The writer is the chief economist for Asia Pacific at Natixis and a senior researcher at the Bruegel think tank.
If the rule for US markets is “Don’t fight the Fed”, the traditional knee jerk of investors in China is to always pay attention to Beijing. That was underlined later In the past week’The move by the country’s top economic official to bolster confidence in Chinese markets.
Liu He, Vice Premier and close economic adviser to President Xi Jinping, made a rare public intervention to reassure investors. His comments to China’s financial stability and development committee were a far cry from Mario Draghi’s “do whatever it takes” speech that turned the eurozone crisis around in 2012. But they had an immediate response.
The CSI 300 index, which tracks the biggest companies listed in Shanghai and Shenzhen, is up 7 percent from a low before the comments. Hong Kong’s benchmark Hang Seng index had its best day since 2008 in reaction, rising more than 9.1 percent.
Clearly, Beijing had enough of the beating Chinese stocks have taken since the start of last year. From highs early last year, the CSI 300 index had fallen by about a third before Liu’s intervention.
Investor confidence was hit by Beijing’s crackdown on the private sector, particularly high-flying tech companies. A debt crisis at real estate developer Evergrande also raised concerns about the real estate sector. Sentiment then deteriorated sharply in the first half of March after a rapid rise in covid cases in major Chinese cities and the start of the Russian invasion of Ukraine.
The problem for investors, however, is that it will be very challenging for China to comply with the remedies outlined in vague terms by Liu. His comments were primarily intended to remind investors of China’s goal of stability, particularly in a crucial political year when Xi is expected to be re-elected after his second term. But Liu also detailed the three routes through which Chinese policymakers could help return capital markets to a stable path.
They were facilitating Chinese companies’ access to foreign capital markets; offer a “standardized, transparent and predictable” approach to the regulation of tech giants; and provide enough stimulus to hit the 5.5 percent GDP growth target set by Premier Li Keqiang just a couple of weeks ago.
However, there are obstacles on all three routes. In foreign listings, the thorniest point is the US requirement for the disclosure of detailed audit information on Chinese listed companies to regulators following legislation passed in late 2020. Stock Market and Securities warned last week it will begin excluding Chinese companies from the US unless they comply. However, there are rumors that regulators in China might be willing to compromise and allow companies to comply.
What might not be so easy for Liu is convincing China new range of regulators to reduce the pressure they have been putting on China’s Internet companies to limit their overseas listings. These include the Cyberspace Administration of China, which oversees China’s Internet companies, and the State Administration for Market Regulation, China’s antitrust body.
These regulators also hold the key to the second problem that Liu He must address, namely providing a more predictable regulatory environment for Chinese Internet companies at home. However, this goal may run counter to Beijing’s general “common prosperity” drive, as most of these Internet companies are owned by billionaires, who are expected to continue to pay the price of excessive market power.
Economic stimulus, the other key part of Liu’s argument, should, in principle, be the easiest to achieve. But the stimulus plans announced so far are a far cry from what China has undertaken in the past, certainly when compared to the massive fiscal package of 2008 and even the more modest one of 2016 following the summer stock market crash. 2015. The People’s Bank of China may also feel that other policymakers need to do more before it eases monetary policy further, particularly as the Federal Reserve is expected to hike rates aggressively.
In the context, Covid cases continue to pile up in China and lockdowns and other zero Covid-related policies continue to weigh on economic growth. The Ukraine war will also hit global demand for Chinese goods, and Beijing’s ambiguous stance on the conflict increases the risk of the country being caught up in Russia-related sanctions.
Liu’s argument can only be praised for its immediate effectiveness, but long-term results will be difficult to achieve.