China’s markets have seen both strong price performance and a surge in IPOs.
The total value of the entire Chinese stock market is at its highest point in five years following a rally that started in March.
The total market capitalisation of all listed Chinese equities is now more than $10 trillion (£7.7 trillion). The total value of Chinese stocks previously reached such heights in 2015, just before a major sell-off due to concerns over China’s growth rate.
The total value of Chinese stocks has been near $10 trillion since July, with recent gains pushing the market over the line. Since March, the market's value has grown by around $3 trillion.
So what has caused this surge in the total value of Chinese equities? As we are looking at market capitalisation of the market – that is publicly available shares multiplied by their price – there are two components to consider.
First, the price of shares listed in China’s market. Over the past few days, Chinese equities have seen a strong rally on the back of a much-touted speech by Chinese president Xi Jinping in the southern city of Shenzhen. Xi’s speech outlined plans to ensure the city becomes a global technology hub, among other economic reforms.
However, the broader story is that China’s market has performed well since March. Following a large sell-off on the back of Covid-19 concerns at the start of the year, China’s markets have generally seen strong price performance. This can be observed in the major indices tracking Chinese equities.
For instance, as data from FE Analytics shows, the MSCI China index has provided a total return of 25.7% year to date (in sterling terms, which will be the case for all other returns mentioned). The FTSE China index has returned 27.1%, while the MSCI China A index has done even better, with a total return of 31.2%.
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Behind this price rally is continued confidence about the future of China’s economy. Since the initial Covid-19 outbreak, the country has largely been able to keep a lid on new cases. By most counts, China has experienced somewhere close to 5,000 deaths from the virus, despite being the source of the original outbreak. In contrast, more than 200,000 people have died in the US.
As a result, China’s economy has been able to open up and therefore recover much quicker. Most economic indicators for China look positive again, with the country likely to be the only major economy to expand in 2020.
There has also been speculation that the Chinese government encourages domestic institutional investors to buy stocks to keep markets buoyant. The idea is that the government tells a “national team” of government-backed asset managers, such as insurance companies, to step in and support prices when needed. Not all market commentators, however, agree that this has been a notable reason for the success of Chinese equities.
The other side of the market-cap equation is the number of shares in existence. While China has reached the $10 trillion mark in part thanks to price rises, the figure also reflects an increasing number of Chinese shares in existence, with China seeing an uptick in initial public offerings (IPOs).
This is the result of recent reforms designed to make it easier for companies to list their shares on exchanges. Most notably, the ChiNext board, which is a Nasdaq-style subsidiary of the Shenzhen Stock Exchange, recently liberalised IPO rules. In August, following the introduction of the reforms, 18 new companies listed on the ChiNext Index, and saw their share prices surge.
The Chinese government is keen to see more companies making use of equity markets to raise funding as part of an overall push to modernise the economy and transition from heavy industry to high tech.
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Tech companies have fewer tangible assets such as plant equipment or machinery. This makes it harder for them to gain funding from banks as it means they have fewer assets that can used as collateral for a loan. Instead, when funding is needed, it makes more sense to sell future claims on their earnings, which means selling equity on stock exchanges. By making it easier for companies to go public, the government hopes to encourage China’s burgeoning tech industry.
As a recent editorial in the newspaper China Daily put it: “It is hard for some fast-developing innovative enterprises to secure loans as they do not possess any assets that they can offer as a guarantee. For companies such as emerging high-tech companies therefore financing through capital markets is a more realistic option. Actually, the fast expansion of high-tech companies in the developed economies [such as the US] since the 1980s is attributable to the high ratio of direct financing in those countries.”
Being a state-run newspaper, China Daily editorials are often seen as offering an insight into the thinking of the government.
Another reason for China encouraging more tech companies to list on Chinese exchanges is part of the wider “decoupling” of the US and Chinese economies. Owing to its deep and liquid capital markets, many Chinese firms previously opted to list on the New York Stock Exchange. However, since the start of the trade war there have been vague threats from the US to either delist Chinese companies, or force them to adhere to stricter financial disclosure rules. This has created an incentive for the Chinese government to push ahead with reforming and strengthening their own capital markets.
The push for more domestic listings is also evident in the launch of Shanghai's STAR Market last year, which was also touted as China’s answer to the Nasdaq. The exchange has since become a new favourite for Chinese tech companies. The Shanghai-based exchange is engaged in competition with the aforementioned Shenzhen-based ChiNext board for Chinese tech company listings.
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