New | China to accelerate reforms to aid economy, shore up stock market, analysts say
Mainland expected to push ahead with stalled measures that may lead to increased trading volatility in stock and currency markets
The mainland is likely to roll out fresh reforms and push ahead with stalled pro-market measures during this quarter as part of efforts to help revive the economy and rescue the stock market, according to financial analysts.
The push for change comes on the heels of disappointing performances on the equity markets, which saw Shanghai and Shenzhen record their worst quarterly loss in years.
The Shanghai Composite Index closed the September quarter down 28.6 per cent from the preceding three months, its worst quarterly showing since 2008.
In Hong Kong, the Hang Seng Index tumbled 20 per cent for its worst quarterly performance since 2011.
"The [China Securities Regulatory Commission] is working on reducing off-market share financing, which is needed restore the stock market back to health," said Joseph Tong Tang, an executive director of Sun Hung Kai Financial. "I believe other measures will follow.
"The futures market is another important area which needs to be dealt with, and more effective measures need to be implemented."
The mainland's currency reform remains a wild card in the months ahead as significant fluctuations in value, even further devaluations, cannot be ruled out. On August 11, the People's Bank of China devalued the yuan by 2 per cent against the US dollar.
"I think the yuan will be stable at the current level while other financial market policies are being implemented," Tong said. "However, the market is predicting that the yuan is trending lower in the longer term, which is not helpful to stock investment."
Keith Pogson, a senior partner at accounting firm EY, said Beijing was likely to unveil new macroeconomic reforms to boost the economy before the end of the year.
"The economy will continue to need stimulus to achieve the central government's targets for growth," Pogson said. "Some obvious low hanging fruit come from relaxing banks reserve requirements on cash held at the People's Bank of China, as this can have a similar impact to quantitative easing on the ability of the banks to lend.
"However, the banks will still need to find good targets for their lending if this is not to stoke the growing level of non-performing loans reported."
Pogson also said he believed the authorities would guide the yuan lower to help support exports.
"We have been warned, so would not be surprised by a further devaluation," he said.
"The spectre of interest rate liberalisation remains. This is a less exciting choice for the central government at the moment as it has the potential to destabilise the banking sector if not well managed.
"Bringing too much competition too quickly may reveal too many weaknesses in the system too quickly."
Heng Koon-how, a senior foreign exchange strategist at Credit Suisse private banking, said he believed Beijing would implement new reforms to boost the internationalisation of the yuan. China would like to see the International Monetary Fund add the yuan to its special drawing rights basket at next month's meeting, a move that would elevate the yuan to a league with the US dollar, euro, pound sterling and Japanese yen.
To achieve such a goal, Heng said Beijing would allow international banks greater scope to sell bonds on the mainland.
On the currency front, he said the PBOC might further widen the yuan's trading band to the dollar, permitting a daily fluctuation of up to 2 per cent from the central rate.
Heng said China might also expand its qualified domestic institutional investor programme for retail individuals, broadening the channel to enable investors to send more funds overseas.
Some progress, although not a full implementation, is expected on the Shenzhen-Hong Kong Stock Connect. A similar tie-up between Shanghai and Hong Kong was introduced in November last year.
"All of these reforms are related to further internationalisation of the yuan and concurrent freeing up of China's capital account," Heng said.
Still, these reforms may also lead to greater capital outflows, resulting in greater volatility in the stock market.
"The policy dilemma between implementing critical long-term reforms versus maintaining capital market stability is going to be a tough one," Heng said.
"It is very unlikely that the Shenzhen-Hong Kong Stock Connect will be implemented soon.
"There is also a growing concern that adding a new stock connect will further open up yet another channel for southbound capital outflows."
Timothy Lo, the managing director of French private bank CIC Investor Services, said China was likely to carry out reform of state-owned enterprises. He also expected changes to encourage consumers and local governments to ramp up spending. "The purpose of the reforms is to sustain the 7 per cent growth target," Lo said.
