The continued volatility in China’s stock markets is making it difficult for authorities to go ahead with key aspects of their economic reforms program, and analysts say a major plunge may be near.
The recent slide, which has washed away over $3 trillion in stock value in recent months, is making it difficult for authorities to implement some key features of their economic reforms program, two economists and a financial consultant told VOA.
At stake is Chinese Premier Li Keqiang’s plan to channel foreign investments through the stock market. China has traditionally relied on foreign direct investments, and restricted the flow of foreign capital through the stock/equity route.
But that may prove to be extremely difficult. The credibility of the Chinese stock markets has been damaged due to regular government meddling to push up prices, according to economists.
“It’s unlikely that foreign institutional investors will be interested in participating in a market in which the government keeps interfering,” said Oliver Rui, professor of finance and accounting with the Shanghai based China Europe International Business School (CEIBS). “In sum, investors should focus on the banking sector instead of the stock market.”
Sandra Heep, head of Program on Economic Policy and Financial System at Berlin’s Mercator Institute for China Studies (MERICS) said, “The aim of turning the stock market into a major pillar of corporate financing has receded into the far distance.”
“The government’s bid to internationalize China’s financial system and attract foreign portfolio investment has suffered a major setback: in the eyes of foreign investors, China’s capital markets have lost much of their sparkle as a result of massive government intervention,” she said.
A key aspect of the government’s reform program is to restructure the State owned Enterprises (SOEs), which are have a widespread reputation for financial mismanagement and wasting of resources.
Chinese authorities expected stock prices to ride high, which would help in the SOE restructuring program. But a falling market, say the analysts, would prove to be frustrating for the government.
‘Polishing’ the balance sheet
“High stock prices were not only meant to allow them to polish their balance sheets, but also to facilitate new funding via capital increases. This plan has been dealt a serious blow,” Heep said.
Rui of CEIBS agreed saying, “The weak stock market will slow down the SOE reforms."
The third cause of worry for the government are initial public offerings (IPOs) of a large number of companies, which were expected to raise over $60 billion through issue of fresh shares. A depressed market will make it difficult for them to raise as much as they had expected.
Besides, the China Securities Regulatory Commission is expected to slow down new issues of shares because a flood of IPOs has the potential of pushing the market further downwards.
“CSRC is delaying IPOS, and the likely further control of the IPO frequency. It is doing so to stabilize the market. Traditionally, the extent of IPOs and market returns have very negative correlations,” said Johnny Fang, an analyst at the consulting firm Z-Ben Advisors.
The regulator has already taken some shrewd measures to soften the blow on the market once the IPOs start coming out. It revised a rule to control the flow of investors’ funds during IPO subscriptions. It also announced another rule under which only existing stock investors can apply for an IPO subscription. The more an investor holds shares, the more he can obtain through IPOs. The idea is to discourage them from selling, and protect the market.
“These measures will greatly mitigate short-term liquidity pressure caused by IPO,” Fang said.
As the market continued falling in January, even the state-owned Chinese media turned critical, complaining that regulators were not thinking through their moves.
“The latest rout should bring an end to any illusion that the Chinese mainland's stock markets are still okay. Instead, the increasing fragile investor sentiment represents an urgent call for a thorough regulatory review to identify and fix the underlying problems that plague them,” China Daily said recently in an editorial.
The most dire prediction came Wednesday in an email sent to clients by Gao Ting, head of China strategy at UBS in Shanghai. He warned that thousands of companies that have pledged their shares to take out loans are now being forced to sell their assets to repay the debts.
"If China’s stock market continues to fall, equity pledging-related selling pressure could increase significantly, putting further pressure on the stock market," said Gao.