Beijing could shift to fiscal stimulus in future

November 16, 2015 16:12
Investors will take a keen interest in new listings after a four-month halt on IPOs. Photo: Xinhua

MSCI Inc. said last week it will add 14 US-traded Chinese stocks to its largest indexes, including the MSCI China Index and MSCI Emerging Markets Index.

The move has reignited investors’ hope for A shares.

MSCI had in fact said early this year that some Chinese stocks listed overseas would be included in its benchmarks.

But the inclusion of mainland A shares in its global benchmarks is much more difficult.

Meanwhile, old comments from central bank governor Zhou Xiaochuan stoked market speculation that Shenzhen-Hong Kong Stock Connect would launch by year-end.

The testing at brokers has yet to start, but there are rumors that the Shenzhen Stock Exchange has launched internal tests.

It’s unlikely that the cross-border trading link between Shenzhen and Hong Kong can be implemented within less than two months.

However, it’s quite likely the authorities will announce a schedule by year-end for launching the trading link.

In fact, investors should not read too much into the timing of the trading link, which will have limited impact on market turnover in the short term.

Nevertheless, its establishment will be a sign that Beijing is determined to reform its financial markets and connect with global markets.

The reopening of initial public offerings is another key focus.

The China Securities Regulatory Commission has tried to optimize the IPO subscription rules in an attempt to ease market jitters and restore investor confidence.

For example, the CSRC has allowed investors to pay up only after they are confirmed as winners of the IPO lottery.

At present, investors need to prepay for the new shares they intend to subscribe for, and their money will be returned if they don’t get them.

The move is aimed at preventing too much liquidity being pulled out of the market and so to reduce market volatility.

However, it does not necessarily mean there will be no cost to subscribing for new shares.

Investors will be allowed to subscribe for new shares worth an amount equivalent to existing shares they hold.

Those who hold no shares are not qualified to subscribe for new shares.

The new rules will increase the market demand for good stocks and benefit the development of A shares in the long run.

I believe that Beijing is set to step up IPO reform and build a multi-tier capital market, which would expand financing sources for companies.

The first batch of IPOs will have limited impact on market liquidity because of its small size.

Investors will, nevertheless, take a keen interest in the new shares after a four-month halt on IPOs.

However, the steady recovery of A shares has yet to be reflected in investors' holdings.

The resumption of IPOs will help lure new investors and maintain an appropriate level of new share supply to market.

Meanwhile, the real economy remains the key question.

Beijing has set a bottom line of 6.5 percent for annual growth in gross domestic product in the next five years.

The central government will release more pro-growth measures to stem the economic slide.

In the past, the central government has relied heavily on monetary policy measures such as interest rate cuts and reserve requirement ratio (RRR) reductions to stimulate growth.

I believe that Beijing might shift to fiscal stimulus in the future.

President Xi Jinping noted recently that the government needs to draw down the housing inventory and strive to achieve sustainable development in the property industry.

That has sent a signal for fine-tuning of property policy to boost investment and stabilize growth.

It seems that the Chinese central bank will maintain current levels of market liquidity, but any massive stimulus package is less likely.

China still faces mounting pressure for capital outflows given looming US rate hikes and slowing economic growth at home.

The Chinese central bank is very likely to cut the RRR again by year-end to maintain liquidity.

This article appeared in the Hong Kong Economic Journal on Nov. 16.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker