China’s efforts to restrict IPOs and reduce stock trading tax might not have the desired impact on the broader economy.
China Securities Regulatory Commission (CSRC) announced its intention to “tighten” the pace of initial public offerings (IPOs). Besides, the country plans to limit smaller shareholders’ dilution unless they meet certain prerequisites. Meanwhile, the Ministry of Finance revealed the decision to halve the stamp duty on a stock market rally. The operation will start on August 28th as part of an initiative to “invigorate the capital market and boost investor confidence.”
Analysts from Nomura expressed reservations, stating that these measures may not represent a significant increment in policy support for the revival of the real economy. They suggest that the impact of these stock-market-focused measures alone could decrease in quantity. Without more aggressive policy stimulus, the measures will affect both the stock markets and the broader economy.
China’s Economic Scenario and Challenges
Despite China’s gross domestic product (GDP) expanding by 5.5% in the first half of 2023, concerns remain due to a 14.5% decline in exports in July and ongoing troubles in the real estate sector, which constitutes almost a quarter of the nation’s GDP. This decline in exports and struggles in the real estate market point to potential economic weakness in the near future.
While the CSRC’s plan to reduce the pace of IPOs seeks to establish a “dynamic balance between investment and financing,” the reduction in the stamp duty on selling shares is expected to provide a boost to China’s equity market. Historically, equity markets have often experienced gains following similar reductions in stamp duties.
Frank Zheng, equity research analyst at Credit Suisse, noted that the planned prohibition on emerging market stocks could alleviate investors’ concerns about the actions of controlling shareholders, which at times adversely impact the interests of small shareholders.
Positive Implications for The Stocks
The recently announced measures are anticipated to enhance market liquidity and decrease buffer stocks. As a result, this could positively affect the overall supply-demand dynamics of China’s A-share market. Analysts believe that these measures might be beneficial for China’s equity market, as they address certain concerns and offer potential improvements.
China’s Dominance in IPOs
In the first half of 2023, China held a prominent position in global initial public offerings (IPOs). The Shanghai Stock Exchange and Shenzhen Stock Exchange together hosted 136 IPOs, raising $29.67 billion, accounting for almost half of the global aggregate. However, globally, the IPO markets have witnessed relatively slow activity this year due to factors such as economic uncertainties and elevated interest rates.
The recent ups and downs in the Shanghai Composite Index largely affected China’s economy. However, with it reaching a nine-month low followed by a rebound on August 28th, these policy measures will positively contribute to shaping the trajectory of China’s equity market.
Asian Shares Get Lift from Wall Street Reports on Consumer Confidence and Job Openings
Asian markets have shown positive movement in response to favourable reports from Wall Street regarding consumer confidence and job openings. In the morning trading session, Japan’s benchmark Nikkei 225 surged 0.9% to 32,529.72. South Korea’s Kospi also saw gains of 0.6% at 2,567.44. Hong Kong’s Hang Seng experienced an increase of 0.4% to reach 18,563.39. Meanwhile, the Shanghai Composite exhibited a minor uptick of less than 0.1%, settling at 3,137.72.
Stock Market Flotation: Boost from Wall Street
The Asian market’s surge is attributed to a rally on Wall Street following optimistic reports about consumer confidence and job openings. The S&P 500 marked a 1.5% rise, reaching 4,497.63—a notable gain and the largest increase since early June. The Dow Jones Industrial Average displayed an uptick of 0.8% to reach 34,852.67, while the Nasdaq composite concluded the day with a 1.7% increase at 13,943.76.
Consumer Confidence and Job Data
In recent developments, the Conference Board, a business research group, reported a surprising drop in consumer confidence for August. Thereby expressing the labour impact on the stock market rally. Moreover, there was a significant reduction in job openings, indicating a cooling labour market that might alleviate inflation pressure.
The robust job market has long been considered a safeguard against a potential recession. However, its role in complicating the Federal Reserve’s mission to control inflation is evident. The recent data could potentially ease pressure on the Fed to implement a rate hike in its upcoming September meeting.
Anticipated Reports that Could Affect the Stock Market Rally
Investors and economists are awaiting several important economic reports. These include updates on GDP and the release of August’s employment data. The response of Treasury yields to these developments has been noteworthy, with the 2-year yield dropping from 5.03% to 4.90% and the 10-year yield decreasing from 4.21% to 4.12%.
Energy Trading and Currency Movements
Benchmark US crude saw an increase of 31 cents, reaching $81.47 a barrel in energy trading. Similarly, Brent crude, the international standard, gained 26 cents, settling at $85.75 a barrel. In the currency stock market rally, the US dollar exhibited a rise to 146.21 Japanese yen from 145.87 yen. Meanwhile, the euro registered a decline to $1.0871 from $1.0881.
