Beijing’s recent push to restore the sagging investors’ confidence is not enough to stem the downward spiral of the economy and will be short-lived if they are not followed by measures for supporting the real economy, say analysts.
Various ministries under China’s State Council announced several measures to bolster investor confidence and support capital markets. These have been under severe strain in recent months due to the second-largest economy’s deteriorating momentum and Beijing’s lukewarm policy response.
On Sunday, for example, the finance ministry halved the stamp duty on stock trading to 0.1 percent, which was the first such reduction since the 2008 global financial crisis. In a short statement, the ministry stated that the cut was made “to energize the capital market and boost investor confidence.”
The China Securities Regulatory Commission also said on Sunday that it will reduce the number of initial public offerings (IPOs) to calm the market considering the recent volatility and to discourage investors from selling existing holdings to fund IPO investments.
Last year, the Shanghai Stock Exchange ranked first in terms of raising funds through IPOs, many of which raised a substantial amount. According to reports, the large IPOs triggered a stock market sell-off as investors liquidated existing holdings to support their investments in major listings.
Yet, while Sunday’s measures led to the hardening of the China Government Bond (CGB) yields and the yuan on Monday, “these were just quick fixes for very short-term solutions and may not help much in improving the GDP growth and solving the crisis in the markets,” said Gary Dugan, the chief investment officer of Dalma Capital, an avid foreign investor in China.
In yet another effort to calm the markets earlier last week, the Ministry of Housing and Urban-Rural Development (MOHURD), the People’s Bank of China, and the National Financial Regulatory Administration issued a joint circular to officially allow local governments to abandon the “no mortgage record” rule for determining the status of first-time homebuyers.
“Markets were already expecting this softening step after the indication from the chairman of MOHURD on July 27,” Mr. Dugan told The Epoch Times.
[But this, too,] was a knee-jerk reaction that is a sticking plaster on the problems, and people are still waiting for a significant policy measure to underpin growth.”
Ting Lu, an analyst at Nomura, argues that the current unwinding policy only benefits major cities because the “no-mortgage record” regulation only applies to tier-1 and a few tier-2 cities.
“Although the circular stresses that it is up to local governments to decide whether to lift this rule, we believe many cities, including tier-1 cities, will lift the rule, given the current risk of a nationwide property collapse,” wrote Mr. Lu in a note on Monday.
He is concerned that the easing may depress demand in secondary markets and do nothing to mitigate default concerns for major developers, many of whom have large holdings in low-tier cities. “In sum, this measure is not enough,” Mr. Lu wrote.
While personal asset allocations in China are skewed toward housing, and falling housing prices pose the risk of a trend reversal effect by sharply curtailing willingness to spend, analysts believe that any loss of confidence in stock markets, as well as trust in listed companies and IPO candidates, can also be damaging to the economy.
“Ironically, the measure to hold back IPOs does not square with a bull market because, in a good market, IPOs are needed to get retail investors excited,” said Mr. Dugan.
During the stock market crashes of 2013 and 2015, China temporarily halted initial public offerings. The latest move, though, is intended to be phased in over time, preventing a complete halt in IPOs. Market circumstances will dictate the scope and length of corporations halting IPOs, the regulator said.
In the July Politburo meeting, the Chinese leadership had promised to revive the country’s stock market and the economy, which have been suffering from a slow recovery from the pandemic and a worsening debt issue in the real estate sector.
China ‘Boxed Itself Into a Corner’
“Unfortunately, China has boxed itself into a corner where it needs to implement big structural changes and unwind the previous drivers of growth quickly, particularly in the property sector,” Mr. Dugan added.“China needs to see a path back to the 5 percent percent growth of the government. We seem to be drifting off now, and we do not see the bottom yet,” he said.
As the economy falters on a deepening housing downturn, poor consumer spending, and plummeting loan growth, major banks have lowered their growth forecasts for the year to below the government’s target of approximately 5 percent.
Data released on Sunday revealed a drop in profitability in China’s industrial enterprises, which has continued for seven consecutive months due to sluggish demand.
Industrial profits in China dropped 6.7 percent in July from the same month a year ago. Meanwhile, the National Bureau of Statistics released figures on Sunday showing that median household income fell by 15.5 percent year-over-year through July, following a 16.8 percent drop through the first half of the year.
This month, the central bank promised to maintain its “precise and forceful” stance in order to promote recovery.
“China needs to put helicopter money into the economy through lending, or financing infrastructure, refinancing the bank or the financial institutions in trouble, or creating a significant pool of capital to bail out the property sector projects,” said Mr. Dugan. “It is going to take billions of dollars to shore up confidence in the market.”
