In recent years, Western economies have demonstrated certain signs of real-financial disconnection, i.e. the inability of financial markets to reflect real economic conditions. For instance, during COVID, US equity price indexes surged despite the pandemic’s detrimental effects on international economic performances. While most market analysts consider the situation temporary, and that stock markets are in line with long-term prospects, the People's Republic of China (PRC) seems to be taking a different stance.
Having learnt a lesson from its 2015 stock collapse and 2023 real estate market failure, the PRC is increasingly wary about a potential gap between real economic performances and financial growth. A hollowing-out of the real economy may result in a disorderly expansion of capital, says Xu Zheng, Assistant Professor at the Huadong Polytechnic University, with financial derivatives affecting market stability.
When Chinese-style Socialism meets Finance
In the Central Financial Work Meeting of October 2023, President Xi Jinping announced that his country will embark upon a Chinese-style Financial Development Path.
This path will be different from the ones embarked upon by capitalist states, which has allowed capital to outgrow the economic base. Notably, PRC researchers pointed out that the financial market should be used as an instrument to coordinate social resources, which should be redirected to support sci-tech innovation, green energy, social welfare enterprises and housing support.
In such a fast-paced and interest-oriented market, how could resources be directed to appropriate areas as the Party desires? Maintaining the Party’s guidance over financial work is the answer. Adhering to central directives, the PRC is to strengthen its currency, central bank arrangements, financial regulations and international financial centres, with safeguarding system stability at the centre of the initiative. All sounds good in theory, but how is implementation going?
From Domestic to Global Financial Hubs
Currently, Shanghai and Hong Kong serve as the two dominant financial hubs of the PRC. Evaluating their performances may help shed light on the country’s current financial capability. In April 2024, the total stock market capitalization in the Shanghai Stock Exchange (SSE) and Hong Kong Exchange (HKEX) were 6.6695 trillion and 4.1014 trillion respectively, denoted in USD. While still far off from 26.9606 trillion of the New York Stock Exchange (NYSE), SSE has already surpassed that of the stock market in London.
The two are also high up in initial public offering (IPO) performances. SSE and the PRC’s Shenzhen Stock Exchange (SZSE) ranked first and second in the 2023 global IPO market, having listed four out of the 10 largest IPOs in Q1 to 3. Slightly behind is Nasdaq at 3rd place, with Hong Kong floating around the 6th. Shanghai’s growth is astonishing, considering it was only ranked 4th in 2010, right behind the NYSE. While the financial hubs are robust in IPO size, however, most contributions are from domestic investors.
Gaining foreign traction seems to be a difficult task for the SSE, with only 4% of capital in its market from overseas in 2023. In total, only 13% of foreign investments amounted towards the final trading amount. Hong Kong’s situation looks brighter, at least temporarily. While data has not been available since 2021, in 2020 30% of capital in HKEX was from foreign entities, which amounted to 41% of the final trading amount. Yet, as geopolitical tension surges and Hong Kong integrates into the PRC’s Great Bay Area, foreign confidence may continue to decline. HKEX’s declining IPO performance and rising mainland capital proportion are all clear evidence of that.
Standardising Finance?
Hong Kong’s previous advantage rested on its operation as a separate economic entity from the mainland, which is considered to be more transparent and regulated in accordance with ‘international standards’. Despite Hong Kong’s dominance weaving off, the mainland did make attempts to upgrade its regulatory policies to accommodate external needs.
As early as February 2023, the China Securities Regulatory Commission (CSRC) rolled out a new registration-based IPO mechanism, replacing its approval-based predecessor. Before the reform, the CSRC directly evaluated each application, taking into account how they serve the national economy in the long run, which resulted in ambiguity of standards and a prolonged vetting time.
The new system, meanwhile, vetted applicants based on the disclosure of information, with each stock exchange permitted to conduct preliminary IPO reviews without considering long-term merits to national development. The CSRC’s involvement is limited to reviewing applicants’ adherence to state laws and regulations. The reform made the process less arbitrary, introducing a higher degree of predictability. Nonetheless, one should note that the CSRC still appoints 1/3 to 1/2 of stock exchange council members, general managers and approves their constitution.
This is not a critique of the CSRC and its way of operation in any way. In fact, state presence is a crucial component that keeps the financial markets ‘socialist’, as in serving people-centric policy targets and guaranteeing stability. State oversight ideally guarantees the market’s alignment with social relief measures and developmental goals. Such attempts are unimaginable in capitalist societies, yet may indeed prevent financial system breakdowns and foster social justice.
Yet, a market that only feeds on domestic IPOs and capital may also not be the healthiest of all. While it is important to guarantee a balanced wealth distribution, strengthening financial capabilities on the global stage is also a prime directive for the PRC. The challenge here lies in balancing regulatory procedures and the free flow of capital, which relies on the skillful manoeuvring of policymakers in the long run.
Image: Calistemon
Comments