China undertakes financial reform to achieve sustainable growth

Regulatory reform across China’s debt capital markets is set to support GDP growth.

June 06, 2023

“We need to shift the focus to improve the quality and returns of economic growth, to promote sustained and healthy economic development, and to pursue genuine rather than inflated GDP growth and achieve high-quality, efficient, and sustainable development,” wrote president Xi Jinping, in an article for Qiushi, a government journal, eight years into his tenure.

Following these words, the Chinese government has displayed efforts to introduce various financial reforms considered vital in order to achieve sustainable economic growth. But analysts suggest that China’s debt capital markets in particular, require further prompt and rigorous overhaul.

Last month, the market established the National Administration of Financial Regulation (NAFR) as new financial regulator, replacing the China Banking and Insurance Regulatory Commission (CBIRC). The development marked “an important step in the country’s institutional reform on financial supervision”, wrote the State Council.

The NAFR takes on responsibility for regulating the financial industry, with the exception of the securities sector, which remains under jurisdiction of the China Securities Regulatory Commission (CSRC). It absorbs certain functions of the central banking authority, the People’s Bank of China; as well as other responsibilities formerly handled by the CSRC.

“The establishment of the new regulator is seen as an important move to deepen structural reform in the financial regulatory sector, strengthen and improve the country’s modern financial regulation, and promote full coverage of financial regulation in the sector,” detailed the State Council statement.

A policy report by European think tank, Breugel, highlighted that action to clarify the responsibilities and mandates of China’s varied regulatory supervisors and individual departments within them, should be a high priority for China’s government.

“There are too many competing and unclear mandates among China’s financial-sector authorities, leaving too much scope for blame shifting and blame avoidance. In the event of a supervisory failure, it should be possible to identify unambiguously where the failure occurred,” the report proposed.

Former vice governor of Sichuan province, Li Yunze, has been appointed leader of the NAFR, having worked across China’s banking sector for more than 10 years.

“Li is seen as the right man to oversee Beijing's ongoing effort to tackle China's intractable local government debt problem,” detailed commentary by London-based macroeconomic forecaster,  Enodo Economics.

“Li's appointment reflects Beijing's worries about the state of local government finances and [its attempt to] tackle the mountain of hidden debt that still plagues localities,’’ the piece added.

Low-hanging fruit

Andrew Collier, managing director of Orient Capital Research, a Hong Kong-based business consultancy, told FinanceAsia, “For China to sustain growth, it needs to adjust its economy to encourage banks to lend to the private sector, which is more efficient at capital allocation than the state sector.”

“It also needs to stop relying on fixed asset investment, particularly in the property sector, for growth. Reform of the securities markets would be helpful, but even changing policies toward the banks would be a positive step forward.”

At a talk at the Hong Kong Foreign Correspondents’ Club (FCC) last month, Xu Sitao, chief economist for Deloitte China, said, “Capital market reform is very important, because then you bring in more equity, and don’t have to lower leverage.”

“If you really reform capital markets, some of these issues (with local government debt) would be resolved. There is no reason for local governments not to tap capital markets. There is no reason for China not to have the biggest municipal bond market (in the world),” Sitao emphasised.

He estimates China’s annual projected GDP growth to continue between 4 to 4.5 percent for the foreseeable future, but he predicts that the market will excel beyond this – to around 5.5 percent this year.

“China can easily achieve annual GDP growth of 4 to 4.5 percent with moderate stimulus for the next 7 to 10 years,” he told FA.

“[But] certain low-hanging fruit reforms need to be undertaken in order for the stimulus to be moderate,” he underlined.

Stock market reform

“Ultimately there will [need to] be some significant move in equity markets to allow private companies to have more access to capital,” Sitao noted during the FCC talk.

He pointed to the implementation of updated IPO reforms to spur participation by mainland Chinese companies in overseas listing schemes, including in Hong Kong; as well as recent domestic action.

Registration reform in China itself since early 2023 has meant that listing companies no longer need to seek sign-off from the CSRC regulator. Instead, the new system empowers mainland Chinese bourses to review and approve IPO applications on a case-by-case basis.

The State Council estimates that this new registration system will speed up the approval process significantly overall. Citing a China International Capital Corporation report, it noted a time reduction related to an IPO approval for listing on the ChiNext board from 520 days to approximately 380 days.

“China's economic development cannot be achieved without the support of the capital market. The full rollout of the registration-based system will increase the proportion of direct financing and strengthen the role of the capital market in serving the real economy,” the State Council statement wrote, quoting Li Huiyong, general manager of the research department for Changjiang Pension Insurance.

In a statement in April, Vivienne Li, Southern Region A-Share Offering leader at Deloitte China’s Capital Market Services Group, said “The implications of this regime are not just about an expected boost to IPO activity, but more importantly, about enabling companies from different sectors to have the opportunities to raise funds, improve governance, and expand their development by going public. Reform of the capital market will provide a strong boost to the country's economic development in the long run.”

In the first quarter of 2023, the Shenzhen Stock Exchange and Shanghai Stock Exchange were the world’s largest and second largest listing destinations by funds raised, noted the Deloitte press release, followed by the Abu Dhabi Securities Exchange, Nasdaq and the Hong Kong Stock Exchange (HKEX).

The Deloitte team expects IPO activity in mainland China to become more vibrant over the remainder of 2023, following full implementation of the registration-based regime. It anticipates that the mainland Chinese IPO market will record more IPO funds in 2023 than in 2022.

“We expect financial reform, including the promotion of direct financing, the development of a multi-level capital market and phased-in market opening, to lower China’s reliance on debt for growth. Meanwhile, retail investor demand for better diversified portfolios should support securities firms’ efforts to expand revenue sources,” said a recent Fitch Ratings report.

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