Two key events were on the radar screen of investors in China last week: the announcement of the country’s economic data for the first half of the year and the trading debut of Agricultural Bank of China (ABC; 601288.SH, 1288.HK).
Economic expansion moderated faster than expected in the second quarter, with GDP growing 10.3% compared to 11.9% in the first three months. Other indicators all pointed towards moderation: Industrial output growth slowed to 13.7% in June from 16.5% in May, while urban fixed-asset investment came in at 25.5% in the first half, 0.4% lower than for January-May.
Responding to the numbers, Premier Wen Jiabao reaffirmed Beijing’s commitment to maintaining a pro-active fiscal policy and moderately loose monetary policy.
As for ABC, the country’s largest lender by customers, its shares rose a meager 0.75% on its Shanghai debut on Thursday and then posted a 2.2% first-day gain in Hong Kong on Friday. This was the worst-ever debut for a Chinese bank, but it was widely deemed normal given the weak fundraising environment.
The mainland stock market has been plagued recently by a series of stock-sale plans announced by large state-owned banks. These institutions are keen to raise capital in order to bolster their balance sheets following a state-mandated lending spree last year as part of efforts to spur economic growth. This has raised concerns about a liquidity drain.
With the Shanghai Composite Index already down by more than a quarter this year, and among the worst performing indexes in the world, Beijing is under pressure to boost investor sentiment. The government wants to press ahead with initiatives to expand its fledging equity market – including the introduction of red-chip and foreign firms – and this is going to be difficult in current conditions.
Its response will be two-pronged: create relatively loose liquidity conditions, and control the pace of equity issuance.
Chinese firms have raised more than US$72 billion from the A-share market so far this year via initial public offerings, rights issues and private placements. According to Reuters, 60-70 companies are still waiting to list and corporate fundraising could run via share sales could run to US$118 billion for the year in full.
The People’s Bank of China has injected a hefty US$137 billion into the money markets over the past seven weeks to help ease the cash crunch, caused primarily by the ABC IPO. It may have to inject even more.
Chinese regulators have gained a reputation for using administrative measures to rescue stock market when it runs into trouble. Times are changing, however. Beijing is keen to internationalize the equities market and this means allowing movements to be driven by fundamentals rather than government fiat.
Consequently, the regulators are more likely to slow approvals of new equity issuance rather than halt IPOs completely. They tried the latter course of action in 2005 and 2008 and it failed to boost equity prices. Furthermore, a moratorium on equity sales would go against the State Council’s pledge to support companies seeking to go public to raise funds. Start-up firms, which are thirsty for capital with which to innovate and expand, would be especially hurt.
But a further postponement to plans to allow overseas-listed Chinese companies and foreign firms to list in Shanghai looks increasingly likely. Both initiatives, which were previously slated for late this year, won’t go ahead as planned unless the mainland index picks up strongly in the third quarter.
Some observers have suggested one-time incentives such as abolishing stamp duty for stock sellers. As it stands, China levies a duty of 0.1% on stock sale transactions, having abolished stamp tax on share purchases in April 2008, a move that offered a short-term policy boost ahead of the global financial crisis.
But economic fundamentals still matter the most. There is no shortage of funds that could be channeled into the stock market – aside from China’s huge household savings, cash is exiting real estate and looking for new targets – just a lack of confidence among investors. In this sense, the current government approach of sustaining stimulus policies may help the market find its upward direction in a short term.
It’s still possible that Beijing will intervene in the stock market via the social security fund and investment agencies such as Central Huijin, but this would be done quietly. The government’s abiding hope is that the market can start to find answers by itself.