“We believe that the current regime makes equities an attractive option for domestic investors as real estate is unpopular, bank deposit interest rates are very low and equity valuations are at very low levels. There is.”
Mr. Wu’s silver bullet to revive the flagging stock market combines state intervention, strict law enforcement and tougher crackdowns on crimes ranging from fraudulent listings to stock price manipulation. While some measures have drawn criticism, all of these efforts reflect policymakers’ main message: the stock market exists to serve the economy and is a place for Chinese people to protect their wealth. ing.
Despite this rally, Chinese stocks remain undervalued, partly reflecting investor hesitation.
Chinese stocks have become cheaper over the past decade. According to Bloomberg data, the CSI300 index, which includes Japan’s 300 largest stocks, is valued at a P/E ratio of 11 times in 2023, which is cheaper than the average of 12.2 times over the past 10 years. By comparison, New York’s S&P 500 Index has a multiple of 22 times, and Japan’s Nikkei Stock Average has a multiple of 21 times, the data showed.
This year’s gathering has been largely led by the Chinese national team, a tongue-in-cheek comment on state-owned enterprises, including the investment arm of sovereign wealth funds. The team poured about 438 billion yuan ($60.5 billion) into exchange-traded funds (ETFs) over the past eight months, contributing to market support, according to estimates by HSBC Qianhai Securities.
Market operators and regulators are typically responsible for ensuring the smooth operation of financial exchanges and typically do not dictate whether markets rise or fall. This is not done in China. China’s lack of investment options has made the stock market the default source of capital appreciation for the country’s 220 million retail investors.
Despite the potential moral hazard, Mr. Wu believes in this approach, declaring in his first press conference since taking office that state intervention is necessary and justified in times of “market dysfunction.” .
Mr. Wu did not respond to an interview request. His focus on investor protection has impressed the market. The CSRC has published a number of draft regulations aimed at raising standards for company listings and strengthening oversight of high-frequency trading. The government has also begun on-site inspections of investment trusts in an effort to strengthen industry controls.
The watchdog pledged to tighten new listing rules, especially for companies that are not profitable, and to step up on-site inspections of the financial records of listing candidates. It also aims to curb the supply of new shares while encouraging share buybacks and dividend payments to boost shareholder returns.
“Most investors are skeptical of recent efforts by Japanese and Korean regulators to improve corporate governance and eliminate large valuation discounts,” said Stephen Sun, head of research at HSBC Qianhai Securities in Shenzhen. “We are likely to support the CSRC’s efforts over the past month to replicate this.” “CSRC’s new regulatory framework could help improve liquidity demand and supply dynamics and facilitate a gradual rerating of the market.”
These improvements could help boost investor sentiment while attracting investment flows from abroad, but much will also depend on the lingering real estate crisis and consumer trends in the world’s second-largest economy.
“Delisting of more companies and stricter IPO requirements will improve the quality of companies on mainland stock exchanges, attract long-term funds, and protect domestic investors,” Everbright Securities analysts said in a report. It is aimed at that.”
The memo said the government is asking companies to carry out share buybacks and increase dividend payout ratios over the medium term.
UBS Group said trading high-dividend-yielding stocks has been a winning strategy for the past year and will continue to be a winning strategy in the second quarter. The report said larger companies will likely outperform smaller companies due to higher earnings prospects and potential inflows from long-term capital. The Swiss bank predicted that profits for companies in the CSI300 index would rise by 8% this year, beating last year’s 3% rise.
Analysts at Everbright say stock buybacks and dividends are important because rising stock market values improve households’ wealth effects, boosting consumption and offsetting the negative wealth effects of falling real estate prices. He said that it would become a major policy element.
Mr. Wu’s image as a hawkish regulator is in sharp contrast to his predecessor, Mr. Li Huiman, whose policy approach seemed more moderate. Mr. Wu, a veteran financial industry regulator, earned the nickname “Broker Butcher” after spearheading the closure of more than 20 domestic brokerages that went bankrupt in the aftermath of the 2008 global financial crisis. Prior to taking the helm of CSRC, he served as chairman of the Shanghai Stock Exchange and vice mayor of Shanghai. As deputy mayor, he worked under current Premier Li Qiang, who, while a city commissioner, approved Tesla’s fully foreign-funded gigafactory in Shanghai.
With the market reratings caused by state intervention coming to an end, Mr. Wu now faces the challenge of further restoring investor confidence and sustaining the market recovery.
According to HSBC Qianhai Securities, for that to happen, investors will need to see an increase in inflows into long-term institutional investors such as insurance companies, an increase in mutual fund subscriptions and leveraged betting, and an increase in China’s economic growth. We need to see further improvements and upward revisions to earnings forecasts.
More effective measures to address the crisis of trust and transparency in the real estate market are some of the other prerequisites for the third General Assembly of the Joint Party, which will set out the country’s long-term policy towards economic development. said the securities company.
So far, very few of these have materialized. Bond funds accounted for most of the new fund issuance in the first quarter, overseas purchases slowed in March, and risk appetite for stocks remains weak.
Hong Kong-listed stocks are currently trading at an average forward P/E of 8.54 times, making them the cheapest among their global peers, according to Bloomberg data.
Wu Qing’s appointment and initial moves may have helped end a three-year market slump, but the real benefits of his reforms will take longer to materialize.
“Over the long term, these regulatory measures will create healthier markets by setting higher standards for public companies, transfer the benefits of the stock market to the economy as a whole, and strengthen the economy,” Deloitte said in the report. We expect this to further contribute to growth.” Activity in the overall A-share IPO market will “slow significantly” until 2024.
“Financial regulation must have teeth,” he said, adding that China could become a financial powerhouse with a system “different from the Western model.”
“For me, China’s biggest problem is a lack of confidence. External investors lack confidence in China, and domestic savers lack confidence,” said Bill Winters, chief executive of Standard Chartered Bank. (CEO) told CNBC.
For Elizabeth Kwik, abrdn’s director of Asian equities investment, the gradual improvement in parts of the economy due to lower bank reserve requirements and domestic deregulation, as well as more accommodative policy support. The market is starting to show signs of optimism. Purchased item.
But for now, it’s not yet the time to be completely optimistic and expect a massive turnaround.
“Investors remain cautious, waiting for a more meaningful and sustainable recovery,” Kwik said. “We believe that foreign investors will only be able to return to the Chinese market once recovery momentum strengthens in all sectors of the economy, including the troubled real estate sector.”
Additional reporting by Daniel Ren
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