China’s mainland equity market is up over 33 percent this year, making it one of the best-performing stock markets in the world. Despite rumours of tariff escalation, a trade war, sanctions against publicly Chinese tech companies like Hikvision and slower economic growth, China’s A-shares are on a tear. Is Beijing rigging Shanghai and Shenzhen’s stock market?
On Tuesday, Japanese financial news agency Nikkei reported that Beijing doubled corporate subsidies in 2019 compared to where they were in 2013. The Chinese government spent 156,2 billion yuan ($22,4 billion) on subsidies last year, handing it out to companies listed on the Shanghai and Shenzhen stock exchanges. Nikkei based its data on Chinese financial news and information publisher Wind Financial.
The tally amounts to about 5 percent of total net profit earned by mainland China’s publicly traded companies in 2018. Subsidies increased 15 percent on the year for the first nine months of 2019, with more than 90 percent of the 3,748 businesses included in the calculations receiving some form of financial aid.
Has Beijing been successful at priming the pump?
Investors in the XTrackers CSI-300 China A-Shares (ASHR) exchange-traded fund gained 33,4 percent year-to-date and 27,3 percent over the last 12 months. Within the big four emerging markets, only Russia has done slightly better this year.
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There are a number or reasons for China gains—global investor’s love for tech companies, and China’s relatively cheap value compared to the rest of the emerging market space.
Another part, from a local retail investor’s perspective, Beijing stimulus and subsidies have kept the animal spirits alive.
The largest recipient in state subsidies is China Petroleum & Chemical (SNP). They received around $450 million in subsidies between January and September. The second-largest recipient was Guangzhou Automobile Group with roughly $270 million.
Highlighting these two large caps, it seems China is misallocating some capital. SNP is down 16,3 percent this year and 23,4 percent over the last 12 months. By comparison, the US energy sector, as measured by the SPDR Energy Select (XLE), is up around 5,4 percent. Brazil oil firm Petrobras (PBR) is up 12,5 percent. Russia’s LukOil is up 40,3 percent.
Guangzhou Automotive is listed in Hong Kong. It’s up 19,5 percent this year and 23,5 percent over the last 12 months.
That’s better than the Hang Seng, but not better than China mainland. Considering it’s not listed there, we can call those subsidies a win for Guangzhou investors and workers, anyway.
Shanghai-listed SAIC Motor Company also got some money thrown its way. Their stock price didn’t benefit, falling 10,6 percent this year and down 6,4 percent over the last 12 months.
Electronics components makers did the best of all
BOE Technology Group was on the receiving end of some government money. Their stock price is up 71 percent this year and 73,8 percent over the last 12 months. Twenty-five years ago, Beijing Electron teetered on the brink of collapse, a government behemoth brought to its knees by superior foreign technology. But over the last few years, fuelled by billions in state funds, the renamed BOE now does business with Apple and has its sights on becoming the biggest supplier of next-generation screens for smartphones.
Shares in state-owned consumer electronics company TCL Corp (the white knight owners of Canada’s BlackBerry) are up 81,2 percent this year and 83,5 percent over the last 12 months.
Partially state-owned air-conditioning manufacturer Gree Electric got some money too. Its stock price is up 80,3 percent this year and 76,7 percent over the last 12 months.
The article did not state that money was going to buy shares, though some Chinese companies are now doing share buy-backs, a normal part of the equity markets anyway.
China BOE technology
The US will make corporate subsidies a part of the phase two trade negotiations, which are supposed to begin after the phase one deal is signed in January.
The World Trade Organisation (WTO) — of which China is a member — bans corporate subsidies if they are being used to bolster exports.
The WTO requires members to report all subsidies in their financials, especially if publicly traded.
China is considered by Washington to have violated WTO rules on state subsidies, a bone of contention sure to upend phase two trade talks in 2020.
“The Communist Party leadership draws its authority from the distribution of wealth, and fundamental change will be difficult,” Shinichi Seki of the Japan Research Institute told Nikkei on Tuesday. — Forbes.