Àlex Fusté, Chief Economist at Andbank
China’s Communist Party has come to the rescue of the capital market: Beijing orders China’s sovereign wealth fund to increase stakes in enlisted banks as a measure to maintain market confidence. This is both a cosmetic and symbolic movement.
Central Huijin Investment, a unit of sovereign wealth fund China Investment Corp, has increased its stake in the country’s biggest banks for the first time since 2015. It bought 477 million yuan ($65 million) of category A shares in Bank of China, Agricultural Bank of China, China Construction Bank, and the Industrial and Commercial Bank of China.
The measure is intended to support the Chinese stock market by showing that the government will act –buying shares when necessary in an attempt to regain lost investor confidence. In our view, this is only a superficial and symbolic gesture, as the increase in the Sovereign Fund amounts to about 0.01% in each bank. This shows the government’s desire to keep the market stable, but we believe that much of the lost confidence will not be regained.
The move comes after leading Chinese macro hedge fund Shanghai Banxia Investment Management asked the Chinese government to set up a stabilisation fund to support shares through direct intervention. Li Bei, founder of this leading hedge fund, stated that “if the fall in Chinese shares continues, it will lead to more selling (margin calls) and further undermine investor confidence” and that “the only way to break the vicious cycle is for the government stabilisation fund to enter the market.” Based on this direct intervention strategy proposed by this hedge fund, we can conclude that the fund may face serious problems, and if these problems materialise, it could cause a chain reaction.
Market reforms that are anti-market ones: the Chinese government announces market reforms that run counter to the most basic laws of the capital market. This time, domestic investors are under attack.
China has for the first time banned domestic brokers and their overseas units from bringing in new clients from the mainland for offshore trading. Investments by mainland Chinese clients must also be “strictly controlled” to prevent investors from circumventing China’s currency controls. The measure is seen as a last-ditch attempt to curb strong capital outflows amid weakening stock markets and local currency. The sources believe the implementation will be immediate. The authorities have also ordered the removal of apps and websites that swindle capital from customers from mainland China. This is like putting domestic investors in a separate room to keep them away from the markets. I don’t think this move will help restore foreign (or local) investor confidence.
Growth challenges: Beijing foresees a higher budget deficit to meet its growth target.
The government is considering increasing the fiscal deficit for the last quarter of 2023 ahead of the new round of stimulus, and is considering issuing at least $137 billion in additional national debt. This would push the budget deficit above the 3% limit set in March. The financing is intended to reduce pressure on local governments due to their high interest burden and to pay for infrastructure projects. Of the total, about $3.6 billion will be sold in yuan-denominated sovereign bonds issued in Hong Kong in the fourth quarter. That would bring the annual figure to $55 billion yuan, the highest since China first issued its yuan-denominated sovereign bonds overseas in 2009. China has incentives to increase bond issuance with the long-term goal of internationalising the yuan.
Trade war with Europe: after Brussels launched an investigation into Chinese subsidies on electric cars, the EU is now planning an anti-subsidy investigation into China’s steel and turbine sector.
The EU plans to announce an anti-subsidy investigation into Chinese steelmakers at a summit with the US this month, as Brussels agreed to join Washington’s efforts to protect the industry from cheaper Chinese competition. It comes just weeks after the EU announced an investigation into electric cars made in China. Investigations into the wind turbine sector are also being considered.
A property sector that’s not hitting bottomm – IMF urges China to take decisive action to solve its real estate problems. Country Garden says the company cannot meet all offshore debt repayments.
In the latest World Economic Outlook, the IMF lowered its growth forecasts for China’s economy to 5% in 2023 and 4.2% in 2024 (from 5.2 % and 4.5 % respectively). The IMF’s chief economist urged Beijing to take decisive action on the property sector to ensure that the problem remains within the property market and does not spill over into the wider financial system. Meanwhile, Morgan Stanley reports that the majority of Chinese households are not ready to buy houses: “prospective buyers remain cautious about entering the housing market despite strong support.” The survey shows that 42% expect house prices to fall over the next 12 months (up from 23% since the last survey).
Russia and China: a marriage of convenience. Next week, China will hold a new Silk Road forum, Xi Jinping will give a speech, and Vladimir Putin will attend. The U.S. has called the project “China’s debt trap.”
Last week, China hosted the third New Silk Road Forum, which was attended by Russian President Vladimir Putin. President of the People’s Republic of China Xi Jinping delivered a keynote speech as China makes recent efforts to strengthen support for the New Silk Road project. The project was launched in 2013 and has since funded $900 billion worth of infrastructure. The U.S. calls it China’s debt trap.