March 25, 2022 • 9:32 am ET
Beijing’s message to the financial markets: We are listening
Last week, Beijing sent a strong message to financial markets: we are listening. That news alone sparked a massive rebound in both the mainland and Hong Kong markets on Wednesday and Thursday of last week.
The message was delivered by Vice Premier Liu He and the State Council’s Financial Stability and Development Committee (FSDC), which is one of the strongest mouthpieces for Beijing’s economic policy support, just before a speech by Li Keqiang or Xi Jinping. But fundamentally, the statement was a reaction to the sell-off that took place earlier in the week, which caused Chinese stocks and bonds to fall by margins not seen since 2008 and reflected multiple economic threats metastasizing at the same time. These included renewed pressure on China’s economy due to the looming Omicron outbreak, multiple defaults by Chinese real estate developers, the threat of Chinese stocks being delisted in the United States, further regulatory crackdowns on Chinese platform and tech companies, and rising political risk in the country Linked to China’s perception of political alignment with Russia.
The sudden need for an explanation from Liu He’s office shows how the Russian invasion of Ukraine has created a massive wedge between Chinese political leaders and technocratic officials who run the financial markets. Political leaders are primarily concerned about how China can use its relationship with Russia to advance China’s interests in longer-term competition with the United States and US-led alliances, and are willing to incur economic costs to do so. Technocratic China, in the voice of Liu He’s FSDC, appears to have reminded political leaders this week that China remains highly dependent on stable financial market conditions, requires significant inflows from foreign investors and requires at least the perception of well-executed domestic economic policies in line with the liberalization of the markets. China’s perceived rapprochement with Russia, as well as issues with political messaging and coordination over the past year have hurt all of those goals.
Foreign investors have reduced their exposure to China and there is a growing group who believe China is becoming “uninvestable”. Financial technocrats have spent years setting up channels like the Stock and Bond Connect programs to invite foreign investors into Chinese markets. China is inevitably under pressure from capital outflows. It sits atop the world’s largest money supply: over $38 trillion, growing at a pace of about $3 trillion a year. This creates incentives for Chinese households and companies to continuously diversify into foreign assets. This week, the promise of long-term rebalancing returns to Chinese markets has come under attack from multiple outlets, and Beijing has felt compelled to respond, or at least try to calm financial markets. The coming months will show whether this message works.
The content of the FSDC announcement was less significant than the statement itself, which refuted growing market fears that Beijing was either sleeping at the wheel, indifferent to market contagion, or actively contributing to some sell-offs by tech and platform companies. The FSDC statement contains five key messages, all of which address specific market concerns over the past few weeks. In turn, these concerned the state of the Chinese economy, pressure on real estate developers, the delisting of Chinese stocks, regulation of technology and platform companies, and specific concerns about the Hong Kong market. The order likely indicates a relative ranking of priorities for Beijing.
On March 15, the NBS announced surprisingly positive growth figures for the first two months of the year. But instead of bolstering market confidence, investors questioned the quality of the data and rushed to exit their positions, fearing Beijing would fail to take concrete steps to stimulate the economy this year and merely manipulate economic data. The FSDC statement pledged to “concretely improve the economy in the first quarter and monetary policy will be more proactive.” This is a clear message that financial technocrats at least do not see a solid basis in the first quarter recovery so far and monetary easing remains on track. Technically, the PBOC could cut interest rates on term loans (MLF) at any time, but the most likely window remains the next regular MLF operation on April 15th. The FSDC statement could even provide impetus for a more dramatic move and lower interest rates on deposits. This has not happened since October 2015.
The second message related to real estate developers and didn’t break much new ground, merely promising to explore and present vigorous measures to prevent and manage risk. Local governments have already unveiled several initiatives to boost demand, and Beijing has helped them encourage asset management companies and state developers to take over projects from distressed firms and keep construction going. But the problem in China’s real estate sector right now is that nobody is buying houses as sales in 30 cities fell 48%y/y in the first 14 days of March, compounding the drop from earlier in the year. In recent years, the supply has rushed far ahead of the basic demand from owner-occupiers. Speculators have filled this void in the past, but these investors are now staying on the sidelines, especially as the Omicron breakout gathers momentum. It’s possible that Beijing itself is strongly urging property magnates to use their own money to ease financial pressures and pay off debt, but ultimately the sector’s recovery depends on a rebound in sales.
Regarding the possible delisting of Chinese stocks from the US markets, FSDC said that China and the US are making positive progress and are working on detailed plans, and that the Chinese government continues to support all companies listed overseas. The CSRC has been saying pretty much the same thing for the past few days, but a message from the FSDC is clearly much stronger and could indicate concrete concessions will soon be offered to US regulators. With delisting deadlines rapidly approaching, significant progress is likely to be needed to maintain investor confidence that the threat of delisting will be delayed or eliminated. Talking here is cheap, even from Liu He’s office, as these issues have remained unresolved for years.
The news regarding platform and technology companies should be interpreted much more cautiously than the immediate optimism of the stock markets in the past two days. The statement only says that regulatory work will progress while maintaining stability (regulators will not stop their campaign, but they will try to make it less destructive to the market). Regulatory work needs to be transparent and proactive (our interpretation is that the FSDC needs to know what the rest of the bureaucracy is doing). The statement also says that departments must coordinate with financial regulators before issuing policies that will have a major impact on capital markets. This could mean more coordination behind policy and less immediate political risk from events like last July’s crackdown on education tech companies that wiped out valuations in the sector.
The FSDC statement addresses a real concern for financial markets, as policymaking has been far less coordinated under the State Council and individual ministries have taken their own initiatives to respond to leadership priorities such as “shared prosperity” with little concern for potential collateral damage close . But this problem remains, even if the FSDC is aware of the costs. After the FSDC meeting, all relevant financial regulators issued their own version of a statement that reflected FSDC’s priorities, but there was nothing from the Cyberspace Administration of China (CAC), the Ministry of Education, or even the State Administration for Market Regulation (SAMR) . All of these agencies have generated their own forms of market risk over the past year. Bureaucratic conflicts in the service of leadership priorities can still easily destroy policy coordination and effective messaging to markets.
In response to the statement, optimistic sentiment rose in financial markets. After the concatenation of factors that led to the sell-off earlier in the week, there was a low threshold for good news. The credit impulse should finally turn positive in April or May and stock market performance has historically improved in these circumstances.
Beijing has clearly shown that it is aware of the problematic narratives that have been developing around the Chinese economy, and in what is a politically important year, an escalating financial market crisis is one of the last things political authorities want to see. But Beijing’s concern now should focus on the effectiveness of political support, not the tone of the leadership’s statements. And there are still many hills to climb to address the real investor concerns that sparked the sell-off in the first place.
Daniel H. Rosen is a Senior Fellow at the Atlantic Council GeoEconomics Center
Logan Wright is an associate of the Atlantic Council and a partner in the Rhodium Group
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