We are entering a much more interesting period for Chinese equity markets. A number of factors are converging right now that will certainly cause underweight investors and the shorts to rethink their positions.
A number of high level political meetings have happened or are upon us. These events provide a platform for the formalisation, and importantly communication, of high-level policy from national leaders. These meeting include:
- On July 22 – 24, the G20 Finance Ministers and Central Bank Governors meeting was held in Chengdu
- The Central Economic Work Conference meeting was convened by the Politburo on July 30
- The Beidaihe Retreat has been carried out over the last fortnight
- G20 Head of State meeting will be held in Hangzhou from September 3 – 4; President Xi Jinping will speak
- A further Politburo meeting is expected in October, along with the Sixth Plenum
- Central Economic Work Conference will be convened in December
Furthermore, investors should expect more news on SOE reform, supply side reform, capital market reform and financial restructuring. So far we have already heard the below:
China continues to promote an overhaul on SOEs to revitalize the public sector of the economy, piloting mixed-ownership reform, liberalizing industries to private capital and encouraging mergers and acquisitions. Look for an acceleration of SOE reform announcements into the remainder of the year, and also into the politically hypersensitive 2017 19th Party Congress season, as various factions jostle for control of the economic reform narrative. The reform and reflation stories remain positive and probably lasting drivers of stock prices.
On supply side reform, Chinese officials have repeatedly stated in the past few months that supply side reform will be a key focus in 2016. At the National People’s Congress session, Premier Li said: “We will address the issue of ‘zombie’ enterprises proactively yet prudently by using measures such as mergers, reorganizations, debt restructuring and bankruptcy liquidations.”
Capital market reform continues after a pause due to stock market volatility. The launch of Shenzhen connect is now confirmed. Another important point to note, the pace of IPO tranches have quietly reaccelerated since July. The CSRC approved 14 new listings on Friday 22 July, for a combined raising of 12bn yuan; both the number of transactions and their combined potential value marks a new high of any batch of IPOs cleared this year.
Corporate debt is a material risk for the banking system. In total, corporate debt in China is now 165% of GDP. Whilst corporate debt has been rising rapidly, returns have been falling. This year, expect trials of unconventional policies to be introduced and expanded in an attempt to mitigate financial risks. We expect the creation of creditor committees, acceleration of zombie companies being removed, establishment of SOE capital management holding companies, the debt-to-equity SWAP, asset managers expanded, bad loans securitized, and the enforcement of document 82.
As markets begin to break higher, these developments will be of much more interest to investors globally.