1 PRC puts trading curbs, imposes penalties, and cuts LPR in bid to stabilize markets and the economy
Regulators urged to review IPO industry data
Feb. 18 to Feb. 19
1. Wu Qing, the Party secretary and chairman of the China Securities Regulatory Commission, and other members of his leadership team held more than a dozen seminars to hear feedback and suggestions from the financial community, according to mainland media. Those who attended the seminars include experts and scholars, small and medium investors, as well as representatives of listed companies, companies planning to go public, securities fund management institutions, accounting and law firms, private equity institutions, foreign institutions, and others. Wu Qing also led a team to China Galaxy Securities on Feb. 19 to hold discussions and exchanges with over a dozen individual investors.
Among the topics discussed at the seminars include IPOs, regulating listed companies, regulating equity sales, optimizing dividends, regulating trading behavior, enhancing investment value, optimizing market value management, strengthening professional institutions, promoting the entry of long-term capital into the markets, as well as delisting, opening up, and security matters.
Mainland media also reported that various parties have raised the issue to the authorities of conducting a 10-year retroactive investigation of financial data produced by the IPO industry (banks, auditing firms, securities companies, etc.), including companies that are preparing for listing or had previously withdrawn materials submitted for listing.
According to Wind data, the number of terminated A-share IPOs did not exceed one hundred each year before 2021. However, the number increased to 131 in 2021, 186 in 2022, and 236 in 2023. As of February 2024, 45 companies have already terminated their IPOs, compared with 31 in the same period last year. Mainland media added that the number of terminated IPOs is still rising in 2024.
Feb. 23
Yan Bojin, the chief risk officer and director of the CSRC’s issuance department, said that the prevention and cracking down on financial fraud and fraudulent issuances is an on-going process, and that the authorities currently have no plans for a 10-year retroactive review of the IPO industry.
More trading restrictions
Feb. 19 – Feb. 20
Quantitative hedge fund Ningbo Lingjun Investment Management Partnership sold nearly 2.567 billion yuan in shares within a minute at the opening on the first trading day after the Chinese New Year, leading to rapid declines in both the Shanghai Composite Index and the Shenzhen Component Index. Mainland media reported that investment accounts under the management of Lingjun bought a net 187 million yuan in shares and made decent profits on that day after selling off large-cap stocks and buying small-cap stocks.
On Feb. 20, the Shanghai and Shenzhen exchanges froze Lingjun’s accounts for three days and accused the company of “abnormal trading behavior.” A day later, Lingjun said in an apology statement that it has a “long-term optimistic view and consistently maintains a bullish stance on the Chinese stock market,” and that it always maintains its stock positions at “nearly full capacity.”
In a strategic situation explanation to investors on Feb. 20, Lingjun said that the markets are “greatly influenced by ‘national team’ funds during special periods” and that it makes adjustments during the day “according to the trend of ‘national team funds’ to effectively increase our win rate.” The explanation added that its quant models had been “significantly impacted by abnormal short-term market environments.”
Lingjun is one of the four biggest quant firms in China with about 60 billion yuan in assets under management in 2022.
Feb. 21
Bloomberg News reported that the CSRC had barred major institutional investors from reducing equity holdings at the open and close of each trading day, citing people familiar with the matter. Companies affected by the ban cannot sell more shares than they buy during the first and last 30 minutes of trading. The CSRC’s order was recently sent to major asset managers and the proprietary trading desks of brokerages.
The people also said that the CSRC has established a task force with the stock exchanges in China to monitor short selling and send warnings to companies that profit from the wagers.
The people said that some brokerages have been asked to recall stock loans to clients for the purposes of shorting. A person added that some quantitative hedge funds are still barred from reducing equity positions in their leveraged market-neutral funds, or a strategy known as Direct Market Access. Another person said that the PRC authorities have also given window guidance to hedge funds to not place concentrated sell orders.
Regulation and penalties
Feb. 8
The CSRC announced that Shenwan Hongyuan Securities and Ping An Securities were being fined and ordered to rectify their actions over bond-related activities. Subsequently, several other securities firms were also penalized.
Feb. 9
The CSRC fined 63 securities professionals from China Merchants Securities Co over illegal stock trading and imposed a total of 81.73 million yuan in penalties. One of the China Merchants employees was also banned for life from participating in the securities market while another who was suspected of insider trading was transferred to judicial authorities for further investigation.
The CSRC added that securities professionals are prohibited from stock trading under the regime’s securities law. The regulator also noted that 67 cases of illegal stock trading by securities professionals were investigated between 2019 to 2023 and 139 individuals received administrative penalties.
Shanghai index rebounds over 3,000 points
After “national team” intervention in the markets following a plunge before the Chinese New Year, the Shanghai and Shenzhen indexes rose continuously for eight trading days between Feb. 6 to Feb. 23 (minus the Chinese New Year holiday week).
- The Shanghai index closed at 3,004.88 points on Feb. 23, or above the 3,000-point psychological mark. The index has only corrected 1.01 percent so far this year, and is down 12.11 percent from a peak of 3,418.95 in May 2023.
- The Shenzhen index closed above the 9,000 point mark on Feb. 22 and closed at 9069.42 points on Feb. 23. The index has fallen 4.78 percent since the start of the year, and is down 25.44 percent from a peak of 12,163.97 points in February 2023.
- Net selling of northbound funds on Feb. 23 amounted to 92.43 million yuan, while net purchases to date (Jan. 2 to Feb. 23) totaled 17.36 billion yuan. This is compared with net sales of 97.804 billion between Feb. 24, 2023 and Feb. 23, 2024.
- The movement of northbound funds that Beijing could have tapped its external “national team” to help domestic efforts to keep up the markets. The data also suggests that actual foreign funds are still hesitant to invest in China.
LPR cut and property data
1. On Feb. 20, the People’s Bank of China announced that the benchmark five-year loan prime rate (LPR), which affects household borrowing costs (including mortgage linked loans), would be lowered from 4.2 percent to 3.95 percent. The 0.25 percentage cut was the largest reduction since the LPR was introduced in 2019.
Meanwhile, the PBoC kept the one-year LPR, which is linked to business loans, steady at 3.45 percent.
2. Per mainland media reports, only 240 units of new residential properties were sold in 10 key cities in China during the Chinese New Year period (Feb. 10 to Feb. 17). The average daily transaction rate of 30 units represented a decrease of 13.58 percent during the same period from a year ago. Beijing, Guangzhou, and Shenzhen had an average daily transaction rate of two units while Shanghai’s rate was five units.
3. On Feb. 22, the National Bureau of Statistics released data for new and second-hand residential properties in 70 medium and large-sized cities for January 2024.
New homes
- First-tier cities: Year-on-year decrease of 0.5 percent, month-on-month decrease of 0.3 percent.
- Second-tier cities: Year-on-year decrease of 0.4 percent, month-on-month decrease of 0.4 percent.
- Third-tier cities: Year-on-year decrease of 2.1 percent, month-on-month decrease of 0.4 percent.
Second-hand homes
- First-tier cities: Year-on-year decrease of 4.9 percent, month-on-month decrease of 1.0 percent.
- Second-tier cities: Year-on-year decrease of 4.4 percent, month-on-month decrease of 0.6 percent.
- Third-tier cities: Year-on-year decrease of 4.5 percent, month-on-month decrease of 0.7 percent.
According to The Wall Street Journal’s calculations, new home prices declined 1.24 percent in January from a year ago, while second-hand home prices fell 4.4 percent for the steepest decline in about nine years.
Our take
1. Financial markets in China made consecutive gains in the days after reopening from the Chinese New Year period. However, we believe that it is premature to conclude that the markets have bottomed out and are rebounding, or that the Chinese economy is in recovery.
There appears to be three main factors behind the recent stock market gains. First, the market panic before the Chinese New Year holiday could have subsided somewhat during the festive period.
Second, the “national team” and institutional investors appear to be propping up the markets with their actions. This is partly seen from Lingjun Investment’s strategic situation explanation to investors where the fund noted that it was making adjustments “according to the trend of ‘national team funds’ to effectively increase our win rate.” Also, the CSI 2000 index rose by 4.38 percent on Feb. 19 after Lingjun’s trading was suspended and was up 13.7 percent as of Feb. 23.
The CSRC restricting institutional investors from selling at the opening and close of each trading day creates favorable conditions for the “national team” to swoop in if needed to support the markets. Further, it is possible that some of the northbound funds flowing into the mainland via the Shanghai-Hong Kong Stock Connect could actually be from the external “national team” rather than foreign institutions.
Third, the appointment of “broker butcher” Wu Qing to the CSRC and the crackdown on the securities and IPO industries appear to have restored some positive investor sentiments. It should be noted though that the investigations into some of the recent cases where penalties have been imposed were almost certainly started during the tenure of former CSRC head Yi Huiman.
The lack of a significant increase in leveraged trading after the Chinese New Year holidays suggests that investors remain very cautious about the market situation and are adopting a wait-and-see attitude. The “national team’s” ability to sustain the rally is also in question.
2. The prospects for China’s stock markets remain poor in light of several factors:
- Xi Jinping continues to promote socialism, the need to grow the real economy over the financialized economy, and increased regulation of the financial sector. This will make companies hesitant to get listed and investors less willing to buy or hold stocks due to reduced dividend earnings.
- The Chinese people remain reluctant to consume and invest. According to mainland media reports, the net deposits of Chinese households was about 58.24 trillion yuan from early 2020 to January 2024, or about the equivalent of the total increase in bank deposits from 2009 to 2019 in China. Also, about 82 percent of the deposits between early 2020 to January 2024 were time deposits. Deposits grew by 17.84 trillion yuan in 2022, the highest annual amount on record.
- Foreign investors appear to be pessimistic about the Chinese economy given Beijing’s lack of aggressive fiscal and rescue policies. In particular, the lack of news about whether a Third Plenum of the 20th Party Congress would be held continues to unsettle foreign investors. According to a Feb. 14 Bloomberg report, a third of the respondents to a Bank of America survey (with $568 billion in assets combined globally) said they will up their allocation to Chinese equities if they see stronger efforts by the authorities to boost the real estate sector. However, the lackluster housing data for January 2024 and demand woes suggest that the steep cut in the five-year LPR may not do much to turn around the property situation.
- The PRC’s geopolitical risks continue to grow and exacerbate capital outflows:
- According to official CCP data, foreign direct investment in China fell 82 percent in 2023 as compared to a year ago, or to the lowest level since 1993.
- A Bloomberg report on Feb. 21 noted that multinationals are choosing Singapore over Hong Kong for their Asian headquarters in order to hedge geopolitical risks.
- The U.S. and Europe are becoming more vigilant about China dumping cheap goods on international markets, and are either stepping up investigations or taking action to curb such activities. This will impact China’s exports, which are a key growth driver.
- The PRC continues to not renounce possible aggression against Taiwan as Beijing seeks “reunification” or end its “no limits” friendship with Russia. This entails a worsening of “new cold war” tensions between the PRC and the U.S. and its allies. An example of simmering tensions can be glimpsed from official mainland media chastising U.S. Secretary of State Antony Blinken for replying, “if you’re not at the table in the international system, you’re going to be on the menu” to a question at the Munich Security Conference about whether U.S.-China tensions are leading to greater fragmentation.
3. The CSRC is not likely to embark on a high-profile and thorough 10-year retroactive investigation of the IPO industry to assuage investors due to the various problems that it would bring.
For one, a real investigation would undoubtedly implicate a large swath of companies. Some Chinese economists have written in social media posts that many listed companies have fabricated their financial data to reflect profitability to secure huge loans from banks when applying for listing. Those companies then distribute the loans as dividends to its shareholders (potentially including officials, business elites, and other powerful figures) before listing. Those companies will pay off their loans using the funds secured through the IPO, but major shareholders will later reduce their holdings and leave investors to pick up the losses.
The observations on social media correspond to mainland media reports on the issue. Mainland media reported in November 2023 that 508 companies preparing for an IPO submitted or updated their prospectuses to the Shanghai and Shenzhen exchanges between January to November 2023. Of those companies, 345 issued “emergency” dividends just before listing. During the reporting period, 193 of the 508 companies issued cumulative cash dividends of less than 100 million yuan, 140 companies issued dividends between 100 million yuan to 1 billion yuan, and 12 companies issued dividends exceeding 1 billion yuan; the highest amount of dividends issued was 6.2 billion yuan.
Mainland media added that Fuhua Chemicals planned to raise 6 billion yuan through its IPO in October 2023 and use 2.751 billion yuan of the total for supplementing working capital and repaying bank loans. The company had previously distributed dividends totaling 3.3 billion yuan.
A large-scale investigation and punishing of IPO fraud will also cause panic in the markets. Major shareholders could make substantial reductions in their holdings, and the resulting sell-offs would send stock prices spiraling down and undermine investor confidence.
Further, plummeting markets as a result of a retroactive investigation of the IPO industry could see dissatisfaction towards Xi Jinping among the CCP elites rise to critical levels. The Party elite have long viewed the markets (which have a reputation for being no better than casinos) as an “automated teller machine” of sorts and are loath to suffer even more losses. Elite pressure against Xi could force the latter to purge Wu Qing similar to how former CSRC head Liu Shiyu was sacrificed, as well as heighten political instability in the CCP regime.
Therefore, we believe that the Xi leadership could be merely looking to “kill the chickens to scare the monkey” by signaling a retroactive investigation into the IPO industry to deter financial fraud in the stock markets, or gather specific information to use against factional rivals. Regardless, there is not likely to be much improvement in addressing financial fraud and boosting investor confidence.
What’s next
The PRC authorities will likely want the “national team” to help prop up the markets until at least the conclusion of the Two Sessions after the middle of March; whether or not the effort can be sustained is another question. Without constant support from the “national team,” the stock market rally will be hard to keep up if domestic and foreign negative perceptions of the Chinese economy and markets persist.
