How Xi Jinping is taking control of China’s stock market
By using listing and trading rules to direct capital into sectors that fit his priorities, the president wants the market to serve the state
When Jilin Joinature Polymer made its debut on the Shanghai Stock Exchange on September 20, it became the 200th company to float on China’s domestic markets this year. Collectively they have raised over $40bn, more than double the amount raised on Wall Street and almost half the global total.
Yet the country’s benchmark CSI 300 index is down 14 per cent since January, having fallen by a fifth in 2022. It has underperformed other major markets such as Japan and the US, as worries mount about China’s slowing economic growth and a liquidity crisis in the real estate sector.
The highly unusual situation of a seemingly stagnant market welcoming hundreds of new companies is a consequence of significant policy shifts in Beijing that have ramped up over the past year. President Xi Jinping is intent on boosting investment into sectors that fit with his priorities for control, national security and technological self-sufficiency, and is using stock markets to direct that capital with the aim of reshaping China’s economy.
“The old playbook of whenever there’s growth weakness, you stimulate the property market or build infrastructure — that’s no longer relevant,” says Kinger Lau, chief China equity strategist at Goldman Sachs. “Meanwhile, the IPO market remains quite vibrant, and clearly there’s a policy incentive to direct capital to areas that are deemed strategically important to China.”
Lance Noble, head of China Reality Research at investment bank CLSA, says the new approach centres on the top-down co-ordination of resources from government, industry, finance, universities and research labs to accelerate technology breakthroughs and help reduce China’s reliance on the west.
But making markets serve the state’s priorities is a major departure from past administrations and the pro-market position initially espoused by Xi after he became party leader in 2012.
“These measures and reforms are running up against the previous mindset of setting up a relatively market-oriented market mechanism, and there’s a huge gap between the policy guidance and market expectations,” says Zhang Jun, dean of the School of Economics at Fudan University in Shanghai.
Nor is there any guarantee that convincing China’s IPO investors to enthusiastically back new listings, or leaning on large asset managers and insurers to become long-term investors in chipmakers or electric-vehicle manufacturers, will result in the kind of job and wealth creation for ordinary Chinese that property and infrastructure investment previously did.
The big idea
Roughly a year ago, Xi told top leaders assembled in Beijing that China needed to mobilise a “new whole-nation system” to accelerate breakthroughs in strategic areas by “strengthening party and state leadership on major scientific and technological innovations, giving full play to the role of market mechanisms”.
That “new” in “new whole-nation system”, and the reference to “market mechanisms” distinguish Xi’s vision from that advanced under Mao Zedong, who ruled China from 1949 to 1976. Mao’s original “whole-nation system” entailed Soviet-style top-down economic planning, delivering technological advances including satellites and nuclear weapons, but not prosperity for the masses.
Xi’s calls for innovation co-ordination at higher levels of government came after a string of disastrous venture capital-style investments in regional chipmakers by local governments and allegations of corruption at the National Integrated Circuit Industry Investment Fund, a key player in China’s semiconductor strategy.
The NICIIF had generally sought to balance policy goals with investment returns, reinvesting profits across the industry. But it had come under criticism for frequently funding low-cost and profitable chip design companies while failing to help higher-end Chinese chip manufacturers catch up with Korean, Taiwanese and other foreign rivals.
Noble says high-profile references to this “new whole-nation system” in Xi’s speeches and articles published in top Communist party journals were “clearly blinking signals that this is a big priority . . . and very important in terms of what China’s science and technology future will look like.”
Whereas Mao shut down China’s stock exchanges, Xi wants to use domestic equity markets to reduce dependence on property and infrastructure development to drive growth. But his “new whole-nation system” prioritises party policy above profit.
This helps explain why the party’s top cadres have been fast-tracking IPOs but remain reluctant to deploy large-scale property and infrastructure stimulus to reinvigorate economic growth. In their eyes, returning to the old playbook would only postpone an inevitable reckoning for debt-laden real estate developers and delay the planned transition to a new Chinese economy.
Key to that shift, Goldman’s Lau says, is getting companies in sectors such as semiconductor manufacturing, biotech and electric vehicles to go public. With stock market investors backing them, they can scale up and help drive the growth in consumer spending needed to fill the gap left behind by China’s downsized property market.
Red light, green light
Xi’s administration was already channelling hundreds of billions of dollars from so-called government guidance funds into pre-IPO companies that served the state’s priorities. Now it is speeding up IPOs in Shanghai and Shenzhen while weeding out listings attempts by companies in low-priority sectors through the launch of two intertwined systems.
The nationwide “registration based” listings system, rolled out in February, made China’s formal process for stock market listings more transparent and ended an often lengthy process of official vetting by the China Securities Regulatory Commission for every IPO application.
Just as important is a behind-the-scenes “traffic light” system, in which regulators instruct Chinese investment banks informally on what kinds of companies should actually list. Companies such as beverage makers and café and restaurant chains get a “red light”, in effect prohibiting them from going public, whereas those in strategically important industries get a “green light”. The CSRC did not respond to a request for comment on the traffic light system.
But a director at one large Shanghai-based brokerage says officials are clearly “trying to push those strategic sectors like high-tech manufacturing, renewables and other new economy-related industries to list and raise capital and flourish.” Listings in those sectors proceed quickly while those companies that do not align with policymakers’ priorities find themselves without the investment bank backing needed to go public, the director adds.
This approach could run into difficulty if shares in those companies going public are sold down immediately by investors hoping to cash out at a profit when prices rise appreciably in the first few days of trading. Regulators have guarded against that risk by extending “lock-up” periods, during which Chinese investment banks and other institutional investors who participate in IPOs are not permitted to sell stock.
“Keeping these investors locked in for longer keeps share prices stable,” says Xia Mi’ang an analyst with Pacific Securities. “It will push listed companies to focus on improving profitability, and make [IPO] investors bear investment risks while letting them enjoy dividend returns.”
Regulators have also restricted the ability of company insiders — be they directors, pre-IPO backers or so-called anchor investors — to sell their shares, especially if a company’s shares fall below their issue price or it fails to pay dividends to its shareholders.
The day after these changes were announced, at least 10 companies listed in Shanghai and Shenzhen cancelled planned share disposals by insiders. An analysis of the new rules’ impact by Tepon Securities showed that almost half of all listed companies in China now have at least some shareholders who cannot divest.
Market discipline
This new and co-ordinated approach to capital markets is already resulting in disruption that officials are scrambling to contain. One major concern is that the flood of new listings has dragged down valuations of existing stocks, because individual investors often sell shareholdings in companies that are already listed to raise the money they need to bid for shares in new arrivals.
The downward pressure on the wider stock market from this year’s listings glut has been so great that China’s securities regulator recently announced plans to slow the pace of new listings in order to “boost capital market investor confidence”.
But that effort has so far had little visible impact. Even a surprise move to boost turnover by slashing trading fees only managed to push the market about 2 per cent higher the day it was announced. By comparison, a reduction in trading fees in 2008 caused shares to rise by 9 per cent.
With the market failing to respond in the way it once did, authorities are encouraging a wide range of domestic institutional investors to buy and hold shares in strategic sectors in order to prop up prices. The latest such move came earlier this month, when China’s insurance industry regulator lowered its designated risk level for domestic equities in an attempt to nudge normally cautious insurers to buy more stocks.
Such measures show that Xi’s stated plan to give “full play” to the role of markets comes with an important rider: those markets will take explicit and frequent direction from the party-state.
“They’re listing the firms and they’re making them attractive because they have government subsidies or enjoy low taxes,” says Thomas Gatley, an analyst at Gavekal Dragonomics. “The strategy is market driven, but not fully market driven — the government’s thumb is on the scale.”
Risky business
Not everyone is thrilled by the enhanced role of the state in China’s stock markets. For those who can still freely cash out of Chinese stocks — namely foreign investors — there has been little hesitation to do so this year.
Last month, offshore investors trading through a market link-up between Hong Kong and mainland bourses sold a record $12bn of Chinese equities, according to Financial Times calculations based on stock exchange data. Fund managers say the country is in the middle of a structural derating, whereby international investment funds permanently reduce the proportion of capital they judge prudent to allocate to China’s stock market.
That undermines longstanding efforts, including initiatives launched early in Xi’s tenure, to persuade foreign fund managers to take up larger positions in Chinese companies.
Back then, the belief that international capital would help dampen share price volatility — largely stoked by the country’s trend-driven retail traders — helped push pro-market reforms that resulted in Chinese securities being included in the global benchmarks used by large index-tracking funds.
Now, as foreign funds are dumping their holdings, traders and strategists say China’s “national team” of state-run investors is busy buying in as part of an effort to prevent a more serious market rout.
“For government-related entities, their participation in the equity market has gone up quite a bit over the past few months,” says Lau at Goldman. “And what they’ve been buying is very much in line with long-term strategic sectors.”
But veterans of Chinese finance say this approach is unsustainable and warn that parking money in strategic stocks just to support valuations is a waste of capital that could be put to more effective use elsewhere.
“Rather than changing market expectations through altering supply or demand, [policymakers] are guiding buy-and-hold funds into the market . . . which cannot work in the long term,” says an investment banker at one of China’s largest brokers.
“Money should not be spent like this,” the banker adds. “The reason they’re doing it is because it’s the easiest option.”
Costs of control
Some investors are warning that the ever-expanding system of state controls over equity investment could do lasting damage to Chinese stocks’ domestic and global appeal.
Jerry Wu, a fund manager at London-based Polar Capital, says that “at a minimum, investors want to see a consistent and persistent trend in policymaking that shows Chinese policymakers are pragmatists again, that they care about economic growth and private businesses”.
But Zhang, at Fudan University, warns the tensions between the “previous market-oriented path and the current new whole-nation approach . . . may continue for the foreseeable future.”
Even if the disruption to China’s stock markets eventually fades and policymakers’ plan to transition to a consumer-focused economy powered by heavy investment in companies that serve Xi’s policy priorities succeeds, there are reasons to question whether the results will live up to his vision.
Economists say that the tech sectors being favoured for listings by Beijing — semiconductors, EVs, batteries and other high-end manufacturing — are simply not capable of providing the scale of employment opportunity or driving the levels of consumer spending anticipated by top Chinese leaders.
“There’s two problems with focusing on investing in tech,” says Michael Pettis, a finance professor at Peking University and senior fellow at Carnegie China. “One is that tech is very small relative to what came before [from property and infrastructure], and two is that investing in tech doesn’t necessarily make you richer — it’s got to be economically sustainable.”
Rising share prices could create a powerful wealth effect for China’s middle classes in the same way that rising house prices once did. But the government’s inability to engineer a stock market rally this year has further undermined retail investors’ confidence. If Chinese equities continue to lag other markets over the long term, that could start to weigh on household spending and further hobble growth.
Fraser Howie, an independent expert on Chinese finance, points out that China is not the only country where artificial intelligence, semiconductors and electric cars are the hot investment ticket.
“A year ago, everyone was talking about how China was the global AI leader. Then ChatGPT came along and everyone went: ‘oh, well, maybe markets aren’t as stupid as we all thought’,” he says.
He points to a global rally in AI-related stocks that has largely excluded Chinese companies and the listing of UK chip designer Arm in New York. That IPO generated $5bn for Arm’s parent company SoftBank, more than any single listing in China has raised this year.
“Xi Jinping wants all these things, but he wants them in a particular way because self-sufficiency and political control are very important to him,” says Howie.
“That comes with limits. It’s like saying, ‘you must do all of this with one hand tied behind your back’.”