analysts at Everbright Securities mentioned in a report.
The report highlighted the government’s push for companies to engage in share buy-backs and raise dividend payout ratios in the medium term.
UBS Group suggested that trading in stocks with high dividend yields would remain a successful strategy in the second quarter, with large-cap companies likely outperforming smaller ones due to their clear earnings visibility and potential inflows from long-term capital. The Swiss bank anticipated an 8% increase in earnings for companies listed on the CSI 300 Index this year, surpassing last year’s growth of 3%.
Everbright analysts emphasized that buy-backs and dividends would play a crucial role as enhancing the equity market’s value could boost household wealth effects, subsequently stimulating consumption to counterbalance the negative wealth effects from declining property prices.
Wu, known for his stringent regulatory stance, differs significantly from his predecessor Yi Huiman, who pursued a milder policy approach. Before leading the CSRC, Wu, a seasoned financial industry regulator, earned the moniker “broker butcher” for overseeing the closure of over 20 insolvent domestic securities firms post the 2008 global financial crisis. Prior to his role at the CSRC, he served as the chairman of the Shanghai Stock Exchange and as the vice mayor of the metropolis, working under the current premier Li Qiang, who approved Tesla’s wholly foreign-owned Gigafactory in Shanghai during his tenure as the city’s commissar.
Having exhausted the re-rating potential spurred by state intervention, Wu now faces the challenge of further reinstating investor trust and sustaining the market’s recovery.
To achieve this, investors need to witness more long-term institutional investments from entities such as insurance companies, a surge in mutual-fund subscriptions and leveraged bets, along with continued improvements in China’s economy and earnings forecasts, according to HSBC Qianhai Securities.
Enhanced measures to address the property market’s crisis of confidence and clarity regarding the Community Party’s third plenum, which will outline the nation’s long-term economic policy, are among the other essential prerequisites, as per the brokerage.
However, few of these prerequisites have materialized thus far. The appetite for stock investments remains subdued, with bond funds dominating new fund issuances in the first quarter and a slowdown in foreign investments in March.
On average, stocks listed in Hong Kong are currently trading at 8.54 times forward earnings, making them the most affordable among global peers, according to Bloomberg data.
While Wu Qing’s appointment and initial actions may have halted a three-year market downturn, the full benefits of his reforms will require more time to materialize.
“Ultimately, these regulatory measures will foster a healthier market by setting higher standards for listed companies, amplifying the stock market’s benefits to the overall economy, and contributing further to economic growth,” stated Deloitte in a report, projecting a significant slowdown in overall A-share IPO market activity through 2024.
Beijing’s commitment to fortifying its financial system revolves around averting systemic financial risks, necessitating financial regulators and industry authorities to define their roles clearly and enhance collaboration.
“Financial regulation must be robust,” he emphasized, envisioning China evolving into a financial powerhouse with a system distinct from Western models.
“The main issue for China, in my opinion, is a lack of confidence. External investors lack confidence in China, and domestic savers lack confidence,” remarked Bill Winters, CEO of Standard Chartered bank, in an interview with CNBC.
Elizabeth Kwik, an investment director of Asian equities at abrdn, noted the emergence of signs of market optimism, with certain sectors showing incremental improvement and policy support becoming more accommodative following adjustments in banks’ reserve requirement ratios and relaxation of home purchase restrictions.
Nonetheless, it is premature to expect a complete shift towards optimism and a significant turnaround at this stage.
“Investors remain cautious, awaiting a more substantial and sustainable recovery,” Kwik commented. “For foreign investors to re-enter the Chinese market, a broader economic recovery across all sectors, including the troubled property segment, is essential.”