|Shenzen, where the finest stocks state funds can buy are traded.|
According to the latest revelations, the big state-owned banks have lent a combined Rmb1.3tn ($209bn) in recent weeks to the China Securities Finance Corp, for lending on to brokerages to finance their investment in shares and to purchase mutual funds directly.Meanwhile, Bloomberg said that, actually, it's more like the $483B quoted in the title after you include the contributions of the People's Bank of China (PBoC):
China has created what amounts to a state-run margin trader with $483 billion of firepower, its latest effort to end a stock-market rout that threatens to drag down economic growth and erode confidence in President Xi Jinping’s government.Whatever the true amount is, let's just say that Western market observers--especially existing and potential investors--have not taken well to massive state intervention. By frustrating the workings of the price mechanism, supply and demand are not left to work themselves out. That is, these stock markets are not 'serious' enough to be considered alongside those of more developed nations. Literally, they are Party playthings:
China Securities Finance Corp. can access as much as 3 trillion yuan of borrowed funds from sources including the central bank and commercial lenders, according to people familiar with the matter. The money may be used to buy shares and provide liquidity to brokerages, the people said, asking not to be named because the information wasn’t public.
“We know that China wants to open its capital markets to foreigners, and that will require an improvement in standards.” said Nigel Green, chief executive of deVere Group. Chris Konstantinos, director of international portfolio management at RiverFront Investment Group, also noted that the Chinese government’s “carte blanche” on market action could offend “democratic societies’ sensibilities. I don’t believe it bodes well for China’s recent overtures toward greater transparency and the prospects for attracting a more global shareholder base for Chinese shares,” he said.China's stock markets are off-kilter. As a result, they say, the PRC still does not represent a true market economy--a status China is seeking. Go ask former Goldman Sachs head and Treasury Secretary John Paulson:
Earlier this week, Bridgewater Associates LP, the world’s largest hedge fund, warned its investors that China’s market turmoil will have broad repercussions, a dramatic reversal from its usual bullish stance on the country, The Wall Street Journal reported. Bridgewater joins a growing list of hedge-fund mangers who have turned more bearish on China in recent weeks, including Elliott Management Corp.’s Paul Singer and Pershing Square Capital Management LP’s Bill Ackman.
“The rise and fall of the market over the past year may well have convinced many investors that the market is simply not a reliable investment vehicle,” said analyst Michael Spencer at Deutsche Bank in a report. “Quite clearly, the reform objective of allowing the market to play a decisive role in allocating capital has suffered a setback.” The state-sponsored buying of stocks is also creating an overhang, which the government will eventually have to tackle.
No advanced economy has achieved high-income status — something to which China aspires — with a closed financial system that misallocates and misprices capital. Chinese reformers undoubtedly understand how to create a modern financial system; policymakers have studied this inside out. They have the blueprint in hand, but need to act on it boldly and quickly. If China is to have a well functioning and stable capital market — which can also help to protect investors, particularly unsophisticated individuals — it needs to allow best-in-class financial institutions and professionals, irrespective of national origin, to serve Chinese investors. In my experience, joint ventures simply do not work for global financial institutions.What, then, are the implications for all this Chinese tomfoolery with financial markets? There are likely two. First, the inclusion of the world's second-largest economy into the Morgan Stanley International Capital (MSCI) world indices will be further delayed. This is important since many fund managers with an index replication strategy would be obliged to hold PRC stocks had they been included in MSCI indices:
China would do well to allow a wide range of participants, including top-notch foreign institutional investors, investment banks and brokers, to compete on equal footing. Exposing companies to serious competition will sort out the best institutions from underperforming ones. Beijing can further protect investors by establishing a well enforced regulatory regime designed to minimise accounting fraud and market manipulation, ensure high quality investment products, set appropriate margin requirements, and mandate high standards for the sales practices of brokers that sell to individuals.
Now, many institutional players believe otherwise and say Beijing’s mass suspension of stocks from trading and a ban on short selling in the wake of a savage market downturn has damaged its credibility, setting back the inclusion of stocks denominated in renminbi and listed in Shanghai and Shenzhen in MSCI’s global benchmark indices.Second, designation of China as a market-based economy by its developed trading partners may similarly be delayed, leaving it still-vulnerable to frequent anti-dumping complaints. The European Union, it is said, is reluctant to give China such recognition:
Michael Lai, investment director at GAM, says the actions taken by the authorities mean that domestic Chinese equities, known as A-shares, effectively became an un-investable market. “Many investors have been starkly reminded over the past weeks that China is a policy-driven market,” he adds.
The question of whether China is given market-economy treatment at the end of 2016 will be hotly debated by governments around the world in the coming months. Beijing and its allies argue that China’s 2001 agreement to join the World Trade Organization requires countries to give China market-economy treatment 15 years later, in December 2016.Through its interventions, China simply confirms other's suspicions that it is not a mature economy. You can be the world's second-biggest economy for all the rest care; but you're still not one of the big boys in the world economy. The lack of respect accorded China riles it, but hey, maybe it should be more careful in thinking how the rest of the world perceives its actions. They don't call it a globalized economy for nothing.
If the EU recognizes China as a market economy, it would make it more difficult for Europe to impose steep tariffs on Chinese goods, at a time when European industries still complain that China uses a vast array of government subsidies to boost exports and undercut overseas competition.
The European Commission’s legal service circulated its confidential opinion within the institution in recent weeks, officials familiar with the opinion said. “The legal service is of the opinion that it would be unwise not to grant market-economy treatment to China,” a senior EU official said.