China Makes Strong Vow to Ease Crackdowns After Market Turmoil

(Bloomberg) -- China made a strong push to stabilize battered financial markets, promising to ease a regulatory crackdown, support property and technology companies and stimulate the economy. 

The government should “actively introduce policies that benefit markets,” according to a meeting of China’s top financial policy committee led by Vice Premier Liu He, the country’s top economic official. That vow to take investors interests into account comes after a sell-off in domestic shares due to fears over growth risks and tough regulation of real estate and internet companies. 

The meeting offered investors re-assurance that a sweeping crackdown on internet companies was nearing its end and that the government would prevent a disorderly collapse in the property market. China’s banking regulator said after the meeting that it would support insurance companies to increase investment in stock markets.

Stocks surged after the announcements. The Hang Seng China Enterprises Index jumped 13% at the close in Hong Kong, the most since 2008, recouping nearly half of this year’s losses. The CSI 300 Index of mainland shares climbed 4.3%. 

“The statement addressed so many issues on various fronts, which is really rare,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “Selloffs tended to be self-fulfilling partly because of the lack of response from the government,” and one aim of the government is probably to break that inertia and stabilize market expectations, he said.

The statement signals an adjustment after months in which Chinese capital markets were battered by government policies ranging from a squeeze on financing for property developers to a sweeping regulatory campaign aimed at internet giants like Alibaba Group Holding and Tencent Holdings. The sell-off deepened in recent days, as rising energy prices caused by Russia’s invasion of Ukraine and a surge in Chinese coronavirus cases called into question Beijing’s ability to meet its economic growth target.

The Financial Stability and Development Committee meeting concluded there is a need to “boost the economy,” in the first quarter and promised investors relief on several regulatory fronts. Monetary policy will be proactive in this quarter and new loans will grow appropriately, it added.

Fed Hike

Echoing moves in 2018, the comments were followed quickly by statements from the central bank, banking watchdog and currency market regulator pledging to implement the policies. Xinhua News Agency separately cited an unidentified Finance Ministry official saying China won’t expand a trial on property taxes, removing another concern for investors.

The flurry of statements came shortly before an expected interest rate hike by the Federal Reserve, which Chinese officials have said risks fueling capital outflows. Further monetary easing by China at the same time as the Fed is tightening could spur those outflows but that is a risk policymakers may have to take to support the domestic economy.

Wednesday’s announcement offered the strongest statement yet that Beijing is loosening its grip on internet platforms, saying that efforts to “rectify” internet platform companies should be completed “as soon as possible.” It also promised investors more policy stability, after a year when markets were repeatedly surprised by sudden announcements on regulatory reform.  

A series of policy moves in the past year taking aim at some of the country’s most valuable companies have battered investors, with Beijing warning that platform operators may abuse their power and undermine competition and that real-estate giants were destabilizing the economy.

In particular, regulators took issue with highly-leveraged real-estate companies like China Evergrande, e-commerce leader Alibaba Group Holding Ltd., which eventually paid a record fine, and food-delivery giant Meituan, which was forced to lower the fees that it charges restaurants for delivery and improve the treatment of its drivers. China’s private tutoring industry was largely shut down as part of a drive to reduce education costs.

“Any policy that has a significant impact on capital markets should be co-ordinated with financial management departments in advance to maintain the stability and consistency of policy expectations,” the financial committee meeting concluded, according to a state-media report.  

On the deep slump in China’s housing market which began last year and has pushed large property developers close to collapse, the statement called for the introduction of an effective plan to prevent and resolve risks around the developers, as well as policies to help the industry transform to a “new development model.” 

China’s banking and insurance regulator said in a statement following the meeting that it would guide trust, wealth management and insurance companies to stabilize capital markets, supports insurance companies to boost stock investment in high-quality companies and help property developers acquire real-estate projects from other developers experiencing financial difficulty.

Since last week Chinese stocks listed in the U.S. had sold-off after Washington raised the stakes in a festering dispute over auditing standards by raising the prospect that some Chinese companies would be delisted. The statement promised that China has achieved positive progress in talks about Chinese companies listed in U.S. markets, adding that both sides are working to formulate a detailed cooperation plan.

China’s yuan rose by as much as 0.43% to 6.3421 in onshore trading following the government’s statements, paring most of its loss over the past two days. The news is helping the yuan as capital outflows seen in March may come to a halt if losses in China’s equity market end, says Alvin T. Tan, head of Asia FX strategy at Royal Bank of Canada. 

Growth Target

At the annual parliamentary meeting earlier this month, Beijing signaled that it was putting some long-term reforms on hold to focus on economic growth. Stabilizing the economy is a political imperative for Beijing ahead of a ruling Communist Party meeting in the fall, where President Xi Jinping is expected to seek a precedent-defying third term as party leader. 

Policy makers said this year’s ambitious economic growth target of around 5.5% would be achieved mainly through looser fiscal policy, with officials remaining hawkish about the property market and debt growth.

“There was fear that Beijing doesn’t care much about financial markets, and this meeting shows that isn’t the case. It looks serious,” said Chen Long, an economist at Beijing-based consultancy Plenum. “But they have to do things quickly. If nothing happens in the next one or two weeks, markets will begin to think this is fake”.

The government statements did not mention Russia’s invasion of Ukraine, which has fueled a spike in oil prices and fears among investors that Chinese companies might be subject to sanctions. Coronavirus controls should be co-ordinated with economic development, the meeting said, reiterating official statements that China’s “dynamic zero” Covid policy will be tweaked to prevent business closures, even as the nation struggles to contain the largest outbreak in two years. 

Authorities have made some changes to that approach in recent days, allowing the use of rapid tests to confirm cases and saying that patients with mild or no symptoms can quarantine in designated facilities instead of being moved to hospitals.

Its not the first time Liu He has tried to calm investor fears following a market sell-off. In 2018 he gave an interview with state media saying Beijing valued the stock market, which helped calm an equity sell-off. However, the statement didn’t lead to any large-scale stimulus.

Other points from the financial committee meeting:

• Regulation of internet platform companies should be “standardized, transparent and predictable”
• Financial institutions should “consider the big picture” and firmly support the development of the real economy
• Long-term institutional investors are welcome to increase shareholdings in Chinese companies
• Beijing and Hong Kong should strengthen communication over the stability of Hong Kong’s financial markets
• Continuing economic development is the first priority of the Chinese Communist party
• The economy should operate in a reasonable range and the operation of capital markets should remain stable

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With assistance from Bloomberg