MNI: China Should Limit IPOs, Boost Growth To Lift Stock Market

Authorities should provide more pro-growth policies, limit IPOs to rebalance supply and demand, and encourage more long-term funds to revive confidence in China’s stock market, policy advisors and market analysts told MNI.

China’s top securities regulator said Sunday it would suspend restricted shares lending and crack down on illegal use of securities lending to reduce holdings and cash out. This followed a string of supportive measures last week including a 50bp cut to bank reserves, which helped lift A shares off three-year lows. However, the Shanghai Composite Index tumbled 1.48% to finish Wednesday at 2,788.55, reflecting deep investor pessimism.

STABILISATION FUND

Some market commentors believe authorities could launch a stabilisation fund. Policymakers may consider a CNY2 trillion rescue package to buy shares onshore through the Hong Kong exchange link, according to media reports.

However, Wang Changyun, professor of finance at Renmin University, told MNI a lack of investor confidence and an imbalance between supply and demand of funds had driven the market’s poor performance. A stabilisation fund would only help offset a negative shock, he added.

“Suspending IPOs, limiting shareholding reduction and refinancing by major shareholders are necessary to help ease the funding demand in the secondary market,” said Wang, noting authorities should encourage long-term institutional investors to increase their A-share holdings and relax restrictions on insurance company equity holdings.

Capital market outflows have increased faster than inflows, with IPOs, shareholding reductions, secondary public offerings, stamp duties and commission totalling near CNY3 trillion every year, according to a public speech by Wu Xiaoqiu, dean of the National Finance Research Institute of RUC last August.

ANBOUND think tank Analyst Wei Hongxu argued a stabilisation fund would also not aid long-term price discovery. “If the amount of funds is too large, such a bailout may lead to more speculative transactions,” Wei said, warning a fund could damage market development and policymakers’ goal to protect small- and mid-sized investors.

INVESTOR-ORIENTED FOCUS

Investor protection – especially for smaller players – is a top priority, noted Wang Jianjun, vice chairman at the China Securities Regulatory Commission in a recent statement. The CSRC also wants to highlight returns within company evaluations and encourage dividends, and share buy backs. (See MNI: China Must Address Investor Concerns To Boost A-shares)

Zhao Xijun, co-president at the Chinese Academy of Financial Inclusion at Renmin University, said policymakers wanted a more investor-orientated market compared to one more focused on facilitating company financing.

Zhao believes emphasising returns should help improve the quality of listed companies. Regulators should next focus on more standardised IPOs, transparent refinancing rules, heavier punishment of investor-rights violations and stricter delisting enforcement, he noted. (See MNI: China Needs To Make Delisting Companies Easier - Advisors)

Greater fiscal expansion will also help boost investment, which slowed to 3% y/y in 2023 from 5.1% in 2022, and strengthen the social security net of education, healthcare and housing to reduce residents’ saving propensity and increase their investment in the capital market, Zhao continued.

“A-shares may bottom out when the Federal Reserve starts rate cuts and drives inflows to emerging markets, but the rebound would depend on the intensity of China’s macro policies,” he added.