China's attempt to support stock markets may do little for economy

China's plan to curb IPOs and its reduction of the tax on stock trading to boost confidence in local equities may be insufficient to revive the economy.

China Securities Regulatory Commission (CSRC), the country's capital markets watchdog, said Aug. 27 that it will "tighten" the pace of IPOs and prohibit the dilution of smaller shareholders unless certain share price and dividend requirements are fulfilled. The Ministry of Finance separately said the stamp duty on stock trading will be halved starting Aug. 28 to "invigorate the capital market and boost investor confidence."

The measures "do not represent a meaningful increment in policy support for reviving the real economy," Nomura analysts said in a note. "Without additional more aggressive policy stimulus, these stock-markets-focused policies alone have little sustainable positive impact on stock markets, not to mention any positive impact on the economy."

China's gross domestic product expanded 5.5% in the first half of 2023, against the government's aim of around 5% growth. But a 14.5% decline in exports in July and fresh troubles in the real estate sector, which accounts for nearly a quarter of the nation's GDP, indicates economic weakness ahead.

The CSRC did not specify how it would reduce the pace of IPOs, a move that it said would promote a "dynamic balance between investment and financing."

Stock boost

The stamp duty on selling shares will be reduced to 5 basis points from 10 basis points, according to the Chinese government. The cut could provide something of a boost to China's equity market, Nomura said, noting that historically equity markets have gained in the aftermath of stamp duty cuts.

The cut is "sizable compared to other trading costs," said Frank Zheng, equity research analyst at Credit Suisse, in an Aug. 28 note. The planned prohibition on stock disposal "could effectively alleviate investors' concern on share sales by controlling shareholders, which sometimes hurt the interest of small shareholders," Zheng said.

The measures will help improve market liquidity and lower stock supply, "which are positive for the overall supply demand situation for the China A-share market," said Chris Liu, senior portfolio manager for China A-shares at Invesco.

China was the world's biggest market for new listings in the first half of 2023, with Shanghai Stock Exchange and Shenzhen Stock Exchange together hosting 136 IPOs in the period, raising $29.67 billion, nearly half of the global aggregate. Globally, the IPO markets have been dull so far this year as a looming economic slowdown and high interest rates dampen investor appetite for new shares.

The Shanghai Composite Index, meanwhile, fell to a nine-month low on Aug. 25. The benchmark index jumped as high as 5.1% on Aug. 28 before ending the day up 1.1% at 3,098.64.