Chinese financial firms under pressure from Beijing's market rescue measures
Financial firms in China may find it hard to expand internationally because their professionalism has been harmed by raft of rescue measures ordered by Beijing to prop up the free-falling equity markets.
Since July, China has introduced measures to stop the bleeding in markets which have lost over 30 per cent in value since scaling a 7-year peak in June. It is not wrong for the government to rescue the market as governments in the US, Hong Kong and Europe did so in the past. But the key question is how they implement the rescue plan.
A good example is when the Hong Kong government spent HK$118 billion to support the stock market during the Asian financial crisis after Hong Kong equities had dropped by 60 per cent.
When Beijing intervened in the market in early July, Chinese markets had skidded by 30 per cent but were still up more than 50 per cent from their year ago levels. The timing for intervention in fact should come either later when the market would correct to a more reasonable level, or it should come much earlier to prevent the bubble from blow to such a high level.
More importantly, what is the role of brokers in the rescue plan? In the Hong Kong intervention in 1998, only a handful of brokers were giving advice to the government to execute their orders. The brokers themselves did not spend their money to do the rescue plan but it was the Hong Kong government which used the local reserve Exchange Fund to buy the stocks. The stock portfolio was later sold via an index fund Tracker Fund while the government held only a small portion as long term investment in the fund.
China’s rescue plan worked differently in that the 21 largest brokerages acted as the core part of the National Team. They not only executed trades but were asked to pool a sum of 120 billion yuan to buy the large cap ETF. China Securities Financial Corp, the margin finance provider, offered 260 billion yuan to brokers to support their share purchases.
This part is problematic. Many of the mainland brokers are listed companies who have individual shareholders or fund companies as their shareholders. They are not part of the government agency. But now they are being told to bear the national duty to invest in the stock market which forces them to make investment decisions based on national interest and at the expense of the interests of their shareholders.
Such arrangement means the brokers need to buy in the market even though many Shanghai or Shenzhen stocks are still trading at 30 to 60 times PE and the risks are too high.
They do not only face a potential financial loss but more importantly, they are forced to give up their professional judgment. As brokers, they do their research and decide when to buy a stock instead of following the national duty to buy now.
China has wanted to promote its local brokers to go overseas. Haitong, Huatai, Citic Securities and many others have set up offices in Hong Kong and are listed here. The cross border fund sales scheme also allows mainland funds to be sold in Hong Kong. It may be hard to let these National Team members sell their products to international investors given their role in supporting the market.