When will capital markets in China recover?

Written by Kapronasia || November 22 2023

In August, the China Securities Regulatory Commission unveiled some potential modest market reforms to strengthen investor confidence and trading in Chinese capital markets. These measures included extension to trading hours for the country’s stock and bond markets, lower transaction fees for brokers and the encouragement of share buybacks. While these measures are welcome and could help boost China’s capital markets, there are underlying economic and political issues that need to be addressed if China’s stock market is to recover definitively.

Deloitte’s Chinese Capital Markets Group predicts that China’s A-share market in 2023 will record 320 to 370 IPOs raising RMB 394 to RMB 446 billion, versus last year’s 424 new listings raising RMB 586.8 billion. While this predicted performance will still be better than many other IPO markets globally, and in general market sentiment has been tepid amid high interest rates, persistent inflation and geopolitical tensions, China faces some specific challenges that if not addressed effectively could augur ill for the long-term prospects of its stock market. In particular, uncertainty about the business environment of the world’s second largest economy has led to foreign investors pulling back from China’s capital markets. Policies and messaging that emphasize a focus on national security over economic growth suggest that Beijing no longer views foreign investment in the same way.

In recent years, Beijing’s support for consumer internet companies – long favorites of foreign investors – has waned, while it has redoubled efforts to support makers of “hard technologies” seen as strategic. Yet foreign investors will be cautious about investing in Chinese companies in areas like artificial intelligence, semiconductors and aerospace as such firms are squarely in the crosshairs of the U.S.-China rivalry.

In the third quarter, outflows of foreign direct investment (FDI) in China exceeded inflows for the first time, according to data compiled by State Administration of Foreign Exchange. FDI came to minus $11.8 billion, with more withdrawals and downsizing than new investments for factory construction and other purposes. This marked the first negative figure in data going back to 1998.

It is important to note that this outflow of FDI includes a wide range of foreign companies and not just American ones. For instance, in a September survey of member companies by the Japanese Chamber of Commerce and Industry in China, nearly half of respondents said they would not invest in China at all in 2023 or invest less than in 2022.

That said, there are still foreign investors interested in China’s capital markets. Citadel Securities, one of the world's biggest market-making firms, is "actively exploring" establishing a licensed onshore business in China, its chief executive Peng Zhao said last week. If Citadel Securities were to obtain a licence, it would be the first foreign firm to formally foray into market-making in China outside interbank and foreign exchange market making. At least 16 domestic securities brokerage firms have been given the nod to act as market makers in China A shares as of mid-September, official records show.

Over the last two years, Chinese authorities have encouraged the development of market makers, approving more licences and pledging to roll out more types of derivatives as they seek to boost liquidity and draw in more long-term capital.