Beijing has stopped the panic in China’s stock markets, but it must do more to convince investors
- Intervention to calm panic is welcome but took too long, coming only after 16 months of intense crackdowns, including on tech giants Tencent and Alibaba
- The rhetoric must now be matched with concrete actions if investors and businessmen at home and abroad are to be reassured
Over the past year, watching how China’s policymakers address mounting economic woes and bleeding stock markets has been not unlike watching a disaster movie in which one sees a crisis looming on the horizon but can only sit and watch until its gathering strength and intensity threaten to overwhelm, before the characters on screen finally take action.
There had been expectations that the Chinese leaders might signal a roll-out of robust market-friendly policies to support the economy and shore up confidence at the annual sessions of the parliamentary National People’s Congress and the advisory Chinese People’s Political Consultative Conference held from March 4 to March 11.
After all, the annual “Two Sessions” are the ideal occasion as China’s elites gather to map out economic and social development goals for the year. Chinese leaders have already warned that the economy this year will face the triple risks of subdued consumer demand, massive disruptions of supply chains because of Covid-19 restrictions, and weakening expectations. The housing bubble has burst and China’s intense crackdown on some of the country’s biggest and best technology companies has scared off investors and raised more pessimism about the country’s overall economic direction. Moreover, the latest spike in Covid-19 cases and Russia’s invasion of Ukraine – and the subsequent tough sanctions by Western countries – have contributed to an even gloomier outlook.
But if China’s leaders including President Xi Jinping were concerned, they hardly showed any sign of it in public during those seven days of meetings. Among other things, Xi talked up the importance of self-sufficiency in grain production. At his last annual press conference as premier following the close of the NPC session on March 11, Li Keqiang was largely subdued and reflective, promising to create more jobs and offer more tax cuts and rebates to micro and small firms hit hardest by Covid-19 restrictions.
In the subsequent trading days, market panic worsened as the Ukraine war dragged on, prompting even more brutal sell-offs in the Chinese bourses and in Chinese companies listed in Hong Kong, New York and elsewhere.
Only on March 16 did Beijing intervene to calm the markets and reassure investors with a promise of a slew of measures after the previous day saw domestic stocks slumping to 21-month lows and Chinese mainland firms listed in Hong Kong to 2008 lows.
Vice-Premier Liu He, Xi’s most trusted economic adviser, announced the market-friendly measures at a special meeting of the State Council’s Financial Stability and Development Committee, which he chaired.
The measures were carefully worded and targeted to address a range of major concerns about the Chinese economy. They included pledges of “actively” introducing market-friendly policies and “prudently” releasing contractionary measures; calls for “effective risk prevention and mitigating solutions” to deal with a struggling property market; a signal for a possible end to the crackdown on tech companies by urging regulators to complete the rectification of big tech platforms “as soon as possible”, and a vow to hold officials accountable for failing to coordinate with financial regulators over any policy which could impact the capital markets.
The positive rhetoric immediately triggered an impressive stock rally across the board at home and for Chinese companies listed in overseas markets. The announcement may have stopped the bleeding in the stock markets temporarily but it has still left many questions unanswered and many investors unconvinced.
The government’s intervention reflected an alarming realisation among Chinese leaders that the market panic could force investors to rethink their strategies of investing in Chinese stocks and its spillover effects could undermine economic and political stability in a crucial year. The Communist Party plans to hold its 20th congress in the fall when Xi is widely expected to seek a third term and set himself up to rule as long as he likes.
But China’s delayed response to market panic and its harmful impact on the economy is extraordinary and mind boggling. It came 16 months after the government signalled the start of an intense regulatory crackdown on private firms in November 2020 when Chinese regulators, without any warning, pulled the plug on the listing of Ant Financial, one of the country’s biggest fintech companies, in the very same week as it was to make its initial public offering. Ant Financial is majority controlled by Alibaba Group, which owns the South China Morning Post.
Since then, as the authorities vowed to tame the “irrational expansion of capital” and monopolistic practices of big tech companies, the sweeping regulatory actions have expanded to businesses involved in gaming, off-campus tutoring, delivery, e-commerce, entertainment, social networking providers, real estate, and pharmaceuticals.
All this has created a ridiculous situation in which many Chinese companies, particularly those tech platforms, are being squeezed from all sides – in their own home country and in the overseas markets where their investments are under increasing regulatory and media scrutiny at a time when China’s overall relations with the United States and its Western allies have worsened.
For instance, the US Securities and Exchange Commission has for years demanded access to the audit documents of the US-listed Chinese companies – an international practice – but Beijing has stalled, citing national security concerns. The March 16 announcement said the Chinese regulators were working with US counterparts on “a concrete co-operation plan”. But that concession came only after the SEC put in motion plans to kick out Chinese companies listed in the US that did not hand over their audit records.
According to Bloomberg data on March 15 – one day before China’s intervention, the country’s two largest technology giants Tencent Holdings and Alibaba Group had lost more than US$1 trillion in combined market value, accounting for more than half of the US$2.1 trillion in total losses for the Hang Seng Tech Index since the gauge’s February 2021 record high. The total should be much higher and could run into US$3 or US$4 trillion once one counts in losses from other sectors.
Following the March 16 announcement, China’s financial regulators acted as if they had suddenly seen the elephant in the room and vowed to tackle the issues vexing investors. On the same day, the Ministry of Finance announced that it would shelve the plan to expand a property tax trial for this year.
In fact, the March 16 measures should have been announced much earlier to improve investor sentiment and stop massive losses. Since late last year, Chinese officials startled by the bearish sentiment have started to murmur about no more policies which risk further hurting markets. Sadly, those murmurs had failed to translate into action until recently.
Among other reasons, China’s much delayed intervention is one more piece of evidence of official lethargy prevailing in the politically charged environment in which officials are asked to strictly toe the party lines and listen to the party leadership. That means even if officials see a crisis looming on the horizon, they are mostly expected to kick the problem upstairs and wait for instructions instead of doing what they are paid to do. By the time the problem reaches the leaders and by the time they make a decision, its severity and magnitude have risen exponentially, which ironically is what makes it serious enough to be worthy of their attention.
While the March 16 announcement was welcome, the rhetoric must be matched with concrete actions to convince investors and businessmen at home and abroad.
According to the announcement, when regulators formulate policies, they must follow the market, legal and international standards and their regulatory actions should be standard, transparent and predictable.
Well, if they had listened to their own advice, they would not be in such a big mess.
Author: Wang Xiangwei is a former editor-in-chief of the South China Morning Post. He is now based in Beijing as editorial adviser to the paper, SCMP