As China's focus switches from property to capital market development, who will benefit?

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personally announced, started trading, two decades, “Red lines”, “for living in, not for speculating”, “common prosperity”, “zero tolerance”

So, what’s next for China, following the government’s crackdown on real estate? We all know that sectors currently in favour include priorities such as semiconductors, green energy and biosciences.

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But here’s the surprise: financial services, too, will be a big winner. In Chinese state capitalism, the winners and losers are chosen by the government at each stage of the country’s development. Right now, Beijing urgently needs to upgrade the nation’s capital markets.

The current policy is to shift household savings away from property and redirect them into productive uses. But how can this be done? The bridge has to be financial services.

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When President Xi Jinping personally announced the launch of a third stock exchange, in Beijing last year, it signalled the highest level of support for capital market development. The Beijing exchange duly started trading towards the end of 2021, becoming the mainland’s third exchange after Shanghai and Shenzhen.

Redirecting savings is not easy, given that the Chinese public has been preoccupied with property for the past two decades. Currently, real estate represents an estimated 40 per cent of household wealth and about 25 per cent of the country’s economic activity.

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In recent years, the government has been restricting property purchases. “Red lines” were introduced to curb excessive borrowing by developers. It’s not the government’s intention to cause a crash, as that could put social stability at risk, but clearly, the time has come to put an end to excesses.

In major Chinese cities, home ownership has already reached 85 per cent, a level higher than in US and Japan, and there are signs of hoarding. Xi has had to remind the public that houses are “for living in, not for speculating”.

China is currently pushing for “common prosperity”, while implementing its “dual circulation” strategy. The aim is to avoid the middle-income trap, make society more inclusive and the economy more sustainable, and reduce reliance on foreign technology.

Such a vision can only be achieved by raising productivity and promoting innovation. Beijing intends to achieve its targets through market economics.

On January 6, Xinhua, reporting on a plan released by the General Office of the State Council, said China “will enhance reforms of the market-based allocation of production factors”, and “efforts will be made to fully leverage the decisive role of the market in resource allocation”.

A high-functioning capital market is necessary. China already has the world’s second-largest stock and bond markets. The reality, however, is that the markets remain immature, with only a limited role in financing China’s economic growth.

Currently, only around 10 per cent of household savings is in stocks. Chinese savings are still mostly in banks and the money market, apart from real estate. And only 6 to 8 per cent of China’s domestic equity market is owned by foreign investors, a low level by world standards and a result of the country’s capital controls.

For the Chinese public, property has been a huge distraction and now the challenge is to refocus their attention on stocks and other capital market products.

Building up public confidence is not easy, given the stock market’s reputation for roller-coaster-like behaviour. The underlying problem is that the market has a short history of just over 30 years. Market integrity takes time to develop.

Currently, Chinese stock market trading is dominated by short-term traders and speculators. Still, the situation is already much improved since just a few years ago.

A government crackdown on shadow banking products – risky financial products that exploited loopholes in regulations – has helped to shift interest to stocks. Market confidence has improved after regulators adopted a “zero tolerance” policy towards misbehaviour and malpractice.

The market’s health has also improved because of growing participation by institutional investors, including public pensions, sovereign wealth funds, asset management firms and foreign institutions. These participants generally take a longer-term approach, based on fundamental research.

Indeed, over time, the government should get what it wants: a well-established, prosperous capital market. The financial services industry stands to benefit immensely. This is especially so for those parts of the industry directly engaged in capital markets activities, such as asset managers, brokers, investment bankers and wealth management and sales platforms.

Having said that, a note of caution needs to be added. China has observed market bubbles in the United States and elsewhere.

The Chinese government has been very clear that finance must serve the real economy, and not the other way round. China does not wish to see one mania, for real estate, making way for another. Socially responsible practices will be enforced.

Since Chinese economic reform started in 1978, Chinese policy has been to apply capitalism for increasing production and to apply socialism in wealth distribution. Through the decades, the Chinese have managed the balancing act between capitalist and socialist practices, placing greater emphasis on one or the other at different stages of the country’s development.

In the foreseeable future, Beijing will boost the capital market, but this will always be subject to national priorities. History has shown that any industry that forgets its place in the nation’s balancing act will get “rebalanced” sooner or later.

Cheah Cheng Hye is the head of Value Partners Group, an asset-management firm in Hong Kong, and an independent non- executive director of Hong Kong Exchanges and Clearing Ltd. He is also active in the Hong Kong Trade Development Council’s Belt and Road Committee as well as the Malaysian Chamber of Commerce (Hong Kong and Macau)

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