An extract from The International Capital Markets Review, 10th Edition
The year in review
In the past, China’s financial model was based to a large degree on state-owned banks lending to SOEs, which in turn exported products to developed markets or financed domestic infrastructure projects. This cycle was ultimately funded by China’s large base of domestic deposits, which are the result of high savings rates, a lack of alternative investment options and the relative security of bank deposits. While this financial model is undoubtedly successful in an export-driven economy in the early stages of development, in recent years rising geopolitical tensions, an easing of gross domestic product (GDP) growth and a build-up of debt have created pressure to build a financial infrastructure that is both flexible and robust. China’s growth slowed in 2019 to 6.1 per cent for the full year, the lowest growth rate since 1990. China therefore already faced the prospect of a macroeconomic challenge in 2019 and beyond and this has subsequently been compounded by the combined impact of its trade dispute with the United States, weakening domestic demand, high levels of off-balance sheet borrowing by local governments and now the unprecedented disruptive challenge of covid-19. As a response, the Chinese central government has even scrapped its GDP growth target for 2020, the first time since records began, implying a step back from the ambitious policy target of doubling 2010’s GDP by 2020. The build-up of economic and geopolitical pressure has pushed the acceleration of change to a new level in China’s capital markets, which, if trade earnings are squeezed, can serve as an alternative growth driver by mobilising domestic and foreign savings to create wealth through investment in new businesses and technologies. The worsening of China’s geopolitical environment in many respects underlines the importance and urgency of continued reform in its capital markets.
In the past year, the wave of policy changes to further reform and open up the capital markets has been greatly accelerated. The Star Market of SSE, which is meant to fund and support companies in innovative industries, has been brought from the original concept to an open business at world-class speed. In November 2019, the State Council blueprinted a series of removal of restrictions on foreign investment to financial institutions, including the restrictions on business scope for foreign-invested banks, securities companies and fund management companies, and the ownership caps on securities companies, securities investment fund management companies, futures companies and life insurance companies. In September 2019, China issued Type A licences to Deutsche Bank and BNP Paribas, allowing them to act as lead underwriters for corporate debt issued by non-financial institutions. In May 2020, the People’s Bank of China (PBOC) and the State Administration of Foreign Exchange (SAFE) jointly issued a rule to remove the long-standing quota limits for qualified foreign institutional investors (QFIIs) and yuan-denominated renminbi qualified foreign institutional investors (RQFIIs). These examples hint at the potential for China’s capital markets to transform themselves and adapt to the requirements of a growing economy and an ever more sophisticated populace. Furthermore, it should be noted that since the reforms and opening up are nearly all government-led and centralised rather than market-driven, some, or perhaps many, of the top-down initiatives may face turbulent times ahead.
i Developments affecting debt and equity offeringsDebut of the Star Market
On 22 July 2019, the new Science and Technology Innovation Board of the SSE, called the Star Market by Chinese authorities, was officially launched, with the first batch of 25 companies listed on the same day. Considering the idea for this new Board was only first unveiled by President Xi Jinping in November 2018 and the birth of the Star Market only took a few months, the implementing speed of the CSRC and the SSE is spectacular by China’s standard, as is the ambition and momentum of China to bid for tech superpowers and the reform of its equity markets. As at 22 July 2020, the one-year anniversary of the Star Market, there had been 140 companies listed on the Star Market, with more than 100 applicants waiting in the pipeline.
Often dubbed Nasdaq-style, the Star Market is intended to catch up with its United States counterpart eventually. The…
Read More: The year in review: capital markets in China