Is China's stock exchange on the verge of a new dawn?

A large volume of Chinese equities was sold off in 2018, which left its mark on the country's economy. But as an Asian proverb says, it's always darkest before the dawn. Will this hold true for the Chinese stock market?

China's economy is facing four challenges

Let's look at China's four biggest economic policy challenges and the measures that leading government officials are promising to boost the Chinese economy and capital markets for the long term.

The four most urgent economic policy challenges are:

  1. Debt restructuring for municipalities and state-owned enterprises 
  2. Reducing export dependence – less "made in China" and more "invented in China."
  3. Boosting the Chinese capital markets to help finance the country's own economy 
  4. Ensuring a good balance of payments

Sunny forecast for the Chinese stock market

These challenges are not new, nor are they issues that only China is facing, but we have good reason to hope that it will get them under control.

This is because:

  1. As long as a country is financed in its own currency, it can manage all of its debt problems with a combination of fiscal and monetary policy. 
  2. Recently, China closed a large part of its shadow banking sector and restructured its non-performing loans. 
  3. Numerous steps have been taken to better regulate the country's financial markets and develop them for the long term. 
  4. Research and development, along with patent protection and education, have been strategically fostered in China at various levels. The "invented in China" economic strategy is starting to show results, shown for example by the recent boost in profitability of the Chinese manufacturing sector.

China's profitability and productivity on the rise

Source: Credit Suisse

China's government prescribes economic policy measures

Let's take a look at the variety of measures announced by the government. They all indicate that China may soon experience a new dawn. A number of things are happening in Beijing, which means a wealth of new opportunities for buyers of Chinese equities.

  • China's government is planning measures to facilitate long-term recovery of China's private economy and stock market. Moreover, additional measures will foster ownership rights and protect intellectual property. In addition, the government plans for easier implementation of private lawsuits before independent courts, in order to make China a top global competitor for the long term.
  • In future, banks will be able to structure and market investment funds for private clients to invest directly in Chinese stocks and bonds. Moreover, retirement funds and pension fund solutions are likely to inject a large volume of liquidity into the Chinese capital markets in the near future. High liquidity and low market valuations could tempt companies to launch new share buybacks.
  • If implemented, the tax reform under discussion would increase tax exemptions for private households along with deductions for training and education, mortgage interest, and health insurance premiums starting in January 2019. These measures could increase China's economic output by up to 1%, as they could raise private consumption significantly. Corporate tax relief measures are also on the drawing board, especially those that promote longer-term growth.
  • Because concerns about pledged Chinese equities are negatively impacting the Chinese stock market, the government has also announced it would create special liquidity facilities that can boost market liquidity at any time and invest temporarily in stable companies.