Sunday 30 November 2008
Market Mood
The continuing financial tsunami has been caused by innovations in financial products and the difficulty of monitoring the associated risks. However, the situation in China is just the opposite: compared with Europe and the United States, the mainland’s capital market is still in its infancy.
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Market Mood
Paul Pong
30 November 2008
The continuing financial tsunami has been caused by innovations in financial products and the difficulty of monitoring the associated risks. However, the situation in China is just the opposite: compared with Europe and the United States, the mainland’s capital market is still in its infancy.
The mainland’s stock market cycle once used to be “long bear and short bull”. Right now the A-share market has been hit by both the economic slowdown and the non-floating share problem - it has become more difficult for mainland enterprises to raise funds in the stock market. They can only get financing from banks, which raises their cost of capital.
Last month, the People’s Bank of China announced the reopening of the corporate debt market. Non-financial companies can now issue medium-term (three- to five-year) notes. Priority is given to large-scale and heavy-weighted listed companies, and the sectors that form the bedrock of the national economy, like electricity.
The medium-term notes were sold in the market in April for the first time. But they were suspended over concerns about the possible impact on bank lending. The reopening thus provides a good channel of financing for mainland enterprises.
In the past, corporate bond issues on the mainland were tightly regulated, and most issuers were large, state-owned enterprises. According to ChinaBond, 50.5 billion yuan (HK$57.42 billion) of corporate bonds and 22.2 billion yuan of medium-term notes were issued in October alone.
The corresponding figures for the entire period from January to September were only 131.1 billion yuan and 73.5 billion yuan. The reopening measure seems to have been timed with the launch of the 4 trillion yuan economic stimulus programme in mind. Yet the promotion of the bond market seems insufficient, benefiting only a handful of Chinese enterprises.
Developing a widespread bond market has several advantages. First, it is difficult to raise money through the stock market right now. Further, the cost of debt from bonds is lower than borrowing directly from banks. Thus, issuing bonds can lower the cost of capital and optimise a firm’s capital structure - boosting its intrinsic value and stock price.
The 4 trillion yuan package has opened many opportunities in sectors like infrastructure and domestic consumption. It will be a pity if firms fail to invest simply because they lack the money.
Finally, mainlanders have racked up large savings in banks, which can be channelled into investment through bonds if banks buy corporate bonds. This will also enhance banks’ returns.
This would be a good time to make experiments in some other fields, such as talent spotting.
The financial crisis has led to large-scale layoffs of finance professionals in the west. China should grab this extraordinary opportunity to attract overseas talent to ease the development of its own investment banking industry. The pay packages of financial experts on the mainland are quite competitive in view of living costs.
European and US financial techniques, ranging from mergers and acquisitions, IPO underwriting and stock and debt issues - to secondary market trading and research and brokerage businesses - are much more advanced than in the mainland. There are still great investment opportunities in China, and it needs outstanding talent in investment. The downturn is a golden opportunity for China to catch up with western economies and create a modern financial infrastructure by attracting talented global professionals hit by the crisis.
This would also be a good time to make some changes in the area of QDIIs - qualified domestic institutional investors. The investment sentiment is weak in China, and not many are willing to buy QDII funds right now. In bullish times these funds raise money easily, but the perceived risks are relatively higher now.
Transferring money overseas through QDIIs during bubbles is actually dangerous. Beijing should take advantage of the bearish market at present and gradually relax QDII approvals, helping capital to invest overseas. This would help the long-term development of the Chinese financial market.
Some analysts are also calling for changes in the central government’s foreign exchange reserve investment strategy, urging Beijing to diversify into gold. Actually, crude oil is an even better choice.
The international crude price is around US$50 a barrel now, higher than the extraction cost for some oilfields. Oil will always be a necessity, and Beijing would do well to put its huge trade surplus to good use to buy crude oil and raise its strategic oil reserve, and even directly invest in oil companies.
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