China’s army of financial bureaucrats must rank high on the list of the busiest people on the planet.
Rarely does a month go by without some rule change making the news. Most are mere tweaks to existing legislation, but a few represent real change and often come as a genuine surprise.
This was the case on September 3. Speaking at a trade conference in Beijing, president Xi Jinping revealed plans for a new stock exchange, to be based in the capital, with the aim of serving small- and medium-sized enterprises.
Within minutes, the securities regulator issued a statement describing the leadership as “excited” about the potential for funding the future financial needs of SMEs.
Three immediate thoughts come to mind.
It makes you wonder how many bourses the country really needs
First, the announcement caught almost everyone on the hop. “It came out of the blue,” says Harry Handley, a data analytics associate at Shanghai-based financial consultancy Z-Ben Advisors, who spends a good amount of the week trying to foresee this kind of thing.
Second, it’s a stark reminder of how little is known about the ruling party’s inner workings. It rarely solicits outside advice, leaks are rare, and journalists seldom get close to the inner sanctum. That’s how, even in a digitally interconnected world, even big announcements like Xi’s can arrive without so much as a trailer.
Third, it makes you wonder how many bourses the country really needs. For 30 years, Shanghai and Shenzhen have dominated onshore share trading. Each has a main board and a growth bourse. All have been bolstered by regulatory upgrades, with Shanghai’s Star Market, a haven for innovative young firms, a standout success.
So why focus on Beijing? The capital already has a stock exchange. It’s called the New Third Board, and it has been pretty much ignored since its launch in 2013, its roster of smaller firms falling from 10,000 at its peak to 7,300 today. Most constituents gravitated up to larger bourses or fled a liquidity-poor listing venue.
Overhaul
Though details are sketchy, Xi’s new Beijing bourse is likely to supplant the old one as part of a full overhaul-and-rebrand.
But why? Fraser Howie, author of Privatizing China, calls it “a solution to a problem China doesn’t have”. At worst, it will divert capital and liquidity away from Shanghai and Shenzhen.
Moreover, it fails to solve a structural issue that has plagued China for decades. Private firms have long struggled to tap sources of capital, with state banks preferring to fund state firms.
Beijing’s crackdown on private technology platforms, which began in November with the cancellation of Ant Group’s $34.4 billion IPO, exacerbated the problem. Ant once acted as a handy conduit for banks to channel capital indirectly to smaller firms.
Bureaucrats have been busy elsewhere. There is change in the air in Shanghai, where regulators are still bent on turning the city into a genuine global financial hub.
‘Grands projets’
Two projects, highlighted in a report published on August 30 by Z-Ben Advisors, are generating a lot of heat and attention despite being still on the drawing board.
The Pudong Development Plan, named after Shanghai’s financial district, is a central-led initiative to use the city to drag in foreign and local capital and transmit it to firms across the economic spectrum, from shipping to trade to technology.
At the heart of this is a desire to pivot away from quantity to quality, as China seeks to shed its dirty industrial skin and build a rich, clean, advanced economy.
Z-Ben goes a step further, exploring two future paths for Pudong.
In the first, it is used to test the waters for opening the capital account. If a trial works in this slice of Shanghai and is replicated nationwide, China’s integration into the global financial system is a step closer to reality.
In the second, Pudong is converted into a true offshore centre, funded in offshore Renminbi and other currencies, and with a fully open capital account. Handley admits this is “a more outlandish option”, dependent on a lot of moving parts and rule changes. But it’s a fascinating glimpse into what might be.
The other project is local but just as important. It sees Shanghai transformed into a global asset management centre by 2025. As Handley puts it, the aim is to turn it into “a financial centre of China, for China and in China. They want everything China-related to pass” through its municipal gates. (How Hong Kong, the current de facto offshore centre, might feel about this is not clear.)
Drilling down, the plan envisages Shanghai as the country’s beating financial heart: of private equity, of primary capital markets activity, and of newer schemes like the qualified domestic limited partnership, which lets domestic investors buy into Rmb-denominated funds that target overseas investment opportunities.
At the heart is a desire to pivot away from quantity to quality, as China seeks to shed its dirty industrial skin and build a rich, clean, advanced economy
Nine real estate investment trusts were listed in Shanghai and Shenzhen in June 2021, raising a combined Rmb30 billion ($4.64 billion). Most are backed by a single infrastructure project – bridges and business parks are popular – with Beijing tipped to add social housing to the list of sectors deemed Reit-suitable in the second half of the year.
There is of course no guarantee any of these mainland-style grands projets will work. Modern China is littered with the skeletons of big policy ideas that failed to stand up to scrutiny. A case in point: Shanghai’s own pilot free trade zone, launched to much fanfare in 2013, but which never really got going.
It’s possible for all the projects outlined here to face the same fate.
Unless China is willing to scrap most if not all of its capital controls, it’s hard to see Shanghai sitting on a financial services pedestal alongside London or New York. And even with the blessing of a president, why would Beijing’s second attempt at creating a vibrant SME stock exchange be any more fruitful than its first?
One thing is for sure. Whether these projects are winners or losers won’t matter to Beijing’s endlessly busy army of financial bureaucrats. In modern China, as it was in ancient China, there are always new laws to write and rules to follow.
