Stock Market News- How Xi Jinping Aims to Boost Shareholder Value

Stock Market News– Xi Jinping is intensifying efforts to create a strong stock market in China. Whether this initiative stems from a genuine belief in shareholder value or is merely a tactic to boost approximately $11 trillion in equities to stimulate the second-largest economy will be pivotal to its success.

Aiming for a “High-Quality Market”

In April, Xi outlined his vision for a high quality market in a policy paper focused on capital markets. The Chinese State Council’s Nine Measures aim to encourage listed companies to enhance dividends and increase their investment value, which includes tighter supervision over payouts. This initiative may seem optimistic at first glance. While China’s stock market has grown to become the world’s second-largest, past policymakers appeared indifferent to whether equity performance matched the country’s rapid economic expansion. Since Deng Xiaoping initiated reforms in 1978, China has averaged an annual economic growth rate exceeding 9%. In stark contrast, the annualized return from the MSCI China A Onshore Index stands at only 4.40%, according to Hong Kong-based Value Partners.

Xi’s push towards shareholder value aligns with similar movements gaining momentum in Japan and South Korea. Despite this, stimulus initiatives unveiled in September indicate that Beijing is committed to boosting stock prices, at least in the short term.

Measures include a swap facility allowing insurers and asset managers to purchase shares, along with loans from the People’s Bank of China to companies through commercial banks at a mere 2.25% interest rate to finance share buybacks. Morgan Stanley estimates that the combined promised 800 billion yuan ($112 billion) through these schemes is approximately 3% of the free-float market capitalization of stocks traded on the mainland.

Following the introduction of the lending facility, the benchmark CSI 300 Index of onshore Chinese stocks surged, gaining more than 20% in a month. However, this may also signal the onset of yet another speculative bubble reminiscent of past cycles in China’s stock market. Still, the central bank’s affordable funding provides a compelling incentive for companies to return capital to shareholders, countering potential drawbacks of the new policies. Notably, profitable firms that fail to increase returns may face repercussions.

The Benefits of a Stronger Stock Market

A more robust stock market could help stabilize the Chinese economy in several key ways. For one, it could offer citizens a reliable avenue to invest their savings. Currently, households are hesitant to invest in volatile equities, with only 10% of their assets in stocks and mutual funds, compared to nearly 60% in real estate, as reported by Allianz Global Investors.

A decline in real estate prices, compounded by a crackdown on wealth management products, has left a significant amount of money looking for alternative investments. This situation has spurred high demand for government bonds, with yields on 10-year Chinese government debt plummeting to nearly 2%, a level not seen since records began. In contrast, stocks have become increasingly attractive; for instance, the $120 billion oil company CNOOC and the $80 billion electrical appliance maker Midea offer dividend yields that are double those of government bonds, with analysts predicting further increases in dividends next year.

Stronger shareholder returns would also benefit state owners, including local governments, which rely on revenue from land sales. According to Kinger Lau, a strategist at Goldman Sachs, state-owned entities (SOEs) account for 48% of the market value of Chinese equities. Every 10-percentage point increase in SOE dividend payout ratios could channel an additional 230 billion yuan ($32 billion) to the government, representing 1% of China’s total on-budget fiscal revenue and 4% of nationwide land sales in 2023.

Overcoming Internal Challenges

Chinese firms are well-positioned to boost dividends, having generated record-high free cash flows last year due to reduced capital expenditures. They currently hold cash reserves totaling 18 trillion yuan ($2.53 trillion), or 23% of the market’s total value, as per Goldman Sachs research.

Moreover, a more reliable stock market could foster innovation. Xi has expressed concern over the declining number of Chinese unicorns—startups valued at over a billion dollars. Stronger equity values would provide founders and investors with exit opportunities without having to rely on overseas exchanges, where political skepticism about Chinese businesses is rising.

On paper, China possesses numerous direct tools to compel companies to improve their performance. The high level of state ownership could diminish the need for stringent governance codes, unlike those seen in Japan.

However, the biggest hurdle in building a robust stock market lies within China itself. The China Securities Regulatory Commission (CSRC) has frequently encountered three pitfalls, as outlined by James Fok in his book “Financial Cold War: A View of Sino-US Relations From the Financial Markets.” These include regulatory overreach, political interference, and intervening to bail out investors during market downturns.

Political meddling often leads to volatile boom-and-bust cycles. For instance, a massive market surge in 2015 ended in a dramatic collapse, wiping out approximately one-third of the value of Shanghai-listed stocks within a month, following the CSRC’s crackdown on shadow-financed margin accounts. Such wild fluctuations deter domestic institutional investors, who currently own only 11% of the retail-driven market.

As Xi Jinping pushes for a stronger stock market, the balance between stimulating growth and ensuring stability will be crucial for the future of China’s economy.