25 October 2016
The PBoC under governor Zhou Xiaochuan (above) has undertaken monetary easing to stimulate economic growth. Photo: Bloomberg
The PBoC under governor Zhou Xiaochuan (above) has undertaken monetary easing to stimulate economic growth. Photo: Bloomberg

What PBoC reform roadmap tells us

Will we see more volatility in China’s stock market? Will A shares follow the trend of world indices when it is included in a global benchmark?

In the United States, stocks are on a seven-year tear, the longest rally in more than 140 years.   

The S&P 500 has surged 213 percent after touching the bottom in 2009 at 666 points. It’s the third biggest spurt in history, behind a 310 percent rally in 1990 and 267 percent surge in 1949.

Some analysts expect a 35 percent correction in the S&P 500.

However, instead of leaving a bull market, investors should reduce risk in their portfolio, keeping in mind that a US rate hike will hit market sentiment.

China market sentiment

The People’s Bank of China (PBoC) issued a document on May 29 which outlines a four-point guideline on capital market reform.

First, authorities will steadily switch to a registration system for initial public offerings from the current approval-based regime.

The government is drafting regulations to streamline the powers and responsibilities of the securities watchdog and is exploring a negative list.

Second, regulators will allow more products to be traded on the stock and futures markets and intermediaries to expand their market presence.

Private investors and professionals will be encouraged to establish securities operations or buy into existing ones, helped by easier entry requirements.

Securities brokers will be allowed to offer mutual funds.

Third, authorities will improve relevant regulations and laws to strengthen investor protection and crack down on fraud, market manipulation and other illegal activities.

And finally, the government will further open the country’s capital market to competition.

Global foray

Authorities will work for the inclusion of A shares in global benchmarks and ease rules to allow Chinese companies to list overseas.

It will fine-tune its investor schemes for qualified foreign institutions and those that invest in renminbi-denominated assets.

Also, Hong Kong and mainland China are moving closer toward mutual recognition of funds.

The Shanghai Stock Exchange will inaugurate a new market for small innovative companies, called Strategic Emerging Industries Board, as early as this year.

Meanwhile, China is planning to widen the financing channels for the over-the-counter equity market and regulate regional bourses that cater to small and micro companies.

Economic reform

China is stepping up efforts to develop its capital market as part of an economic restructuring.

The reform will help improve resource allocation and reduce companies’ financing costs.

The PBoC has adopted monetary easing measures to stimulate the stock market.

China’s economy still faces significant downward pressure given gloomy economic data in April.

The market expects another round of cuts in interest rates and banks’ reserve requirement ratio by 50 basis points and 250 basis points, respectively.

A 50 basis-point cut in RRR could come in June.

This article appeared in the Hong Kong Economic Journal on June 1.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker

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