Caixin View: Stock Market Woes Need More Than Short-Term Fixes
China’s dismal stock markets rebounded from a near four-year low on Monday after China’s top three financial regulators and Vice Premier Liu He came out in force to boost market confidence. They listed a slew of measures that will be implemented to support the markets and the economy, including the use of local government funds to rescue companies in trouble and an order to banks to be more circumspect in dumping shares put up as collateral for loans.
The Shanghai Composite Index, one of the world’s worst-performing benchmarks this year, closed Monday almost 8% higher than its low on Friday morning before the official statements. The smaller, tech-heavy Shenzhen Component Index gained more than 9% over the same period. But the fundamental factors that propelled 2018’s poor stock market performance have not disappeared, and the measures being proposed are likely to have only a limited impact, raising the risk that this is just a short-term bounce.
Before the rally, the Shanghai Composite Index had lost 30% of its value from a January high because of concerns about slowing economic growth and the impact of the crackdown on “shadow banking,” as well as uncertainties caused by the trade war with the U.S.. China’s GDP grew 6.5% in the third quarter, the slowest since 2009.
Poor access to financing also played a part in the stock market fall, as it often forced controlling or major shareholders to offer their stakes as collateral to obtain loans. Declining share prices can create a vicious cycle of forced stock sales as falling prices trigger margin calls that compel borrowers to cough up more shares as collateral for their loans. Those who cannot do so and fail to repay their loans face the prospect of brokerages or banks selling the pledged shares into the market, further depressing prices. An analysis by Moody’s Investors Service found 22% of listed companies had had more than 30% of their shares pledged for loans at the end of June. Shareholders typically pledge large amounts of shares because they have weak credit quality and limited access to other funding, Moody’s said.
Liu He, People’s Bank of China Governor Yi Gang, banking and insurance regulatory chief Guo Shuqing, and top securities watchdog Liu Shiyu all released statements Friday urging calm. They were joined on Sunday by President Xi Jinping, who promised “unwavering” support for the private sector.
But many of their pronouncements were not new. Liu He, for instance, stressed often-repeated government calls to continue opening up the economy, to push forward the reform of state-owned enterprises, and to support the private sector, especially small firms. Other proposals, such as methods to encourage insurance firms and banks’ wealth management subsidiaries to invest more in the capital markets, may have a more tangible effect. But what’s most likely to have an immediate impact are efforts by local governments to support the markets by buying up shares in listed companies, especially those facing a crisis triggered by the pledged stock fiasco. This echoes the way the “national team” of state-owned institutions bought up piles of shares after the crash of 2015. That strategy has led to sporadic short-term bounces but has done little to support stocks over the longer term.
Caixin reported last week that the local government of Shenzhen is planning to inject at least 15 billion yuan ($2.16 billion) into nearly 30 local listed companies, while Shunde, also in Guangdong province, is considering something similar. On Oct. 16, the Beijing bureau of the China Securities Regulatory Commission (CSRC) brought 23 banking and brokerage creditors of Shenzhen-listed Beijing Orient Landscape & Environment Co. Ltd. together and instructed them not to dump the company’s shares or freeze its assets.
But none of this will solve the basic problem, which is that too many companies can’t access the financing they need and many of them are so indebted that giving them more credit would only throw good money after bad. As we’ve argued before, many smaller businesses are simply just too risky to lend to, and often lack adequate collateral. Banks, which are still under pressure to reduce risk and clean up their balance sheets, don’t want to risk taking on more bad debt. In addition, as government sources have told Caixin, getting local teams to buy up shares in their listed companies is only a short-term solution at best. It also spreads the financial risks to other actors in the economy, notably local governments, who themselves are heavily indebted and may struggle to come up with the money unless they raid the proceeds of local government bond sales which are supposed to be used for infrastructure or paying compensation to farmers for appropriating their land.
The rebound in the stock market may give investors and the government some short-term breathing space. However, slowing growth, deepening trade tensions with the U.S., over-indebtedness and a poor financing environment are longer-term problems that need more than soothing words and an attempt at some quick fixes. The pressures on China’s corporate sector and the stock market will continue and the risks of a deepening pledged-share meltdown, which is ultimately only a symptom of deeper woes, have not gone away.
Caixin View is coming to Singapore
Our research partner CEBM is an instrumental part of Caixin View. CEBM’s Chief Economist, Dr. Zhong Zhengsheng, formerly with the People’s Bank of China, will be visiting Singapore from Nov.19 to 23. Readers and their institutions are welcome to schedule a meeting with Dr. Zhong by contacting him at firstname.lastname@example.org, or with CEBM’s chief macroeconomic analyst Zhang Lu, at email@example.com, to discuss topics of interest or potential cooperation.
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