MNI: China Equity Challenges Rise, More Stimulus Needed

China’s latest efforts to support the equity market will likely have limited impact, while share sale and IPO restrictions may increase financing difficulties for some companies, market experts and policy advisors told MNI.

Chinese regulators launched a slew of rules to support the sluggish equity market on Aug 27, following a 5.19% slump in the A-shares over the month. The measures focus on slowing the pace of IPO approval, restraining major investor share sales and refinancing of underperforming firms, and a stamp duty reduction on securities transactions.

The share sale restriction was the most fundamental change that had the potential to improve the market’s health, said Zhu Zhenxin, chief researcher at Rushi Financial Institute.

SHARE SALES

According to the China Securities Regulatory Commission, major shareholders holding stock that has fallen below IPO level, net asset levels, or have not paid adequate dividends, will be unable to sell shares in the secondary market. Market officials believe this is the strictest control on share sales to date, with over 30 listed companies terminating share sales this week.

Yu Wengong, partner at Joius Law Firm, told MNI the regulation would make shareholders unable to sell over 70% of A-share-listed companies. The dividend requirement was also unprecedented, Yu added.

According to Haitong Securities, the restrictions would protect CNY250 billion of equity market funds and strengthen liquidity. The broker expects a total of CNY750 billion of new funds to enter the market thanks to the regulations.

However, Yu believes the rules could hurt institutional-investor allocations to startups as they shift their attention to more established dividend paying companies. This will impact the ability of startups to spend on research and development, he added. Previously, China required companies to pay dividends to be eligible for an IPO, which had pushed many companies to list in Hong Kong and the U.S., he added.

The latest regulation may benefit market order and protect small shareholder interests, but it will also come with long-term side effects, he argued. To slow the pace of IPOs, authorities will require stock exchanges to tighten approval procedures, despite the introduction of the registration-based IPO system, Yu explained.

An advisor who asked for anonymity said China’s equity market suffered serious excess supply due to refinancing, share sales and IPOs totaling over CNY10 trillion since 2018. The large amount of low-quality equity has damaged share prices, so authorities must address the oversupply problem to rejuvenate the capital market, he added.

Interviewees agreed, however, the measures would not reverse the market’s poor performance, as weak sentiment due to the economic slowdown had driven share prices lower.

LONG-TERM PROBLEMS

Zhu said the measures sent a signal that the market was bottoming but it was not strong enough for a rebound. He predicted market sentiment may improve at year-end with further policy support. Accommodative policy will help deal with short-term problems, but authorities must address long-term structural issues, he commented. (See MNI: China Must Address Investor Concerns To Boost A-shares)

Yu said more stimulus was needed urgently to boost the economy. Listed company profits remained the decisive factor driving share prices, he said. National Bureau of Statistic July data showed on Sunday that industrial profits declined in July.

The Shanghai Composite Index, meanwhile, has had a mixed response to the measures, closing 0.05% down to 3,119.88 on Thursday after a three-day rally.

The advisor said authorities will not tolerate the SCI slumping below 3,000. Each time the index has neared 3,100, authorities have sent positive signals or state-run funds – the so-called national team – have reacted. He predicted the index would rise above 3,200 due to the latest moves.

Regulators have also urged pension funds, large banks and some Chinese financial institutions to increase equity investment. Pension funds will likely double their allocations, providing long-term capital to the market, the advisor said.

However, Yu noted the risk appetite of insurance funds remained low and they usually focused on shares of large companies and stable sectors rather than innovative small ones. The latter, however, is more crucial for long-term economic growth and youth employment, he warned.