BEIJING LAUNCHES PACKAGE TO BOOST HK’S BATTERED MARKET
Regulator pledges to deepen cooperation and loosen rules for mainland firms seeking IPOs in city
China’s capital market regulators have announced a package of measures to boost liquidity, attract international investors and enhance competitiveness between the mainland and Hong Kong, offering a salve to the city’s market woes.
The China Securities Regulatory Commission (CSRC) yesterday said it would “deepen” its cooperation with Hong Kong through five new measures intended to optimise its status as an international financial centre.
The aim is to promote the coordinated development of the capital markets of the mainland and Hong Kong.
The measures include plans to relax the eligibility criteria for exchange-traded fund (ETF) products in the Stock Connect mechanism that links the two financial hubs. The watchdog also aims to loosen the listing rules for mainland companies wanting to launch initial public offerings (IPO) in Hong Kong.
The CSRC said it would enhance its communication and coordination with the relevant departments to support qualified mainland industry leaders wishing to go public in Hong Kong.
Other measures include allowing qualified real estate investment trusts from the mainland and Hong Kong access to the Shanghai-Shenzhen-Hong Kong Stock Connect channel, and including yuan-denominated stock trading counters on the Hong Kong stock side of the cross-border mechanism.
The moves come amid the worst listing market Hong Kong has endured since 2009. In the first quarter, the city saw 12 IPOs, raising US$604.4 million, a fall of 29 per cent year on year.
Earlier in the week, Xia Baolong, Beijing’s top man on Hong Kong affairs, said the city offered several unique advantages such as its rule of law, competitiveness and innovation. He said new policies would continue to support the city’s development and “maximise the dividends of one country, two system”.
Chief Executive John Lee Ka-chiu said: “The measures announced today are important initiatives to support the further development of Hong Kong’s financial markets, increase the number of attractive investment products, provide more investment opportunities to domestic, mainland and overseas investors, and enhance Hong Kong’s status as an offshore [yuan] business centre.”
The expansion of mutual access between the financial markets “encapsulates our country’s firm support for Hong Kong to enhance its status as an international financial centre”, he added.
Financial Secretary Paul Chan Mo-po said the measures would allow the city to better perform its function as a platform for attracting capital and high-quality enterprises.
“Support for leading mainland enterprises of industries to list in Hong Kong will benefit Hong Kong’s initial public offering market,” he said.
“The increase of listed companies with long-term growth and return potential in Hong Kong will also drive the development of our secondary market.”
The CSRC also plans to reduce the average asset management size requirements for ETFs to trade via the Stock Connect.
The measures would bring greater choice to international and mainland investors, attract more liquidity to the city’s markets and further enhance the competitiveness of Hong Kong, said Bonnie Chan Yi-ting, the CEO of Hong Kong Exchanges and Clearing, the bourse operator.
“We look forward to continue working closely with our mainland partners and regulators to prepare for the launch of these initiatives,” Chan said.
Another measure involves optimising the mutual recognition arrangement of funds so as to help meet the diversified investment needs of investors on the mainland and Hong Kong.
“We are delighted that the joint efforts of the two securities regulators are now bearing fruit, with several mutual market access schemes seeing significant breakthroughs,” said Julia Leung, chief executive officer of the Securities and Futures Commission in Hong Kong.
“We believe the expansion of the Stock Connect and the enhancements of the mutual recognition of funds will enrich product choice for mainland and international investors.”
The schemes would enable Hong Kong to better leverage its unique role and advantages in the “high-quality opening-up” of the mainland’s capital market.
Robert Lee Wai-wang, lawmaker for the financial services sector and a local broker, said Hong Kong’s IPO market would enjoy a significant boost.
“The new measures indicate the central government will support the key players of important industry to list in Hong Kong, which will support the IPO market in Hong Kong and will strengthen the city’s role as a fundraising centre for Chinese companies,” he said.
“It may mean Hong Kong can reboot its new listings as soon as the second half of this year.”
The measures … enhance Hong Kong’s status as an offshore [yuan] business centre CHIEF EXECUTIVE JOHN LEE
The six-month exodus of foreign capital from the mainland’s US$9 trillion stock market appears to have petered out, as some foreign investors voted with their feet in response to securities regulator head Wu Qing’s push to instil market discipline.
It remains to be seen whether this conviction is deeply entrenched among domestic and foreign investors.
Since Wu’s appointment as chairman of the China Securities Regulatory Commission (CSRC) in February, benchmarks tracking the country’s yuan-traded onshore stocks have risen by more than a tenth from their lows.
Overseas investors are now taking a more favourable view of the world’s second-largest stock market because the new regulations strengthen regulations on delisting, raise the bar for new share sales, and enhance oversight of high-frequency trading and the mutual fund industry.
“We observe that the Chinese government is more determined to boost the stock market,” said Shi Jian Cortesi, a Switzerlandbased investment director at GAM Investments, which has US$70 billion in assets under management.
“With real estate out of favour, bank deposits paying very low interests, and stock valuations at a very low level, the current set-up makes stocks an attractive option for domestic investors in our view.”
Wu’s elixir for reviving the ailing stock markets is a cocktail of state intervention, strict law enforcement, and tougher crackdowns on offences ranging from fraudulent listings to share price manipulation.
While some of the measures have drawn criticism, these efforts all reflect the primary message from policymakers that the stock market exists to serve the economy and is a place for the Chinese to preserve their wealth.
Despite these gains, mainland stocks remain undervalued, reflecting in part the hesitancy of investors.
Mainland stocks have become cheaper over the past decade. The CSI 300 Index, which tracks 300 of the country’s largest stocks, is valued at 11 times 2023 earnings, lower than the average of 12.2 times over the past decade, according to Bloomberg data.
In comparison, the multiple for the S&P 500 Index in New York was 22 times and that for Japan’s Nikkei 225 Index stood at 21 times, the data showed.
This year’s rally has been driven mainly by China’s national team, a tongue-in-cheek term for state-owned entities, including the investment unit of the sovereign wealth fund. HSBC Qianhai Securities estimated the team had poured about 438 billion yuan (HK$473 billion) into exchange-traded funds (ETFs), which had helped support markets over the past eight months.
Market operators and regulators are typically responsible for ensuring the smooth running of financial exchanges and usually refrain from directing the market’s rise or fall. That is not the practice in China, where a dearth of investible options has turned the stock market into the biggest source of capital appreciation by default for the country’s 220 million individual investors.
Despite the potential moral hazard, Wu believes in this approach, proclaiming in his first press conference since taking the reins that state intervention was necessary and justified in times of “market dysfunction”.
Wu did not respond to requests for an interview.
His focus on investor protection has impressed the market. The CSRC has issued a host of draft rules seeking to raise the bar for company listings and tighten oversight of high-frequency trading. It has also launched on-site inspections of mutual funds to strengthen the management of the industry.
The watchdog has pledged tougher new listing rules, especially for companies that have not turned profitable, as well as more on-site inspections of listing candidates’ financial records.
It is also seeking to moderate the supply of new shares while encouraging buy-backs and dividend payouts to enhance shareholder returns.
The CSRC announced five additional steps to bolster Hong Kong’s market yesterday.
“Most investors are likely to cheer the CSRC’s efforts over the past month to replicate Japanese and South Korean regulators’ recent initiatives to improve corporate governance and close deep valuation discounts,” said Steven Sun, head of research at HSBC Qianhai Securities in Shenzhen.
“The CSRC’s new regulatory framework could help achieve better liquidity supply-demand dynamics and drive a gradual market re-rating.”
These improvements could help boost sentiment and attract foreign investment flows, though much also depends on the lingering property crisis and consumption trends in the world’s second-biggest economy.
“Delisting more companies and tightening listing requirements are designed to increase the quality of companies on the mainland bourses to attract longterm capital and protect domestic investors,” analysts at Everbright Securities said in a report.
The note said that in the medium term, the government was pushing for companies to issue buy-backs and increase dividend payout ratios.
UBS said the trade on stocks with high dividend yields would still be a winning strategy in the second quarter after the tactic had been in play over the past year. Big-capitalisation firms would probably outperform small ones because of their high earnings visibility and potential inflows from long-term capital, it said.
The Swiss bank expected earnings for the companies on the CSI 300 to rise by 8 per cent this year, outpacing last year’s 3 per cent growth.
Everbright analysts said buy-backs and dividends would be an important policy factor, as increasing the value of equity markets could improve household wealth effects, which in turn encouraged consumption as an offset to the negative wealth effects from falling property prices.
Wu’s image as a hawkish regulator stands in sharp contrast with his predecessor, Yi Huiman, whose policy approach seemed to be milder.
Wu, a veteran financial industry regulator, gained the sobriquet of “broker butcher” for spearheading the closure of more than 20 insolvent domestic securities firms in the aftermath of the 2008 global financial crisis.
Before taking the helm at the CSRC, he spent time as chairman of the Shanghai Stock Exchange and vice-mayor of the metropolis. As vice-mayor, he worked under the current premier, Li Qiang, who approved Tesla’s wholly foreign-owned Gigafactory in Shanghai when he was the city’s commissar.
With the market re-rating spurred by the state intervention having run its course, Wu now faces the challenge of further restoring investor confidence and sustaining the market rebound.
For that to happen, investors will need to see more long-term institutional flows from the likes of insurers, a rise in mutual fund subscriptions and leveraged bets, a further improvement in China’s economy and earnings forecast upgrades, according to HSBC Qianhai Securities.
More effective measures to tackle the crisis of confidence in the property market and clarity around the Community Party’s third plenum, which would lay out the nation’s long-term policy for economic development, were some of the other prerequisites, the brokerage said.
So far, few of these have materialised. The risk appetite for stocks remains tepid, with bond funds dominating new issuances in the first quarter and foreign buying slowing last month.
Hong Kong-listed stocks are now trading at 8.54 times forward earnings on average, the lowest among global peers, according to Bloomberg data.
Wu’s appointment and initial moves may have helped end a three-year market downturn, but the real benefits of his reforms will take longer to materialise.
“In the long run, these measures will create a healthier market by setting a higher benchmark for listed firms, delivering enhanced benefits from the stock market to the overall economy, and contributing more to economic growth,” Deloitte said in a report, which forecast overall A-share listing activity would “slow considerably” through this year.
Beijing’s resolve to strengthen its financial system is built around preventing systemic risk, with President Xi Jinping emphasising financial regulators and industry authorities must clarify their responsibilities and strengthen cooperation.
“Financial regulation must have teeth,” he said, adding China could become a financial superpower with a system “distinct from Western models”.
“China’s biggest problem, to me, is a lack of confidence. External investors lack confidence in China and domestic savers lack confidence,” Standard Chartered Bank CEO Bill Winters told CNBC.
For Elizabeth Kwik, investment director of Asian equities at abrdn, signs of market optimism have been emerging, with part of the economy delivering incremental improvement and policy support becoming accommodative after a cut in banks’ reserve requirement ratio and a loosening of restrictions on home purchases.
But for now, it is still not time to turn fully optimistic and expect a massive turnaround.
“Investors are still cautious, waiting for a more meaningful and sustainable recovery to come through,” Kwik said. “For foreign investors to return to the Chinese market, we think this will happen once the recovery momentum builds up across all parts of the economy, including the troubled property sector.”
The current set-up makes stocks an attractive option for domestic investors in our view SHI JIAN CORTESI, GAM INVESTMENTS
Investors are still cautious, waiting for a more meaningful and sustainable recovery ELIZABETH KWIK, INVESTMENT DIRECTOR, ABRDN