Is China Building an American-style Stock Market?

Listen to episode 2 of “À l'Orée de l'Éco”, our new podcast presented by Tom Benoit:

Today, I'd like to talk to you about China, and the recent surge in the markets. Last week, stock market activity in Shanghai and Hong Kong was so brisk that orders sometimes couldn't even be processed on time. Brokerage firms were overwhelmed. So what happened? What came out of it? Will and can the Chinese stock market become a true American-style stock market? Will Chinese real estate take off again? And luxury, too?

Over the past week, the CSI 300 index, which brings together three hundred of China's largest market capitalizations, has jumped 15.7%, a record not seen for at least fifteen years. 

In Hong Kong, the forecast was just as exceptional. On Friday September 27, the Hang Seng closed up 3.55%. The flagship index of the Hong Kong stock exchange also posted its best weekly performance since 1998, up 13%. For several months, however, Chinese equities have been showing signs of slowing down.

The cause of this sudden sunrise is undoubtedly the stimulus package announced by the Chinese government a few days ago. Let's just say that this was surely the trigger for such a rapid upturn. What's more, a number of analyses suggest that Chinese equities are grossly undervalued. 

The real question, then, is the long-term future of the Chinese stock market and, above all, its architecture, since it is in the process of changing, evolving and, one might almost say, becoming Westernized or Americanized. 

China's leaders are sending out an increasing number of signals to the effect that they would like to see a stock market ecosystem in China as efficient as that in the USA. 

Just this week, the Chinese Financial Market Regulatory Authority announced that a fast-track approval procedure for ETFs (exchange-traded funds) would be rolled out. 

So it's not just the promise of cash distribution that's creating a favorable climate on the markets. Although, of course, last Tuesday's statement by Pan Gongsheng, Governor of the People's Bank of China, announcing a total injection of 1 trillion yuan into the economy, the equivalent of just over $140 billion, counts for a great deal. 

It's also worth noting that the trajectory of Chinese decision-makers tilts quite massively towards the people, the idea is not to launch a series of measures that would be disconnected from the population and the sectors and markets to which it is attached. No, we need to revive the real estate sector, which is in crisis and accounts for around 25% of China's GDP, and also generate activity in all those sectors that, until now, were flourishing, such as luxury goods.

Good news for LVMH and the other giants of the “social status” business, because China remains the world's second-largest customer for the luxury goods sector, accounting for some 360 billion in global spending in 2023, 16% of which came from China.

So it was only natural that in the hours following the first announcements of the Recovery Plan, LVMH's share price began to climb. This was certainly reassuring for Bernard Arnault, whose fortune depends to a considerable extent on LVMH's fluctuations, and who had been silently observing an annoying erosion of the share price for several months, which between March and the last few days had fallen from 872 euros to just 590 euros. A few weeks ago, Bloomberg reported that the fortune of the billionaire, not so long ago the richest man in the world, had shrunk by $28 billion. Nevertheless, the ascent had to slow down, LVMH has been rising steadily since the mid-2010s, sometimes while other major luxury groups couldn't even keep up, and today the company is still very solid and well-organized. 

Beyond the need to see liquidity flowing, the future shape of the luxury sector depends mainly on three factors: 

• On the financial side, there's the likely reorganization of stock markets and the monetary system. 
• Then there's the political dimension, as the modern luxury economy is highly globalized, and the repeated upheavals caused by increased standards and customs duties could have a negative impact.
• Finally, a new form of competition is emerging to challenge the major luxury groups. This is reflected in higher-quality manufactured products whose marketing does not depend on a brand's image. Italy, once again one of the world's four biggest exporters, is regularly involved in the latter type of model, exporting various categories of high-quality products at prices well below those offered by the big luxury groups.

To boost bank lending, and thus the economy, China's central bank has lowered several interest rates. Classic. It's a safe bet that, at this level, decisions will swing back and forth over the coming months and years. Let me explain: China's leaders undoubtedly have two objectives, the best of which are not heading in the same direction: to boost economic activity and, in the long term, to have a yuan that is, if not strong, at least respectable in relation to other currencies.

For the time being, the authorities are concentrating on the first of these priorities, with plans for a capital injection into six major commercial banks. There's also a 0.5-point reduction in the interest rate on home loans, and a number of measures designed to motivate Chinese households to take on debt in order to invest in property. For example, the down-payment requirement for the purchase of a second home will be reduced from 25% to 15% of the total amount.

In a further move to westernize the Chinese stock market, the People's Bank of China will lend directly to major financial market players to enable them to buy shares. We're talking here about liquidity support amounting initially to 500 billion yuan, and which could even triple in time. In addition, many operations that are feasible in the USA or here in Europe, but complicated to undertake or prohibited in China, will be the subject of reflection. A plan to increase the number of mergers and acquisitions is due to be announced shortly.

The Chinese government is also planning to increase its indebtedness. Make no mistake about it, the situation is nothing like that in France, which is drowning in debt but has no credible prospect of creating value. What Xi Jinping apparently wants to avoid at all costs is for his country's growth to return to ordinary levels, and fall below the symbolic 5% threshold, and for that, all means are good, and above all, many means are available. This is another reason why the situation is so different from the one we're in now.

Among the geopolitical parameters likely to influence the next decisions of China's leaders, there is of course the relationship with the European Union - I'm talking here about dissonances or agreements with the European Commission - and above all the American election, the outcome of which is eagerly awaited by Beijing. On the other hand, the degree to which Russia's marginalization from the Western world is accentuated, or diminished, will have a direct impact on China's economy and industry, whether in terms of energy imports, banking, bond and currency restructuring within the BRICS, or potential industrial and defense cooperation.