Sanctioned China stocks win sudden boost from patriotic buyers; Exclusive Insight: Why does the Chinese stock market tend to rise less and fall more?
Gasoline Prices, a Source of Pain Last Year, Have Come Way Down; China Bulls Are Stepping Back as Stocks Witness Renewed Selloff; Are China and Russia the real reason Canada is talking to Saudi Arabia
Welcome to this issue of The China Brief. Today is May 26, 2023 . Here at The China Brief, we bring you the latest news on China's politics, economy, and society from global media sources, along with exclusive expert analysis. If you find our content helpful, please subscribe to our newsletter.
Exclusive Insight: Why does the Chinese stock market tend to rise less and fall more?
In the millennial year of 2000, the Shanghai Composite Index had risen to 2000 points, closing at 2073 points. Twelve years later, at the end of 2012 when Xi Jinping took over as the General Secretary of the Chinese Communist Party, the index closed the year at 2269 points. Over those twelve years, the index hardly increased, a trend that sharply contrasts with the average annual GDP growth rate in China, which was above 8%.
From the end of 2012 to the end of 2017, during Xi Jinping's first term, the Shanghai Composite Index saw a bull run with its highest point being 5178 on June 12, 2015 (Friday). However, on the next trading day, June 15th (Monday), which was Xi Jinping's birthday, the Chinese stock market began a sharp decline, resulting in the infamous stock market crash. Two months later, the index plummeted to its lowest point at 2850. For the subsequent seven-plus years, there has been neither a bull nor bear market, rather the Shanghai Composite Index has fluctuated around 3000 points, like a monkey bouncing up and down. As of today (May 4, 2023), it closed at 3350 points, another stark divergence from the economic trajectory of China over the past seven years.
This article seeks to explain why the trajectory of the Chinese stock market diverges from macroeconomic indicators? More specifically, why does it tend to fall more than it rises? Why can't it, like the Dow Jones Index, exhibit a clear upward trend?
The fundamental function of the stock market is to improve the efficiency of capital allocation. For instance, if I have a sum of money sitting idle in the bank earning low interest and lack the ability to start a business, I can invest it in a promising project which needs to raise funds. After the project's success, I receive dividends, and the project thrives. From a macroeconomic perspective, the stock market helps to match investor capital with worthwhile projects, fostering economic growth.
However, since the birth of China's stock market in the early 1990s, its fundamental function has not been to improve capital allocation efficiency, but merely to serve those seeking to raise capital. In the 1990s, the Chinese central government's positioning of the stock market was to "relieve state-owned enterprises (SOEs) from distress". Many SOEs were struggling due to systemic and institutional issues, and banks were saddled with a significant amount of non-performing loans from these SOEs. The difficulty for SOEs to continue borrowing from banks grew, but by issuing a portion of circulating shares to investors while maintaining absolute state control, the funds raised did not require repayment of principal and interest like bank loans! Fast forward to the present day, two to three decades later, and most of China's key SOEs have listed on the stock market. Currently, the primary function of the Chinese stock market is to help a large number of private enterprises facing difficulties in obtaining and affording financing from the banking system (where SOEs are the main clients) to raise capital.
For a long period in the past, even if a company met the listing standards, it needed approval from the China Securities Regulatory Commission (CSRC) to go public, a mechanism known as the "approval system". The central government's performance evaluation of the CSRC is based on the number of securities issued and the total amount of funds raised, rather than the annual increase in the Shanghai Composite Index. The dysfunctionality of the market and its performance evaluation criteria imply that:
Using economic terminology, once the Chinese stock market performs well and the market warms up, the CSRC is invariably "unable to commit not to" issue new shares. An increase in stock supply, naturally, will pull down the index and cool the market. This inherent "unable to commit not to" flaw means that it's challenging for the Shanghai Composite Index to emulate the Dow Jones Index and experience a long-term, sustained bull market. To draw a metaphor, the Chinese stock market is like a pot of dumplings; the listed shares are the cooked dumplings in the pot, the unlisted shares are the raw dumplings outside the pot, and the temperature of the water represents the Shanghai Composite Index. Once the water heats up and starts boiling (bull market), the CSRC always dumps a significant amount of raw dumplings into the pot, thereby reducing the water temperature and making it hard for it to sustain boiling.
Although the Shanghai Composite Index can't continually rise and is perpetually stuck in a "monkey market", if one charts the total market capitalization of the Chinese stock market and the total financing amount annually, one would discover that these variables, like the Dow Jones Index, exhibit a clear upward trend, and are even steeper than the trajectory of the Dow Jones.
The Chinese stock market's propensity to fall more than it rises and its divergence from macroeconomic indicators can be attributed to other factors, such as poor quality of listed companies, low governance levels, fewer dividends, poor stock market regulation, market manipulation, etc. However, compared with the basic function positioning issue of the stock market, these are not the main factors. At this point in the article, media has just announced that Zhu Congjiu, the former leader of the CSRC who had been in charge of stock issuance for a long time, is being investigated by the Central Commission for Discipline Inspection. The corrupt "approval system" for issuing stocks will soon become a thing of the past. Cleaning up corruption in the stock issuance process may help improve the quality of newly issued stocks, similar to improving the quality of raw dumplings. However, if the "unable to commit not to" issue is not resolved, the Chinese stock market will continue to be like a pot that can hardly sustain boiling, remaining in a perennial "monkey market".
(The author of this article is Li Weijun, a special contributing economist for The China Brief.)
Gasoline Prices, a Source of Pain Last Year, Have Come Way Down
NY Times
The US national average price for regular gasoline is now $1 per gallon lower than it was at the same time last year, due to a surplus of oil supplies and the subsequent fall of prices. This marks an unusual situation compared to the previous year when prices were surging and drivers were paying over $4.60 per gallon in May, with prices hitting $5 by the second week in June. Experts predict that gas prices will remain around the same level for most of the summer, with gasoline demand increasing in the last month with AAA predicting a 7% increase in holiday weekend travel from last year. While gasoline prices are known to have a psychological effect on lower-income groups, who tend to spend a larger proportion of their income on energy than more affluent groups, Americans in general have started changing how and where they purchase their fuel, favouring big-box retailers and supermarket chains offering lower prices by buying their gasoline in bulk from refiners.
China Bulls Are Stepping Back as Stocks Witness Renewed Selloff
Bloomberg
Citigroup's allocation team has cut its overweight rating on Chinese equities to neutral as the MSCI China Index has lost 2.5% since it took the stance in December 2019. Rather than buying into the Chinese recovery story, the bank believes there is "no sense that any large stimulus is imminent". Jefferies Financial’s Christopher Wood also reduced his overweight allocation on the market for the second time in under two weeks, doubling down on his bullish stance on India, Korea and Taiwan instead.
Are China and Russia the real reason Canada is talking to Saudi Arabia again?
The Toronto Star
Restoring relations with Saudi Arabia is the right move forward for Canada despite human rights concerns, say experts. The comments come as Canada announced that it is normalizing diplomatic relations with Saudi Arabia and appointing ambassadors, five years after a rift. The move has come as Saudi Crown Prince Mohammed bin Salman is seeking to make his country the region’s energy powerhouse. Critics say the move has put economic factors ahead of human rights.
Portugal paves way to a Huawei ban on country’s 5G network
Financial Times
The Portuguese government has released a Cybersecurity council document laying out a plan to restrict the use of "high risk" 5G hardware in the country, which many observers believe implies a ban on Huawei's equipment. If formalised, the ban would be a significant policy change from its previous stance on Huawei and a setback to China's ambitions in Europe. The three main mobile telecoms companies in Portugal are Altice Portugal, Nos, and Vodafone. Altice Portugal signed an agreement with Huawei in 2018 to use Huawei's equipment in its 5G network.
Sanctioned China stocks win sudden boost from patriotic buyers
Reuters
Investors in China are increasingly backing Beijing in its technology industry spat with the US and Japan by buying shares in local firms and state companies. As Japan has imposed restrictions on 23 different types of chip-making equipment from export while the US threatened to sanction chip maker Changxin Memory Technologies following Beijing's ban on Micron Technology, state propaganda has been urging investors to put "long-term asset allocation in line with the country's needs". Shares in companies such as NAURA Technology Group, ACM Research Shanghai and Piotech have risen thanks to Japanese restrictions.
Morgan Stanley Asia Job Cuts Include Key China Bankers, Six MDs
Bloomberg
Morgan Stanley is to cut at least six managing directors as part of a broader shake up of its Asian operations. The cuts include some of the bank’s key Chinese bankers and come as broader job cuts in the region pick up speed amid a fall in dealmaking and an economic slowdown in China that has been exacerbated by growing tensions with the US. The cuts will extend to bankers based in Beijing, Hong Kong and Shanghai and are part of a global move to eliminate around 3,000 jobs by the end of the current quarter.
China Reopening Drives Demand for Industrial Land in Thailand
Bloomberg
Thailand's largest industrial estate developer, WHA Corp, expects a surge in demand for land from Chinese investors looking to diversify beyond China's borders for factory locations, with a major push towards electric-vehicle (VE) and battery manufacturing all but inevitable. WHA forecasts sales in excess of 1,200 to 1,300 rais in H1 2021, representing nearly 75% of its full-year target of 1,750 rais, fuelled by firm demand from Chinese firms and the re-opening of borders bringing tourists and investors back to Southeast Asia's largest economy. The Thai government is making inroads to reduce its reliance on investing its money in China for its tech industry to win the race in EV and battery manufacturing.
U.S. will come to regret holding back China at the IMF
Nikkei Asia
The article discusses the potential implications of the US-China AI arms race and the need for international cooperation in regulating the technology. The author suggests that the US's current position of strength in AI could lead to a "currency" problem in which other countries become dependent on American technology. The author argues for a global dialogue on AI regulation and standards to prevent unequal access and dominance by certain countries.
Singapore signs new China ETF connect agreement with Shanghai
Financial Times
The Singapore Exchange and the Shanghai Stock Exchange are seeking to deepen cross-border connectivity by establishing a new exchange-traded fund scheme. The two exchanges, which signed a memorandum of understanding, have established an ETF scheme with a master-feeder fund model, allowing investors in each other's markets to access locally-listed ETFs through feeder ETFs. Assets of the Singapore-listed UOB AM Ping An ChiNext ETF skyrocketed 244% when it debuted after two weeks last November. Since then, CSOP Asset Management launched two Singapore-listed ETFs.
Winning without fighting? Why China is exploring ‘cognitive warfare’
Japan Times
China's People's Liberation Army (PLA) is exploring an "intelligent" form of warfare dubbed "cognitive warfare". The operations are a manipulation of the minds of its rivals through techniques such as disinformation spread by social media and "deep fakes". The methodology will help Beijing influence decision-makers, manipulate public opinion in Taiwan and discredit US efforts to support Taiwan. The PLA is actively considering cognitive operations as a new warfare domain alongside land, maritime, air, cyber and spatial. Koichiro Takagi, an expert in military information and a fellow at the Hudson Institute, said that China has already gathered a significant amount of data on US citizens and officials, ensuring a foundation for influencing them.
US and China address trade tensions in rare high-level Washington meeting
Financial Times
In a meeting with the US commerce secretary in Washington this week, China's commerce minister has raised concerns about recent US export controls in areas such as semiconductors and the proposed review of outbound investments for security purposes. Despite this, both sides promised to maintain open lines of communication. The meeting came as the G7 group of industrialised countries criticised China for security issues over the weekend. Analysts have suggested that both sides are trying to stabilise their relationship, with the possibility of Chinese President Xi Jinping visiting the US in November.
Joe Biden’s advisers say he doesn’t want to drag allies into ‘headlong clash’ between US and China
The Guardian
US President Joe Biden wants to give allies and other close partners “breathing space” to engage with China constructively amid “very serious competition” between the two superpowers, according to Edgard Kagan, the National Security Council’s (NSC) senior director for east Asia and Oceania. Speaking at a webinar hosted by the United States Studies Centre at the University of Sydney, Mira Rapp-Hooper, the director for Indo-Pacific strategy at the NSC, said that while Biden’s recent comments had been conciliatory, it was important that partners and allies “don’t want to feel like they’re being trampled by a headlong clash”. Biden cut short his trip to the Indo-Pacific region to focus on negotiations over the debt ceiling, postponing a visit to Papua New Guinea and Australia and cancelling a planned Quad summit at the Sydney Opera House. Nonetheless, Kurt Campbell, the coordinator for Indo-Pacific affairs at the NSC, said the US remained “a steady predictable force” in the region.
Should Ukraine Take the War Into Russia?
Bloomberg Opinion
Ukraine could use a “Scipionic” strategy of threatening an invader's home base, forcing it to withdraw wholly or partially from the original front line in order to protect its rear, against Russia. This would involve opening up fronts inside Russia, but the West, including the feared risk that NATO could get dragged into a shooting war with Russia, would withdraw its support if Ukraine adopted offensive tactics. Instead, Ukraine could launch an offensive on Crimea by using Western tanks to drive through Zaporizhzhia to the Sea of Asov, severing the “land bridge” Russians have built between Luhansk and Crimea. This would cut Crimea off from Russian supply lines, making Russian positions in Kherson and the Crimean peninsula undefendable in the long run and could force Putin to enter peace negotiations. Ukraine could not attack Russia proper, nor encourage anti-Putin proxies to do its work for it, however, it must demonstrate that it is purely defending its country with the aim of winning global support.
China and Russia draw closer, but how close?
Washington Post
China and Russia have increased their ties at a time when the west is applying economic sanctions to both nations. China hosted the highest-ranking Russian official to visit China since the 2014 invasion of Ukraine. The Kremlin hoped the five-day visit of Prime Minister Mikhail Mishustin, which saw the signing of agreements and the meeting of Russian business elites with Chinese President Xi Jinping, will increase Beijing and Moscow's $190bn bilateral trade. Chinese officials are seen to be standing with Russia in the hope of creating a multi-polar world, with the two nations and their neighbours forming a larger regional market to challenge the US and its allies. However, experts warn China may be cautious given that Moscow has to rely on Chinese buyers for its natural resources. Nonetheless, Russian energy shipments to China are expected to rise 40% this year. The meeting between the two countries followed the Group of Seven (G7) wealthy democracies' condemnation of Russian aggression, as well as China's human rights abuses on its nationals and aggressive actions in the South China Sea.
Baidu will 'very soon' officially launch generative AI model, says CEO
Reuters
Baidu CEO Robin Li has announced that the Chinese search engine giant will soon officially launch Ernie 3.5, a generative AI large-language model that will upgrade its search engine and power Baidu's ChatGPT-like app Ernie Bot. Ernie Bot and other AI-powered products have been in trial mode since they were first shown to the public two months ago, with a limited number of users and companies providing feedback.
Chinese companies seek opportunities in Indonesia's new capital
Nikkei Asia
Chinese businesses are keen to participate in Indonesia’s capital relocation project as officials struggle to secure foreign investment, according to reports. Indonesia plans to move its capital from Jakarta to Borneo and aims to build a new presidential palace there by early 2024. While the site in Nusantara lacks basic infrastructure and investors remain cautious, Chinese companies are confident they can assist.
China Eastern set to operate C919's first commercial flight on Sunday
Reuters
China Eastern Airlines will launch the first commercial flight of the C919 aircraft, China's homegrown narrow-body jet, on Sunday 9 May. Built by Commercial Aviation Corp of China, the single-aisle passenger plane will go up against the Airbus A320neo and Boeing 737 MAX in a bid to break the Airbus-Boeing duopoly in the world's airline manufacturing industry. Although assembled in China, the C919 relies on Western components, such as GE's engines and Honeywell International's avionics, which some have warned creates a potential security risk.
China’s Top Rating Firm Downgrades US in Echo of Global Rivalry
Bloomberg
China Chengxin International Credit Rating has lowered the US's credit rating from AAA to AA+, putting the US on review for a further downgrade. However, no market reaction was noted to the CCXI decision, since the firm doesn’t have any connection with the President Jinping’s government. This action came amid increasing rivalry and recriminations between Beijing and Washington. It is worth noting that both countries have been publicly accusing the other of “economic coercion,” while Beijing has used the debt-ceiling fight to criticize America’s stewardship of global financial stability.
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