China starts market mayhem blame game

CSRC chief Xiao Gang’s plans failed to convince investors

China has rarely known a summer like it. Through most of the first half of this year, stock prices on the country’s main bourses in Shanghai and Shenzhen were unstoppable. 

By lifting a long-standing ban on short selling and margin lending last November, Beijing had tacitly encouraged retail and institutional investors to buy onshore-listed securities. 

Authorities in the capital stoked speculative trading. State newspapers printed happy tales of the fortunes to be made in the glorious A-share market. 

Analysts counselled even small-time retail investors to get in early and stay there, as stock prices were, they predicted, set to rise for years to come. 

A total of 192 initial public offerings was completed in the first half of the year, up from 58 the previous year, and none at all in the first six months of 2013, according to data from Dealogic. 

In the first half of 2015, $23.9 billion in fresh equity capital was raised from new stock sales, an annualized rise of 267%. Shanghai briefly became one of the hottest stock markets on the planet. 

Rattled

Of course, it couldn’t last. When the levee broke on June 12, the Shanghai Composite index had risen more than 150% in barely six months. Over the next three weeks, mainland shares lost nearly a third of their value. 

Rattled by the carnage, the government, aware that it was on the hook for the blame, stepped in. A clumsy plan was cobbled together by premier, Li Keqiang, and a few others including Xiao Gang, head of the country’s stock regulator. 

Through July and August, the government spent $200 billion buying shares (mostly using state banks and brokerages) that retail investors desperately wanted to shed. When shares tumbled again in August, dragging down stock markets across the world, Beijing made a last and desperate bid to shore up its own bourses. 

But attempts to convince retail investors that stocks remained a sure bet fell short: by the end of August, daily trading volumes on the Shanghai Stock Exchange had fallen to $66 billion, down from more than $200 billion during the first two weeks of June. Unable to hold back the waves forever, and having already banned short selling and put a freeze on new IPOs, it threw in the towel. 

Then the blame game began. In the last week of August, as the price of onshore securities tumbled again, Chinese authorities placed five of the country’s largest brokerages, including Haitong Securities and GF Securities, under investigation, accusing them of failing properly to scrutinise the reliability and veracity of clients.

Journalists were trotted out to confess to their complicity in causing market ‘panic and disorder’. Their crime: using ‘emotive’ words such as price ‘spikes’ and ‘slumps’ in their reports and stories, thus imbuing the markets with a sense of panic, authorities alleged.

Four senior executives at the country’s largest brokerage, Citic Securities, owner of Hong Kong-based CLSA, confessed to insider trading, while the head of Man Group China, Li Yifei, was forced to publicly deny she had been taken into custody and instead said she had been meditating. 

The events of summer and early autumn have also left many observers wondering how committed Party leaders really are to reform. China’s economy has expanded at a rate unprecedented – at least for a country of its size and complexity – in human history.

For some, these public proclamations brought to mind uncomfortable memories of Chairman Mao’s ‘struggle sessions’. Foreign funds and institutional investors have been slowly pulling money from onshore stocks since the markets first fell in June. 

But Beijing’s determination to censure everyone but itself for the market turmoil left many wondering whether they should be invested in mainland securities at all. One Hong Kong fund manager with a licence to buy mainland-listed securities told Euromoney that mainland officials had “gently reminded” him not to undermine stock prices through public statements. 

Yet that decades-long burst of growth appears to be coming to an end. China’s central data source, the National Bureau of Statistics, tips gross domestic product to come in at 7% this year. Others say this is over-optimistic. 

Brink

Andrew Polk, resident economist at The Conference Board in Beijing, says a more realistic rate of economic growth this year and next is 4%, a rate that would, he adds, put the economy on the brink of recession. Exports are also falling, as is fixed capital investment, raising fears that the world’s second largest economy is heading for an unexpectedly bumpy landing. 

China desperately needs to shake up its crusty old state-owned enterprises, inject new vitality and competition into the state-dominated financial services sector, and to replace an overweening dependence on exports and heavy industry, with a new, lighter economic structure based on innovation, technology and services. 

Only by building a truly “healthy” economy, says Liu Li-gang, Greater China chief economist at ANZ, can Party leaders “fully revitalise China’s stock markets”.