In a conference today, Shang Fulin, chairman of the China Securities Regulatory Commission (CSRC), said the country will encourage companies to sell more shares domestically. The securities regulator plans to “expand the scale of fundraising in the capital market, increase the amount of tradable shares and push forward the listing of large companies and high-quality medium-sized companies.”
For a while we have been hearing that one of the best ways the country can deflate the stock market bubble is by increasing the supply of shares. This will allow it soak up some of the flood of money looking for a place to go, and will reduce the need for heavy-handed measures that the government now employs to knock down the market every few months.
This is almost certainly true. China suffers from too much money looking at too few investment opportunities, and not surprisingly the result has been credit bubbles, real estate bubbles, stock market bubbles and much else. The government’s main way of managing down the stock market – various administrative measures – is not only very inefficient but, as I argued in an entry last week, actually retards the development of a well-functioning stock market by undermining fundamental investment strategies and strengthening speculative strategies based on predicting government behavior. But, as an indication of the quandary in which the government has found itself because of its slowness to address the currency regime, if the CSRC is really serious about increasing the selling of shares in the domestic markets it will seriously undermine attempts by the PBoC to control inflation and overheating by reining in lending.
The PBoC hopes that by imposing caps on loan growth it can reduce China’s torrid pace of investment, which is seen as key to the overheating problem facing the country. As I have argued earlier, we need to be skeptical about the effectiveness of these caps on loan growth because there are too many reasons why banks, corporations, and provincial leaders are going to resist. In fact last week at the end of its two-day conference, for the first time in years, the PBoC was not able to announce loan growth targets for the year – probably because the policy was too controversial to resolve.
But even if it does succeed in reining in loan growth it won’t matter. One of my recurring arguments is that if China’s lack of a domestic monetary policy is the real culprit, which I believe it to be, administrative measures such as capping loan growth will simply force money to flow through other channels into overinvestment. Here, it seems, the CSRC is going to help prove my point. By encouraging companies to sell more shares, they will take money away from the banks – who presumably aren’t able to lend it anyway – and pass it on directly to corporations who will then spend it on new investments. The only difference is the structure of the corporate and banking balance sheets, but the money will still end up invested.
However this difference is not negligible, and this is a very important consideration. If China is anyway going to suffer from an overinvestment crisis, it will be much better for China if corporate funding is raised in the form of equity rather than debt. This reduces the financial distress costs to corporations after the crisis, speeds up their recovery, and perhaps most importantly of all, reduces the future growth of non-performing loans in China’s already shaky banking system.
So I agree wholeheartedly with the CSRC’s plan to encourage share sales, but not because it will help soak up liquidity and so reduce the consequences of China’s out-of-control monetary policy. I think it will have no such effect, and only policies that directly address the accumulation of capital inflows can ever do that. I think this is a good policy because it will significantly ease China’s recovery if it is forced into an ugly adjustment.
China is still trying to figure out what policies will help prevent a crisis. I think it is just as important to figure out what policies will minimize the economic impact of a crisis if and when it occurs.
