Less Transparency, Less Faith In China Stocks

As economist Louise Loo at Oxford Economics observes,“discretionary retail spending fell at the sharpest sequential pace since the April 2022 Shanghai lockdowns.”

Hence the Politburo's renewed focus on demand-boosting stimulus. To economist Zhang Zhiwei at Pinpoint Asset Management, it's a sign Xi's inner circle“recognizes that domestic demand is weak and plans to prepare some policy measures in the pipeline to address the problem.”

This backdrop explains why the People's Bank of China surprised global markets with an interest rate cut on July 25. It trimmed the one-year policy loan rate by 20 basis points to 2.3%, the biggest move since April 2020. That came just days after the PBOC lowered a key short-term rate.

Robin Xing, economist at Goldman Sachs, is struck by the“reactive nature of easing” by PBOC Governor Pan
Gongsheng. Kathleen Brooks, research director at XTB, called it a“sign that the Chinese authorities are concerned about the state of the Chinese economy, which is more worrying for stock markets and for investors.”

All the more reason to use the recent Third Plenum as an opportunity to accelerate moves to increase the quality of growth, not just the quantity.

The weeks since the meeting have left unclear the status of Xi's pledges to get bad assets off property developers' balance sheets to avoid defaults. The same goes for creating social safety nets to prod households to save less and spend more, the fate of internet platforms uncertain about the regulatory outlook and moves to build more vibrant
capital
markets.

Though Xi has been promising to prioritize capital market development since 2013, the effort seemed to get a big lift last November. That was when Xi met with a who's-who of top chieftains in San Francisco on the sidelines of the Asia-Pacific Economic Cooperation summit – including Apple CEO Tim Cook, Tesla chief Elon Musk and Blackstone's Steve Schwarzman.

Other top executives on hand to rub elbows with the man leading an economy with which the US does roughly $600 billion of trade annually: Marc Benioff of Salesforce; Stan Deal of Boeing; Raj Subramaniam of FedEx; Ryan McInerney of Visa; Ray Dalio of Bridgewater Associates; Albert Bourla of Pfizer; Merit Janow of Mastercard; and Larry Fink of BlackRock .

There, Xi raised expectations for his inner circle, led by Premier Li Qiang, to strengthen capital markets in foundational ways. Since then, though, progress on the ground in China hasn't matched the lofty rhetoric.

The speed with which capital has continued to flee China suggests that Xi's efforts to communicate that Beijing is at the top of its myriad challenges are not getting through to investors. That includes efforts to stabilize a cratering property market and overall weak demand.

There's confusion in international circles, too, about Xi's commitment to giving the private sector and market forces“decisive” roles in Beijing decision-making. That 2012-2013 pledge was first called into question in 2015 when Xi's government intervened aggressively to stabilize Shanghai stocks.

Questions only increased after Xi began cracking down hard on mainland tech platforms in late 2020, starting with Jack Ma's Alibaba Group. The inquisition rapidly widened to Baidu, Didi Global, JD, Tencent and other top internet companies. It even had Wall Street banks debating whether China might have become“uninvestable .”

Now seems the time to get under the economy's hood as rarely before. One law of economic gravity
that Xi's team has tried to beat these last 10 years is the idea that a developing nation must build credible and trusted markets before trillions of dollars of outside capital arrive.

In China's case, this means increasing transparency, making local government officials more accountable, prodding companies to raise their governance games, crafting reliable surveillance mechanisms like credit rating companies and strengthening the financial architecture before the world shows up.

Too often during Xi's first two terms as leader, China has tried to flip the script, believing it can build a world-class financial system after waves of foreign capital arrive. Whether fair or not, the Xi era's efforts to communicate that a financial Big Bang is afoot continue to get lost in translation in boardrooms from New York to London to Tokyo.

The sense that Xi's China tends to over-promise and under-deliver financial upgrade-wise set in back in summer of 2015, back when Shanghai shares plunged by one-third in three weeks. Beijing's response was to treat the symptoms of the market rout, not the underlying causes .

Since then, Xi stepped up the pace of winning Chinese stocks places in top global indices – from MSCI for stocks to FTSE-Russell for bonds. Yet increases in access
to yuan-denominated assets often
outpace reforms needed
to
prepare China Inc for the global prime time.

Whether China can win back investors' trust is an open question. As Chinese stocks are reminding us – the Shanghai Shenzhen CSI 300 Index is
down more than 13%
this year – there are certain laws of gravity that still apply
to
economies transitioning from state-driven and export-led growth
to
services, innovation and domestic consumption.

Sign up for one of our free newsletters

• The Daily Report Start your day right with Asia Times' top stories
• AT Weekly Report A weekly roundup of Asia Times' most-read stories

Trouble is, China's bond market – totaling more than $23 trillion overall – is underpinned by a developing economy with limited liquidity and hedging tools, a giant and opaque state sector, and a rudimentary credit-rating system that can obscure risk and misallocate capital.

For all China's promises, this makes it more of a buyer-beware market than many investors expected.

This gets at other split screens. On one, China's inclusion in major benchmarks is luring bond giants like BlackRock. On screen No. 2: the crisis of confidence surrounding
developers like
China Evergrande Group
offer a stark reminder of the mainland's opacity and excesses.

The prevalence of local government financing vehicles – roughly $13 trillion of such off-balance sheet LGFVs – can be a major turnoff for foreign bond funds.

Not only are they difficult to analyze but their fingerprints also touch the operations of everything from commercial banks' wealth management units to mutual funds to hedge funds to insurers to the gamut of securities companies.

Hence the need for deeper bond markets. And, of course, for regulators in Beijing to avoid steps that spook global markets anew. Among recent missteps by Xi's party: last year's
crackdown
on foreign consultancy firms on which global investors and multinational firms rely for information and analysis.

The move, supposedly part of a nationwide anti-espionage campaign, reduced the appetite for investment from some overseas firms. When US Treasury Secretary Janet Yellen's team visits Beijing these days, the consultancy policy is among the examples of“non-market” practices and“coercive actions” against American firms that US officials highlight.

Deeper debt markets would help sort out the cart-before-the-horse problem that afflicts China's economy. During the Xi era and before it, China too often believed that pulling in more foreign capital was a reform all its own. It's been slower to strengthen China's financial system ahead of those waves of overseas capital.

And pulling down new curtains of opacity won't help to reverse recent capital outflows and flagging investor confidence.

Follow William Pesek on X at @WilliamPesek

Already have an account? Sign i Sign up here to comment on Asia Times stories OR

Thank you for registering!

An account was already registered with this email. Please check your inbox for an authentication link.