Fact Check
Stabilizing the stock market
By Lan Xinzhen  ·  2023-09-01  ·   Source: NO.36 SEPTEMBER 7, 2023

Several adjusted policies boosted China's A-share market on August 28. On that day, the Ministry of Finance and the State Taxation Administration halved the stamp duty on stock trading from 0.1 percent to 0.05 percent, while the China Securities Regulatory Commission (CSRC) announced to slow down the pace of initial public offerings (IPOs), further regulate the share reduction of major shareholders, and approve the Shanghai Stock Exchange, Shenzhen Stock Exchange and Beijing Stock Exchange to lower the minimum margin ratio of financing for the purchase of securities from 100 percent to 80 percent. Meanwhile, brokerage firms announced that they would lower their commissions. In response to these adjustments, stocks in the A-share market rallied sharply early in the day, but the gains faded later at the close.

Chinese A-shares are the shares of companies incorporated in the mainland and listed on the Shanghai, Shenzhen and Beijing stock exchanges. A-shares are primarily available for trading by mainland investors. Overseas investment in these companies is permitted under strict regulations.

The world economy is still in the throes of the COVID-19 pandemic. At the same time, the U.S. trade war against China, the strengthening of the U.S. dollar and the Russia-Ukraine conflict are all adding uncertainties to global economic recovery and causing sharp fluctuations in the stock markets around the world. China's A-share market, which is intricately linked to the world economy, has been in a downward spiral amid the fluctuations. Therefore, this round of stock policy adjustments aims at the market's stabilization. 

A declining A-share market is eroding the public's confidence in the economy. Against this backdrop, on July 24, the Political Bureau of the Communist Party of China Central Committee, which consists of the Party's highest-ranking officials and decides on major issues, called for measures to invigorate the capital market.

The main function of the capital market is to raise funds. The new policies are intended to tighten the pace of IPOs and refinancing, but there are no restrictions on reasonable financing needs. They will restrict the refinancing only of companies that continuously report financial losses and whose shares trade below the net asset value or IPO price. The CSRC will check whether the listed companies have used up share sale proceeds and whether all the funds have produced the expected results.

Listed companies are required to invest proceeds from stock issuances in their core business and are discouraged from engaging in diversified investments. These measures aim to prevent them from abusing investors' funds, as well as to guide them to make rational decisions on the scale of refinancing. They will also help direct resources to well-performing companies.

Almost all of China's major financial institutions are listed on the A-share market. These include commercial banks, insurance companies and securities firms. The market capitalization of listed commercial banks alone is estimated to be more than 10 trillion yuan ($1.4 trillion). Therefore, the new policies will be a great contribution to financial stability.

The stock market's strong rebound on August 28 reflected a positive response to the policy changes, but major A-share indexes subsequently declined due to the short-covering activity on the same day. Over 8.2 billion yuan ($1.1 billion) of funds entering the A-share market through the Shenzhen-Hong Kong Stock Connect and the Shanghai-Hong Kong Stock Connect, channels that give overseas investors access to mainland bourses via Hong Kong Special Administrative Region, flowed out that day, dampening investor confidence.

Despite the fluctuations caused by the short selling of foreign capital, its size in the A-share market is not large enough to affect the medium- and long-term trends of A-shares. By the end of July, a total of 1.95 trillion yuan ($267.3 billion) had entered the A-share market through the Shenzhen-Hong Kong Stock Connect and the Shanghai-Hong Kong Stock Connect. As of August 28, the A-share market capitalization stood at more than 80 trillion yuan ($10.9 trillion).

Copyedited by Elsbeth van Paridon 

Comments to lanxinzhen@cicgamericas.com 

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