20 February 2019
Guo Shuqing, head of China’s top banking regulator, has unveiled various measures targeted at shadow banking. Photo: Reuters
Guo Shuqing, head of China’s top banking regulator, has unveiled various measures targeted at shadow banking. Photo: Reuters

Major challenges for China equities

The Belt and Road project dominated newspaper headlines over the weekend as the Belt and Road Summit began in Beijing.

While the monumental development strategy has grabbed much attention and would be good for China over the long term, investors are preoccupied with some other near-term concerns.

I’ve been asked 10 questions in a recent interview which reflect what’s on investors’ minds.

First, Chinese President Xi Jinping has outlined six measures to safeguard financial safety, including deepening financial reform, intensifying supervision, increasing punishment for illegal activities and creating a sound financial environment for the development of the real economy. How should investors respond to these measures?

Second, the nation has constantly reshuffled top regulators in the financial sector since last year. Is that a move to restore financial stability? Is that a temporary pain in the process of reform?

Third, Guo Shuqing, head of China’s top banking regulator, has unveiled various measures targeted at shadow banking. Will that affect market liquidity?

Fourth, China has tightened scrutiny of the banking and insurance industries. Liu Shiyu, head of the nation’s stock market watchdog, even vowed to hunt down misbehaving players, or “crocodiles” in his own words. Does that mean a financial regulatory storm is on the way?

Fifth, what are the implications of the financial regulatory storm? Will it affect financing costs, the business environment for private banks, insurance firms and state-owned companies?

Sixth, will these measures lead to a credit crunch as regulators tighten monetary policy? How should investors react?

Seventh, some believe the tightening regulation of the banking sector will affect the bond market the most. Will that impact the upcoming bond connect program?

Eighth, China’s top insurance watchdog has issued guidelines to enhance risk control and requested insurers to maintain a prudent asset allocation approach. What are the implications for the insurance industry?

Ninth, will that affect southbound investment of mainland insurance companies? Will that lead to a sharp contraction of southbound capital inflow?

Tenth, if so, will China’s A shares be adversely affected by tightening financial regulation? Tighter rules in fact go against the direction of regulatory liberalization required by the MSCI. Will that undermine the chance for A shares to be included in the MSCI emerging market index?

Undoubtedly, these questions have well demonstrated the key challenges for A shares in the short run. That’s why the domestic stock market has underperformed global equities.

In the meantime, the financial deleveraging has started to kick in. Housing sales and commodity prices have shown signs of weakening. The nation’s aggregate financing is likely to fall sharply in the second quarter. Corporate borrowing costs are set to rise.

As such, more noticeable impact on economic and investment and economic growth could surface in the third quarter.

Against a more hostile environment for mainland economy and stocks, one must ask this question: How long can Hong Kong equities stay unaffected?

This article appeared in the Hong Kong Economic Journal on May 15

Translation by Julie Zhu

[Chinese version 中文版]

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Senior investment banker

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