The Economist reported that foreign investors, once enamored with Chinese stocks, are now increasingly fleeing, with net sales reaching $2 billion in January alone. Amid a turbulent economic landscape, the Chinese stock market faces a crisis that raises concerns for both local and foreign investors alike. The dismissal of the head of the Chinese securities regulatory committee, Yi Huiman, has underscored the seriousness of the situation, as market instability persists.
This development follows the evaporation of over $6 trillion in market value in China and Hong Kong over the past three years, with the Shanghai Composite Index hitting its lowest level in five years on February 5th. Huiman’s dismissal is part of a series of regulatory officials’ removals in China following stock price downturns, including his predecessor Liu Shiyu in 2019, later investigated for corruption. Xia Jiang, former head of the Chinese Securities and Exchange Commission, was scapegoated for the market collapse in 2015, according to the Economist.
Reports highlight a concerning trend where the Chinese government, particularly the internal circle of President Xi Jinping, intensifies efforts to suppress negative views on the country’s economic prospects. State Security Ministry warnings against spreading pessimistic narratives signal a crackdown on dissenting opinions, echoed in the precautionary measures taken by Citic Group and the reintroduction of the controversial “Article 23” in Hong Kong, reflecting governmental efforts to control information flow.
These developments pose significant challenges for economists, private bankers, and foreign news companies operating in China.
Shrinking Puts Pressure on Chinese Leadership
The current decline in the stock market intertwines with bleak economic forecasts in China primarily due to the stagnation in the real estate market. With prices and sales declining for over a year, policymakers have struggled to prevent a correction, exacerbating economic challenges.
Beijing faces multiple concerns stemming from the crisis, with over 200 million Chinese citizens owning stocks, making officials susceptible to public blame for market disruptions. Social media platforms have become avenues for expressing dissatisfaction, with speculations ranging from potential threats like bombs or toxins being sought at the Shanghai Stock Exchange.
Foreign Investors Retreat
According to the Economist, regulatory data since late January, including the commitment of “Central Huixin,” a government-owned investment arm, to buy stocks to stabilize the market, has left foreign fund managers unsettled. The crackdown on short selling and potential enforcement of measures against hedging instruments like shorting has heightened fears among foreign investors.
This regulatory uncertainty has led to a significant withdrawal of foreign investors from Chinese markets, amid concerns of employee detainment and accusations of financial crimes. Foreign and local investors eagerly await the establishment of a potential government rescue fund rumored to be worth around ¥2 trillion (about $280 billion), equivalent to about 3% of the stock market capitalization in China.
Long-Term Reforms
As China grapples with the current crisis, long-term reforms are being considered to reshape its stock market dynamics. A key aspect, according to the Economist, is shifting focus from raising capital to preserving investor wealth, aiming to create a more “investor-centric” market, necessitating fewer initial public offerings (IPOs) and more liquidity directed towards secondary trading.
The government’s plan also includes boosting the market value of state-owned companies, currently estimated at half the level of non-state-owned firms. The proposed reforms aim to establish a “Chinese-characteristics appraisal system” to enhance state-owned company stock prices by educating investors on their broader social roles.
Policymakers also aim to make state-owned enterprises more attractive to investors by providing metrics such as return on equity, regular profits, and stock buybacks.
While these reforms may pose challenges amid the current economic contraction, the government is considering them concurrently with broader plans to attract foreign investment and make Chinese stock markets more competitive globally.
However, in the context of the current crisis severity, permanent market transformation is likely to require comprehensive and ambitious measures, as outlined by the Economist.
