China Stock Market reforms and long term outlook

China Stock Market Reforms

by Tom McGregor, CNTV Commentator

This article was first posted on http://english.cntv.cn/ on 11-19-2015 and is being published here courtesy of CNTV. Sol Palha has added additional commentary at the bottom of this article

Are China’s finance markets ready for the ‘Big Leagues?’ Stock exchanges in New York, London, Tokyo and Hong Kong have long been regarded as the premier hot-spots for global investors. Yet despite China laying claim to the world’s 2nd largest, it’s stock markets are tightly-restricted to foreigners.

To compete internationally, Beijing is pushing ahead on much-needed finance reforms. Xinhua reports, “China will modernize its financial market system in the next five years. ”

Pan Gongsheng, deputy head of the People’s Bank of China (PBOC), said, “More financial business will be carried out to make the market more elastic.”

He believes the “healthy development” of internet financing, venture capital, private equity investment funds and asset management can attract more foreign investors to the Chinese stock markets.

Reforming at a steady pace

Embarking on pro-market reforms can rapidly expand the domestic finance sector, but could usher in waves of volatility creating investment bubbles – sharp increases and declines in the markets. Hence, Beijing intends to bring such reform mechanisms in a slow and steady manner.

China’s central government had introduced its new reform agenda in 2013, which would focus on reducing trade and investment barriers, as well as liberalizing market tools and upgrading financial regulations to adapt to today’s global economic conditions.

Historically, Beijing’s finance reforms have been remarkable for its comprehensive framework and large-scale transaction volume, but weak on corporate governance and lack modernization upgrades, according to the Website, EconomyWatch.

Finance experts have called for China to restructure its economy to allow for more liquidity access for private-run companies in order for them to compete better in the marketplace.

Jumpstarting interest rates liberalization

A key measure to level the playing field would be implementing more effective interest rate liberalization to create opportunities for small and medium-sized firms and consumers to participate.

The Chinese economy is transforming into a service sector-oriented one, meaning higher consumption demand and more financial investments are impacting the country overall.

By liberalizing interest rates, the Chinese can enjoy more access to credit. And if interest rates are lowered, that would spell more affordable loans for businesses. Savers would find it more attractive to buy into the stock market. Such liberalization efforts would help the domestic real estate industry as well.

RMB joins the SDR basket

As the Chinese economy keeps going more and more global, the nation’s currency, renminbi, RMB, has surged to become the world’s fourth most-used payment currency, soaring above the Japanese yen in recent months, as disclosed by the global transaction services organization, SWIFT.

Beijing has applied for the RMB to join the International Monetary Funds’ (IMF) Special Drawing Rights (SDR) elite basket of a reserve currency. The IMF will announce the matter at the end of the month, but its chief director, Christine Lagarde, has expressed her support in a public statement.

In response, “China thinks that the inclusion of the RMB into the SDR basket will strengthen the representativeness and the attraction of the SDR and that will also improve the existing monetary system,” said the PBOC in a press release. “It will have win-win benefits both for China and the world.”

Shanghai Stock Exchange gains higher status

Meanwhile, the Shanghai Stock Exchange can raise its stature in the eyes of the world, but reforms are necessary. Foreign investors require easier cross-border access to pour their funds into the markets, while more investment funds could reignite China’s finance sector nationwide.

Yes, such efforts can cause potential harm, but without risk, there are usually no rewards.

China Stock Market Reforms: Comments from Sol Palha

While it is easy for the developed world to point fingers at China and demand more reforms, we must remember that it was the Wild Wild West in New York not too long ago. Many of the transactions conducted years ago would be deemed if one were too kind as questionable by today’s standards. One could argue that the USA has done nothing to address the issue. We had the Savings and Loan scandals in the 1980s. We had the dot.com scam, where any company with a dot.com could give great projections on what they hoped and dreamed of without illustrating how these illusions would become a reality. Lastly, we had the 2007-2008 financial crisis; the real term should be financial fraud as the banks swindled the poor and middle class.

For the record, not one banker was arrested or put in Jail, even though conclusive proof shows that most banks encouraged their clients to lie on loan applications. Banks came out with no income verification loans before the housing market collapsed. This meant that you could state any income you wanted to qualify for the loan, and the banks encouraged people to do this. So when it became that easy to get a loan, everyone started to buy a house. The idea moved from owning a home to speculation. No longer were people interested in owning a home; the only goal was to become rich overnight.

Tulip Style Mania In China

This is what took place with the Chinese markets this year. Everyone wanted to become rich overnight, so they borrowed money and entered the markets. This is all fine when the markets are rising, but when the markets start to pull back, things get ugly. You begin to take on losses on money that is not yours. So you have to pay back the original sum of money, plus interest and worst of all, this money does not belong to you. Leverage is good when the markets are going up; it is the trigger for euphoria when the markets are falling, it is the trigger for panic, and that is why the Chinese markets crashed.

At least we can say that China is doing something to address this issue. Seven years later and Wall Street has done nothing to address the real issue that triggered the financial crisis. The banks that caused the problem were rewarded instead of being punished. Every major bank was bailed out, and the Major Banks brought about this crisis that affected the whole world. And still, not one banker has been jailed. Worse yet, the banks have made the most money after the problem, while the Middle Class has been destroyed.

This is like the pot calling the kettle black. China is moving in the right direction and, in the long run, we think China makes for a great long-term investment.

Originally Published Nov, 2015 , updated Dec 2022