China’s desperate stock traders keen for policy ‘bazooka’ to rouse US$10 trillion bear market from slumber

“I’m about 60 per cent confident in the market,” said Jia, who works for a Japanese software company in Shanghai, in a recent interview. Despite the positive vibes on the policy front, “there’s no significant improvement in fundamentals,” he said. “The key issue is the lack of money and confidence. Of course, confidence matters more.”

Chinese stocks surged after the authorities halved the stamp duty on trades, effective 28 August. But the long-term outlook is clouded. Photo: EPA-EFE

The task of restoring that confidence, among both retail and institutional investors, rests with the China Securities Regulatory Commission (CSRC), the watchdog that oversees the nation’s US$10 trillion stock market. President Xi Jinping’s all-powerful Politburo made its move in a meeting in July, setting the tone for second-half economic policy.

Sentiment has been shaky for some months, as expectations of a strong post-Covid economic recovery failed to materialise and top policymakers refrained from launching a policy “bazooka” to kick-start growth. The term “bazooka” is often used to refer to a large-scale stimulus package, similar to the one Beijing launched during the 2008 global financial crisis.

The government has adopted a more piecemeal approach to economic stimulus. In the latest move, on Thursday, China’s central bank announced a fresh cut to the amount of cash banks must hold as reserves.

The CSI 300 Index of yuan-traded stocks has been mired in a bear market since January 2022, when it was down 20 per cent from a high in February of the previous year.

So far, the regulator’s efforts to rebuild investors’ confidence have yielded some results. The CSI 300 Index has stabilised, halting its declines since April, and some global investors have turned more positive on the outlook, often citing stock valuations at distressed levels.

“Policies in China have clearly turned supportive in many respects,” said Jian Shi Cortesi, and investment director at GAM Investments in Switzerland, which has US$80 billion in assets under management.

“China will contribute to roughly one third of global economic growth this year,” she said in an interview. “The absolute scale shows us that China remains a key driver for global growth. In my view, the more certain driver for stock prices will be earnings growth.”

The MSCI China Index, a US$2 trillion benchmark tracking 755 onshore and offshore stocks watched by Cortesi, is trading at 13 times its earnings, compared with the five-year average of 15 times, according to Bloomberg data. The gauge has fallen about 7 per cent this year.

China’s move to bolster sentiment in stocks culminated late on August 27, when the finance ministry announced it would halve the stamp duty payable when shares change hands, the first time the fee has been reduced since 2008. At the same time, the CSRC unveiled rules banning stake reductions by listed companies trading below book value or initial public offering prices, lowered the threshold for participating in margin trading and said it would slow down the pace of new share sales.

The reaction from the market the next day was tepid. The CSI 300 Index closed just 1.2 per cent higher, giving up most of its 5.5 per cent intraday gain. That was a far cry from the excitement 15 years ago, when the levy was last cut; the stock gauge jumped almost by the maximum permissible 10 per cent on April 24, 2008.

For Invesco, a US money manager that oversees US$1.6 trillion of assets, the ramifications of the stamp duty cut should not be judged by the magnitude of the gains in stocks.

“The implication of the stamp duty tax cut is much bigger than just some trading cost savings for investors, as it sent a signal to the market that the top management is paying great attention to reviving sentiment in China’s stock market,” said Chris Liu, a senior portfolio manager at Invesco, in recent comments emailed to the media. “There could be further policy support for the market if needed in the future.”

Follow-up measures on the cards include extending trading hours, expanding the investment scope of mutual funds and raising the cap on stock investments by banks’ vast pools – estimated at 10 trillion yuan (US$1.37 trillion) – of wealth-management products, he said.

This month, the CSRC published guidelines aimed at revitalising the Beijing Stock Exchange, China’s youngest and smallest bourse. The watchdog is calling for higher-quality listings and the addition of more market makers to provide liquidity.

Some of the recent bolstering measures have even come at the cost of the market-based reforms that have been implemented so far.

The CSRC’s new administrative control over the pace of fresh share offerings is a setback for the registration system for IPOs, a mechanism that was introduced in February to let market forces determine pricing and demand. The order will throw into limbo the fate of Swiss agrichemical giant Syngenta Group’s 65 billion yuan flotation on the Shanghai exchange, which could become the world’s biggest IPO this year.

Still, none of this is proving to be enough to address the concerns of overseas investors that sold a record US$12 billion of Chinese stocks via the exchange link scheme with Hong Kong last month.

Lowering the stamp duty and other market-stabilising measures are little more than incremental moves that answer the call of the Politburo but will have a limited impact on reversing the downward spiral of Chinese asset prices, according to Gary Dugan, chief investment officer at Dalma Capital Management in Dubai.

“We increasingly believe that the ‘big bazooka’ is not coming,” he said in a report dated August 28. “The Chinese leadership is trying to evolve its economy away from significant reliance on the real estate sector and debt for growth. However, we suspect that global investors will not be confident that a centrally planned economy is the best system to effect such a change.”

His view was echoed by Swiss private bank UBP whose senior economist for Asia, Carlos Casanova, said more policy support and a sustainable recovery in earnings are needed for stocks to enjoy a meaningful recovery.

The focus now comes down to China’s beleaguered property market, once a pillar industry that buttressed the nation’s US$18 trillion economy.

Since Beijing introduced its infamous “three red lines” policies to rein in leverage in 2020, the industry has been reeling from broad-based liquidity stress and slumping home sales, triggering a wave of defaults in bond payments and burdening leading players like Country Garden Holdings and China Evergrande Group with mountains of debt. This has had a devastating effect on the stock market.

In the boldest rescue manoeuvre so far, China has lowered the bar for first-home purchases and cut the down payment requirements and mortgage rates for first-time buyers. The measures are particularly important for first-tier cities such as Beijing and Shanghai that are the barometer of nationwide home sales.

While there was a spike in house viewings and, to a lesser extent buying, in the biggest cities immediately after the announcement, it remains to be seen whether the downturn in the property market can be reversed – something that would inevitably lift sentiment on stocks.

Nomura Holdings is not optimistic, arguing that Beijing still needs to do more to solve the housing crisis. The remaining restrictions on home transactions and land supply, as well as sluggish external demand and weak confidence in the private sector, continue to weigh on potential buyers’ sentiment, it said.

Meanwhile, any pickup in major cities may drain demand in smaller ones, where prices register bigger declines because of excessive supply, according to the Japanese investment bank.

A full industry recovery may need the government to rescue major developers, lift almost all restrictions on house prices, scrap curbs on home purchases everywhere, step up infrastructure spending in big cities and map out a plan to tackle the debt problems linked to local government financing vehicles, said Lu Ting, chief China economist at Nomura.

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That said, real estate stocks have been riding the policy tailwinds, and not everyone shares Nomura’s gloomy take. The Hang Seng Mainland Properties Index has surged more than 9 per cent in the past four weeks, outpacing the benchmarks both in Hong Kong and mainland China. Among its constituents, Sunac China Holdings jumped by a record 68 per cent on September 6 and Country Garden climbed above US$1 for the first time in three weeks, a level once categorised as a penny stock, after reaching agreements with debtors to extend the payments on some of its bonds.

“The resonance of these policies within the market fabric enhances sentiment, potentially nurturing a more favourable environment for equity markets than the currently downbeat one,” said Redmond Wong, a strategist at Saxo Markets in Hong Kong. “When complemented by lighter market positioning and better-than-feared earnings recently reported by Chinese corporations, the trajectory of the market appears aligned towards an upwards movement.”

UBS Group is even more sanguine, predicting a “turning point” for Chinese stocks after earnings probably bottomed out in the second quarter. The Swiss bank recommends increasing bets on stocks whose businesses are closely linked to the strength of the economy to reflect the package of policy loosening measures, according to Meng Lei, a Shanghai-based strategist at UBS.

For Jia, who until recently had not spent much time agonising over his stock investments, the dilemma remains. The lowering of the transactions duty helped him bank a 5 per cent return so far this year from a portfolio that has a heavy weighting of brokerages that benefited directly, as well as consumer and green-energy stocks.

However, he cannot be certain the downturn is over.

The best he can do is hope the government ramps up its policies to shore up economic growth and, by extension, the stock market.

“The key lies in whether the economic fundamentals will improve,” he said. “The government still has ammunition in reserve.”

South China Morning Post