China will set up a national-level mergers and acquisitions fund to help venture capital investors find an exit.
How urgent is the need?
And with cumulative dividends and share buybacks hitting a record high.
What does that signal about the reshaping of China's securities market?
Welcome to the chat lounge.
I'm Tiyun.
Joining me for this special edition on China's financial priorities for the coming year Yao Shujie Cheng Kong.
Professor of Economics, Chongqing University.
John Ghosn, Professor of Economics University of International Business and Economics, and Einar Tengen, Senior Fellow of the Canadian Think Tank Centre for International Governance, Innovation and the Chairman at Asia Narratives.
A warm welcome to you all, gentlemen.
So first let's take a look at the bigger picture.
China's fiscal and financial authorities have outlined their priorities for supporting economic and social development this year.
So from a macro perspective, what stands out to you most about this policy?
And is the bigger goal stabilizing growth and market expectations or pushing structural transformation?
This question goes to you all.
Let's begin with Einar, please.
Okay.
Well, I mean, it's a layered approach.
This is just one part of it.
They're looking at the structure of mergers and acquisitions.
One of the problems that you have is turnover markets because of uncertainty groups that invested initially.
They want to go to market, but their impediments and what the government has said OK, we're going to try a multilayered approach.
First off, we're going to put this 1 trillion fund out there that should leverage about 10 trillion, And they're hoping that this will allow entities to sell so that you can recycle the initial money that was put in by VCs, etc.
And that can go back into the system.
But they're also supporting it with loans.
There's another trillion dollars for that.
And then technical innovation, there's another one point trillion for that.
So it's a very layered approach, looking not only at these entities that have innovation, but making sure that small and medium-sized business entities have options.
You know, China has been found it very difficult to adjust to lending money based on a business plan.
They always want to do it on assets.
But, you know, in technology, you really have to be able to evaluate there are.
And I think there are some AI solutions to that we can discuss later.
So what impressed you most is the overall overhaul or increase of the funding?
Yeah, absolutely.
I mean, this is it's a layered approach.
It's not just, you know, OK, we're going to throw a dart at something and see if it does anything.
They've taken a very, very systematic approach.
You know, I think 2022, 23 were like record years for foreign direct investment into China.
And then since then, it's declined slightly.
Last year was still very good in terms of the rankings.
But, you know, it's an enormous task when you're trying to do innovation.
And somebody says, oh, okay, I have a new AI product.
What do you benchmark it against?
You don't know.
So you have to have people who are very knowledgeable, and then you have to have the finance facilities in order to get them to capital so that they can develop.
So China sees this as maturing their internal markets.
And the concern about companies leaving, especially with the divide in the world, with the US trying to put pressure and isolate China.
They want to keep as much technology and manufacturing here, but they can't force companies to do that.
So they're offering incentives, which is basically, you know, making their system more mature.
John, your take here?
Well, I want to talk about that, you know, trillion UN national level merger and acquisition fund.
I think this is, as it says very clearly, intended to create another venue for exit for venture capitals.
There are a couple of reasons why China is doing something like this.
We all understand very well that innovation and investment in new cutting-edge technologies is very much driven by venture capital.
This is an indispensable ingredient of the whole model.
You can't have a success story without capital supporting to this.
But the way the VC capital works is that They're all looking for an exit.
Sometimes they have a time window.
You can't prolong this for too long.
It's a way VC funds are run.
You need this investment to be recouped quickly.
Well, at least, you know, over a period of a few years.
But the problem is that I think it's getting more and more difficult to put these new companies onto the public equity market.
IPO.
I mean there's a long, long line right now of these high tech companies lining up to go IPO at the equity markets here in China.
And this causes pressure on the equity market because you know this is actually creates more supply of the stocks.
Essentially,
Right.
And there's some pricing pressure on the stock market if you have too many IPOs a year.
In the past, a lot of these IPOs go to the United States, go to Europe.
Now, with the geopolitical tension, with America's China policy and with the intense competition between the two countries, it's getting more and more difficult.
It's also, you know, more companies are getting listed on Hong Kong stock exchange these days.
So I think this creates another venue essentially, you know, for the VC capital, this money to be recouped via, you know, these MA activities.
In other words, you basically created a buffer between initial capital investment and the eventual exit through IPO right.
So essentially, you create a somewhere in between on one side to make sure that the VC capitals are being recouped, On the other hand, make sure that there's not creating too much of a pressure on the equity market.
I think it's a brilliant idea, actually.
We'll dive deeper into this aspect later on.
But Xu Jie, your take here, from a macro perspective, what stands out to you most about this policy mix.
We have to look at the basic foundation of what China really needs at this stage, because this is the first year of the 15th Five-Year Plan.
China is facing two challenges.
The first challenge is the domestic structure transformation.
And the second challenge is the external uncertainty and risk.
So the fiscal and financial policy as you just outlined, there's lots of very concrete policy measures, including the one trillion for the MA security emergence and also for the fiscal deficit, you know, state fund to stimulate the domestic economy expansion.
I think you have to look at the concept why the central government want to pour so much money into such an area.
The first area, the one trillion yuan for the acquisition in merger fund, is basically to support the technological company who lack financial support, but they have huge potential to drive the future economy, development and technological independence at the global level.
So this is not one shock.
I think that going to be a very long term year after year policy if you turn out to be effective.
And the second is why the government pulling so much money and also in the next stage, is going to neglect the financial and monetary system to give more liquidity.
So the investors consumers, and also market entities, enterprises and local government, they will become more neglect to invest more into the real economy.
And all these kinds of effort is basically to achieve the set goal of 45 to 5 GDP expansion in 2026.
Because this is the first year of the five-year plan, it's very important that the policy ammunitions, the fiscal and monetary policy, have to be highly precise, effective and also surmountable to all different barriers in the economy system.
Yes, we want a good opening, like they say.
A good opening is halfway to success, right?
So both Yuji and John mentioned this national level M&A fund.
It's a new thing.
Yes, I know John mentioned how important it is, but why wait until now?
And what prompted this move?
Some observers associate it to the recent relocation of the AI startup Manus from China to Singapore.
Does that case highlight weaknesses in China's venture ecosystem?
Aina?
Okay, well, there's two questions in there.
Okay, what is China doing?
And I would put it simply, and I think John and Shuqi would agree with me.
This is about, you want new productive forces.
That's technology.
You have to have a means of financing them.
You can't say just, you know, make it out of thin air.
You have to provide support.
So these are just simply support items that they're doing now, especially because they're emphasizing that you know, the way forward for China is, as they keep saying, and new productive forces.
In terms of manners, that is slightly different.
There are a lot of entities that are trying to make sure that they have as much market as possible.
With the difficulties, geopolitical pressure that the United States is putting on China as it seeks to isolate it.
If you're based In China, the likelihood is that you're going to have real problems.
Just remember, TikTok was based in Singapore.
They had a CEO from Singapore, but that didn't seem to matter at all to the United States.
So in the kind of hysteria that's going on, a lot of companies are saying okay, we have to have a strategy so that we're not cut off from markets.
So that was really the central core of what they're doing.
It's also you should notice that it's easier for cross-border transactions liquidity if you're in a third country like Singapore.
China, as I said earlier, is trying to put together a package where the new technology is developed here, manufactured here, applied here, but they're not going to stop companies from trying to develop markets outside.
That would be cutting off your nose to spite your face.
So it's all, I think, very well thought out, but there's only so much you can do when you have a very hostile global partner.
It should be a partner.
But if we have this national level mergers and acquisitions fund, which is expected to help venture capital investors exit more easily, would that be more helpful or make China more attractive?
Yeah, absolutely.
Because you're providing a facility to get out of these investments.
That's what John was talking about.
One of the funds.
And they'll say, we want to be in for three to five years and then we need an exit.
And this is what they tell the people that, you know, invest money.
So they need to keep on that schedule and they don't want to sell at a loss.
Obviously, they want to make gains.
So having these additional facilities is very important, but it goes beyond that.
They're also setting up funds that will lower the cost of borrowing which, of course, is very advantageous to small entities, because they're borrowing money and they want to borrow it as cheap as possible.
And these companies are starting out as small, medium-sized business entities.
So they have tax breaks.
They have all sorts of policies in terms of If you're located in certain economic development zones, you can get lower tax rates for five years.
You can bring in outside specialists, highly talented people.
And this is all part of economic development.
You don't just do one part of it.
It has to be cohesive and whole.
And this is where China really excels because they do a lot of planning.
They learn from what happened before.
They study what is successful in other areas.
Then, as a result, they're able to put something together.
Now, it doesn't always work out exactly as planned, but what do they do?
They adjust and they keep adjusting until they get it right, and that has been literally the reason that china has been able to go as far as it has in such a short period of time.
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The chat lounge unpacks views and opinions on hot issues in a more casual way.
And John, how urgent is the problem the fund is trying to solve?
Well, some of my VC friends have been telling me that they're very concerned about the prospect of, you know, exit strategy being very much limited by the much diminished chance of going IPO in the United States equity markets.
And we all know that the waiting line at the Shanghai Stock Exchange, Shenzhen Stock Exchange, is very long.
So that's a big concern.
At the same time, the regulators don't want to see a flood of IPOs onto the market.
That's going to have some impact on the pricing at the equity markets these days.
And we have a fairly good run so far for both Shanghai and Shenzhen Stock Exchanges.
So I think the idea is very clear.
Just to buy some time, And you know the state essentially is creating another venue, probably not a permanent venue, but at least buying some time so that you know these VC funds can recoup their money and move on to the next great projects.
I think it's a very clever idea, actually.
I don't see this has ever been done before in history.
I mean the state comes out organizing a huge fund for MA activities, essentially creating a pool of these great assets waiting to be eventually materialized.
You're saying it's unprecedented, globally or nationally?
I think the fund is a domestic fund.
I think the focus will be investing in companies domestically.
And I'm not even sure that companies overseas would be interested in something like this.
I think from a VC's perspective, their first priority is to get publicly listed.
I think that's the most straight way of exiting from their investment.
Right.
Then who do you think stands to benefit most from this one then, apart from those tech startups?
Yeah, the purpose is not for the state to benefit, but eventually i think the state will.
In the short term, i think the state is just to facilitate the innovation company, the high-tech company uh, to develop quickly so that they can have a, you know, new breakthrough which would meet the country's desire as an innovation country uh which uh, you know, increase the level of quality of the national economy and also technological independence from different countries, as the external risk is very high.
But I think the fund, it is used fairly effectively so that some new technology will come to the market and being implemented at the real economy to propel the real sector, the industrial sector, the service sector, so that they can generate commercial profit.
And once they generate commercial profit, then the state will benefit.
But this kind of venture capital, this kind of A&M fund, they have to have a long-term vision.
Because in the short term it means that you put the money into the market but you may not have an immediate return.
But once the return is coming, it may take time, but it can be very massive.
And then the state would benefit.
Actually, the state is looking at the global or the social benefit of the entire country, rather than the state financial ministry or the central bank.
The state would have a fairly longer term to see how this investment will benefit.
And they supported a particular sector or a few sectors, especially in the AI and also automation, logistics and also new energy sector.
So they have to be highly targeted.
They're going to have a long-term benefit for the whole society, not only the enterprises as such, but also the consumers and also the social environment.
Right.
Thanks, Xu Jian.
And now let's move on to fiscal policy, something new there.
Well, this year's fiscal deficit will rise from about 56 trillion yuan to roughly 59 trillion, or over 850 billion US dollars, hitting a new high.
But it will still account for roughly 4% of the country's GDP.
And new government bond issuance will approach 12 trillion yuan, or 17 trillion US dollars, also a new high.
So Aina, what does that level of fiscal expansion tell us about where China is in the economic cycle right now?
Well, I mean, there's a lot of uncertainty.
I mean, we've been talking about this, the geopolitical competition, mainly from the United States.
This is a situation where China has to figure out how it's going to grow itself internally, and that's going to need capital.
We've talked about a number of different facilities, including this M&A fund.
But if you're trying to develop internal growth and internal consumption, it's going to take an investment.
And given the headwinds, they have to do that themselves.
The number is not wildly high if you compare it to what the United States or Japan is doing.
China has been very fiscally conservative in terms of its national budget.
It has a fairly low by the size of the country standard in terms of debt.
But there are real problems that are developed within the provinces and cities.
They had these special purpose vehicles which were kind of off the book transactions that they were using.
Hopefully.
In their mind they thought well, maybe there's some way we can stir up some dust here and create some opportunities and some jobs.
And this will be a benefit to my next job posting.
But a lot of them didn't work out.
So there's a lot of zombie companies and debt that's kind of sitting out there.
And the new management moves in and they suddenly discover that their hands are tied because they have so much debt.
So the government is pushing some money towards the provinces and cities and saying it's time to clean up the books.
They're also shoring up the banks, putting more money money into them.
This will increase their ability to lend money and in part of that is just not just the quantity of money.
They have a special facility of a trillion dollars, a trillion rem and b which they are going to leverage to create the lower loans.
So they will loan money to banks at a very low level that can then be passed through to small, medium-sized business entities, startup at, et cetera.
That's what I was talking about this layered approach to providing everything that's necessary to have a robust economy that is based on these new productive forces and also encouraging spending.
The better that these companies are at selling things and providing jobs, the more disposable income there will be and therefore the more confidence that Chinese consumers will have.
But there's also other parts of that in terms of the social safety net.
But this confidence issue is absolutely critical.
And they're doing everything they possibly can to show that they're involved in the process.
There's long descriptions about the processes.
I think it kind of went over most people's heads.
But if you start examining it, It's very, very comprehensive and it covers all areas of society.
This.
What we're talking about is just one on the financing side, but all of these pieces fit together.
And that is what's unique about China is they harmonize, and they spent a lot of hundreds of thousands of man hours harmonizing all of their policies.
So they're going in one direction.
Because once you have a compass, you have to make sure that all the cats and are going in the same direction.
And that can be quite challenging when you have 1.4 billion people.
Let's narrow it down to this fiscal policy.
One new feature, I should say, of this central government transfers to local governments is that policymakers are stressing better efficiency and greater flexibility in how local governments use those funds.
So, Xu Jie, why is that emphasis so important now?
Yeah, China is a large country, as Annie just mentioned.
We have 14 billion people and also across a vast area with different economic and social environmental conditions.
And also, you know, nature and human capital endowments.
They are so diversified and different reasons.
For example, like the eastern region, is more economy and technological advance and in the central and the western region is relatively lagging behind and in northeastern china it requires a lot of uh investment to, uh you know, legitimize the traditional uh economy.
So the central government play a law of helping, you know, the lagging behind region to catch up with the more advanced reasons so the country can have a more balanced economy and social development.
By generating a more balanced development the country could be more integrated and to generate a bigger universal market in china, which is, uh you know, you know, required by the column policy so that you know natural resources, professional factors, production factors in the less direct regions in the central and western and northeastern part of the country they can fully exploit it to the level close to the eastern region so that china can move steadily from a middle-income country to a high-income country and then to a modernized socialist economy system.
So the balancing of the whole country is a fairly important and fundamental issue.
And to fulfill this task, the central government has to use the central fund, whether it is from tax revenue or other revenue resources or even the budget deficit.
Whatever it means, it's going to target where the country needs and where the leaders need requirements uh, for further investment, and this has been a process for many, many years.
Uh, it is uh well calculated into the five-year plan and this uh 10 trillion of central to regional transfer is a very important financial resource to achieve these kinds of national long-term vision development.
But with greater flexibility.
Would there also be any risks like weaker oversight or mismatches between funding and projects?
Do you have any concern?
Yes, certainly.
I mean, the amount of money is fairly massive in a way.
And some projects could be failed, could not achieve the design objective.
But on the main I think, according to the past experience, I think the central government is highly intelligent in terms of targeting where the project needs and balancing the risk of the regional, local authority and the central authority.
So, on the man, i think the real outcome is much better than we expected and there are certainly some some failure projects, but most of the project, especially the vast majority of the project, turned out to be highly efficient and profitable and it is good for the country's balance development, as i just mentioned.
If I just may, one of the things that they've done is they said that if you start a project during your tenure as mayor or party secretary, that will follow you.
So if it's a failure and it's three or four years down the line, they're going to evaluate and they're going to say well, this is a bad mark.
This is something fairly new.
The last project was supported by the central government through the transfer.
It doesn't really depend on the individual mayor.
Actually, it is written in the local government development plan.
And this plan, whoever is the mayor, they have to carry out.
So yes, Aina is right.
I mean, it's not depending on the individual mayor.
Even if transfer the job, then the project will continue.
I understand Aina was talking about those who make any mistake will be held accountable, right?
But it's like a, after some mistakes are made.
But what about any preventative measures you think should be taken?
Well, I mean, no, no.
I mean, Suu Kyi just pointed out that any project you do now has to be in the plan.
So it's been approved.
It's been vetted.
But then it is the responsibility of the mayors and the party secretaries to get it done.
And there's going to be responsibility.
It's been like this forever, but uh well, not really, not really.
You know, with these what would happen is somebody would be mayor, they were responsible.
They start something, then they become party secretary or they move somewhere else and then they just kind of leave it behind and they go on to the next thing and the new people coming in inherit these problems and they they're you know it compounds.
Because if you're behind, what you do is you say okay, how do i solve this?
I might have to take some bigger risks.
So you're saying you don't have any concern here.
I probably just give a couple of examples to answer your question in a more real way.
For example, let's say the water transfer project from the Yangshuo River to the north, or also the sweet north area of forest plantation and also the restoration of the environmental system.
This project is supported by the central government with lots of money transfer from the center to the region and also the very particular project area.
And in the short term yes, you can see a lot of debate of this project whether they are going to generate any real benefit.
There is debate all the way through and through.
But after 20, 30 years when you look back, you look at this project, oh my god, this project is so important for the country to balance.
The reason is so important that we cannot ignore and the investment that people worry about at the beginning or even during the process.
Now they just see the benefit, so that they see these kinds of central intervention is really very important.
Where I could take some less successful example?
But most of the mega projects implemented by the central government turned out to be highly productive, including the high-speed rail system.
Some of the money transferred to the less developed region, they don't have the financial support.
It has to depend on the central government.
But you look at the whole country as a whole.
Oh my God, this kind of comprehensive network turns out to be China's.
Both Shu Jie and Einar think the risks here are minimal.
Well, it's not minimal.
It's not minimal, but it's manageable.
All right.
And John, do you see any other risks arising from that?
Not on this issue.
I think it's already been said about this.
I think the measures are really important to make sure that the money is well spent, not squandered away.
This is the money from the central government, essentially, to pay out local governments.
And it has to be spent very wisely.
Great.
Great to see you all have that confidence here.
This has been the Chat Lounge.
We'll have more on China's financial priorities for the coming year after the break.
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Welcome back to the chat lounge.
We continue our discussion on China's financial priorities for this year.
Let's turn to monetary policy.
Well, the central bank says it will maintain a moderately a commodity of stance.
Tools like reserve requirement ratio cuts and interest rate reductions are still on the table.
But with borrowing costs already relatively low, where does remaining policy space actually lie, John?
Well, interest rate is indeed quite low here in China for a couple of years so far.
But if you compare to you know some other precedents worldwide, it's actually not the bottom that interest rate can go.
You know europe, for a period of time, and particularly japan for a long period of time, interest rate has been, you know, hovering around just a little bit of a zero percent.
We're a long way to go to that bottom, um.
So i think there's still a lot of room for for maneuvering, um.
I think the phrase um moderately accommodative means that the money supply is still very much available.
I think one of the weaknesses of the economy last year is that lending hasn't been very active.
That has to do with the investment confidence level.
So I think the central government doesn't want the access to capital to be an impediment to investment and want to make sure that the credit is still very much available, especially to small and medium-sized businesses.
So I think, even though the interest rate is pretty low, there's still plenty of room for maneuvering from a central bank's perspective.
All right.
Well, the PBOC has also wrote out a one trillion yuan financing support facility for private enterprises.
I believe some of you have already mentioned that.
Is that a significant shift in scale?
And how much difference could it make for private sector? financing?
Maybe this goes to Einar?
Well, I'm a big fan of small, medium-sized enterprises.
60 of all the revenues there, 99 of all the companies they're well over 80 of employees and new employments and things like that.
So this is really the lifeblood of China as things start out small.
I mean, even Ant Financial was small.
I mean, Alibaba was small at one time.
But these are where innovation hurts.
So you have to have ways of basically helping them.
I disagree a little bit with John on the fiscal side.
I think there's signaling that there will be adequate liquidity and that the market shouldn't worry about it.
But They're going to be very, very targeted in where they go.
I don't agree that bringing rates down to zero although they can, they do have the room, as John said, but bringing it down to low, that leads people to borrow money and then try to figure out how to make money.
And that is a danger.
We saw that in the United States, massive amounts of loans out there.
And people thought, oh, well, I get it for so cheap, I can, of course, make some money.
Then they make some bad bets and all of a sudden they have a lot of debt that they can't pay back.
You have the same thing in Japan, where they have this carry trade where they borrow at basically zero and then they invested in a lot of it in American treasuries.
Um, but then when the, when you start losing value on the treasuries, the underlying value because of the dollar uh starts to weaken, you've actually lost a lot of money, despite you know the interest.
Um, then what would you say is a better solution?
Well, it's not a panacea.
I mean, if you're encouraging new businesses, that's what you want, but you don't want to encourage speculation.
That's not the real economy.
So they're signaling that, look, there's plenty of room here and we're going to take care of it.
In terms of this facility.
As I was saying before, the mechanism that they're putting out there is that the central bank will loan at very low rates to regional banks money that's intended for small and medium-sized business entities.
Maybe it's a double-edged sword.
Xu Jie, you were saying?
Yeah, I think the fiscal and monetary policy is only one policy instrument we are talking about.
Don't forget that there are some other policy instruments that the government can use.
For example, the central and local government have to identify where the investment is going to be, such as identify the particular area where it can generate long-term economic expansion and growth, creating more jobs, and also where again, for the general public, i think this is even more important issues.
So in the government report, i think it identified a lot of area that the central and local government can invest, including the order, the policy issue that we have been talking about uh, you know the the central, local transfer and also the uh a m fund and also the fiscal policy.
They are going to sector, for example, the housing sector, which is currently still experiencing a very sharp reduction cycle, and how to stop this trend, to make sure that people come to have more confidence in the housing market so that investment could be pulling into increasing the quality of housing and also the comfort of the living environment.
The other area, for example, like technological innovation, which we had been talking quite for a few while earlier in this discussion artificial intelligence automation, the new emerging industry and also the future industries.
All these are mentioned extensively in the government report.
Now we come back to this financial, the monetary policy.
The so-called modestly accommodated.
Modestly, it means that it's going to be not highly critical.
Because if it is too critical, then the risk you know, the negative effect against the positive effect that the policy aim to achieve could become more eminent.
So I think moderate means that you have to balance the benefit and also the cost and the potential risk.
Accommodative means that if the real economy is needed, then the policy will be ready to help.
So it means that liquidity is not going to become a big issue.
The real issue is where can we accommodate?
This is a very important word.
I think it is a very important word in this expression.
The central bank and also the Ministry of Finance is ready to help whenever it's needed.
That's my understanding.
Do you see one trillion yuan or 145 billion US dollars is sufficient?
One trillion yuan could be sufficient in the short term.
And if it needs more, it will be more accommodative in the future.
All right.
And officials have also said financial policy should help curb what they call involutionary competition.
So, John, how can financial tools actually steer capital away from overheated sectors?
How difficult is it?
Well, this is actually a new phrase.
It had not existed in economics textbook for evolutionary competition.
I think what it means is that there's too much competition.
There is too brutal competition to the extent that it's actually hurting the market, making everyone unprofitable below the break-even point, and to the extent that the products being put on the market are not up to standard cutting corners, just to cut costs.
I think they're mostly talking about things like that.
I think it's the most noticeable in the automobile market.
Now I have a little bit of a reservation about this issue as an expert in competition and competition policy and antitrust.
I think in general, competition is always good.
In my view, it's not so much about reducing competition, but more about enforcing the regulations, enforcing the standards, so that the products on the market are not going to be falling below standard.
Cutting corners is not going to be tolerated, things of that nature.
Once the products are up to standard, the products are something that are not going to hurt consumers.
The market is going to take it itself in terms of restoring to a new equilibrium where competition is, um is acceptable to everyone, so that the companies can be uh profitable, you know, but this is going to take some time, though i think it's a, it's a process.
Uh, it's probably a painful process, so i think that's why the government steps in to make sure that this process is um, as uh as short as possible and obviously, when the government's talking about something like this uh, Everybody will go back to their sort of a normal operation to make sure that the products are good.
The pricing is not too excessive, stuff like that.
But at the end of the day, you know, it's not going to be sustainable.
Everyone's going to do that.
So some companies are going to have to exit right.
So essentially, you know, this is what the government is trying to do is to accelerate market consolidation and to restore a more profitable and more healthy equilibrium market equilibrium I think that's what it's all about right, and maybe this is where the MA fund could, you know, play its role.
And finally, the capital markets.
Since the release of the new policy package in 2024, which included improved listing standards and higher investor returns, listed companies have delivered record levels of dividends and share buybacks, while 88 companies have been delisted.
And at the same time, regulators say they've handled more than 1100 securities violations over the past two years with record high penalties.
So, Ina, what signals do these numbers send about the direction of China's capital market reform?
Well, I mean, it's very simple.
I mean, there has always been concerns about transparency with Chinese companies.
And China has been working for a long period of time to rein those in.
And part of that is to have financial supervision.
So when you start talking about them clamping down, that's actually good for the market.
Because people can invest with more confidence at the same time as you have a value-based approach.
In the US, NVIDIA is valued at around 5 trillion or less right now because of the market downturn.
But you start looking, that's more than the yearly output of Germany, which is around $4 trillion.
And it's very speculative.
Whereas in China right now, things are very value oriented.
They want to know what you're making, what kind of dividend you're going to get.
And I think that's a very, very positive sign long term for China's bourses.
They want to project confidence so that people who don't understand a lot of stuff can, instead of putting their money into real estate, which is not going to help anybody, they can put it into productive use by helping China move forward, providing the capital and thereby getting returns.
But it all comes down to confidence.
And that's what Shuji and I think John and I would agree.
The government's number one priority here is creating a system that encourages confidence in China and all the mechanisms that are there, not only through planning, but also through regulation and delivering value.
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Regulators also say the goal.
The goal is to shift from what they call a financing oriented market to an investment oriented market.
So why is that transition so important?
Obviously, they cannot reach it within the next year.
It's a long-term mission.
But realistically, what would China's capital market need to look like before we can truly call it investment-driven?
Then this question goes to Xu Jian.
Yes.
The stock market in China has been established for almost four decades from 1990 to now 2026.
And most of the investors are still, you know, not really trust the stock market for making investment, including myself, to be honest.
And why is that?
It's because, you know, we have a couple of, you know, financial bubble, the stock market bubble.
One is in 2007, one is in 2015.
It's about nine to eight years and you have a bubble.
Now, the last cycle from 2015 to now is 11 years.
We don't see this bubble.
So it means that actually the investor become more rational to me.
They are highly hesitant to putting so much money into the stock market, and then they lose all their money in a day or two.
So this actually pulls back to the financial regulator, particularly the Security Commission, to push the market reform.
And the market reform is twofold.
The first is the regulation.
The second is the listed company.
The listed companies.
They have to be more scrutinized so that they have real value generation capability.
And secondly, the information have to be transparent so the investor would know the listed company much better than before.
So this is one thing.
The second thing is the regulatory system.
For example, the figure you just mentioned, the regulatory certainly have directed the listed company to provide more evidence, rather than investing in their own company to generate more money for the key shareholders or the owners.
So this is a progress to me.
And also the investigation is getting fairly intensive.
You know, if they violated this concept, you know principle, then they will be legalistic, or they will put aside or they will be declared for legalistic.
I hope this process would have a fairly consolidated and solid outcome so that it can generate trust for the investors.
Once the investors trust the capital market, then it will become a truly investment market.
If the investors most of the investors are still hesitant to invest in the stock market, then it could be still a financing market.
This is the testimony.
How much the proportion of investors trust the market, it is a place for long-term investment.
This is the only judgment to me.
If the investors are still hesitant the large proportion of investors are still hesitant then the reform is still not finished.
Right.
Last questions to you all.
Looking ahead, what are the biggest challenges in delivering on these policy goals this year?
And if you could offer one piece of advice to any of the authorities we discussed, which one?
Would you choose and what would your suggestions be?
Shall we begin with still Ina?
Oh, OK.
My one piece of advice is that small and medium sized business entities they have to be able to borrow based on business plans.
Now, this is beyond the ability of most banks in China.
So what I suggest they do is they set up AI expert systems that can help them evaluate companies, because they can gather all the information, do a lot of due diligence and help these companies create scorecards where they can determine whether or not this is a good basis.
You know, it's the business plan is a good one for lending money on.
And challenges, do you see?
The challenges are always in implementation.
I think China has a very comprehensive plan, but it's always about execution.
China has been generally very good about that, but this is really the first year that this is being implemented.
So there's going to be some, let us say, hiccups along the road.
They're going to make adjustments to make it work.
I often, you know, hear from people especially uh, foreign companies, but also from chinese companies, and say oh, you know it's.
They change the policy.
And i always say to him he says well, was the policy working?
And they'll say well no, i said well, when you're relying on a policy, make sure it's working, otherwise don't rely on it.
And um john please um well, i think uh, as usual, you know the the devil is in a detail.
I think the information part, implementation part, has a lot of challenges.
I think these are all very good policies, without any doubt.
These are things that are well thought out by the policy planners.
Nevertheless, when it comes down to implementation, there'll be a lot of challenges, I would say.
It's a system that has many chains of control, and you never know where is the weakest link, right?
So I think, just very briefly, as one example, the insider trading, for example, they have it's reported that the records have caught you know hundreds of thousands of uh, these kinds of events.
I mean these are very detrimental to the credibility of the stock market.
So you know how to enforce policies to make sure that the no loopholes, uh people doing bad things, will be caught and pay a price, things like that.
I'm still reasonably confident that the equity market environment in China will continue to improve.
But also, I want to say that it's going to take some time, though.
Sure.
And last but not least, Xu Jie, please.
Yeah, I think what I suggest here is that the financial ammunition is there, is already there, which is a positive step.
But the challenge is where to find the place to invest.
And some of the target is very clear.
My suggestion is that we have to look at more investment in the human capital, in the people, less on the physical infrastructure, although physical infrastructure will continue to be attracting investment, but maybe more investment should be in the education, health care and the environment.
Okay, on that note, we conclude this session.
Many thanks to Yao Shujie, Chang Kong Professor of Economics, Chongqing University, Zhang Guan, Professor of Economics, University of International Business and Economics, and Ina Tangin, Senior Fellow of the Canadian Think Tank Center for International Governance Innovation and the Chairman at Asia Narratives for your time and insights.
Drop us a line anytime at radio at cgtn.com.
Tell us what you think.
I'm Tun Yun.
Tune in for more chat at the chat lounge next week.
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