China’s breakneck stock market rally is not just lining the pockets of retail investors – it’s also delivering huge unrealised profits to the Chinese government through its ownership of listed state-owned enterprises.
The WSJ reports on the giant amounts of paper profit generated for the government since the start of 2014. Its stake, valued around 15 trillion yuan just 16 months ago, has now soared to 35.3 trillion yuan as at the end of April, according to the Journal.
It’s a staggering increase any way you look at it: 135% or, in US Dollar terms, some $3.3 trillion.
The surge in valuations may be part of a broader plan to reduce levels of corporate indebtedness.
According to the Journal, “one of Beijing’s biggest hopes is that the booming share market will help companies deal with the vast pile of debt on their balance sheets. Higher stock prices can ease a company’s debt burden by increasing the relative value of a firm’s assets and, in the case of companies that subsequently sell shares, by giving the company funds to pay down debt”.
The rally may also assist established firms raise additional capital, something that could prompt an increase in merger and acquisitions. It could also benefit smaller firms looking to raise capital through increased demand for initial public offerings.
“China’s securities regulator has approved 145 initial public offerings so far this year, up from 48 in the same period last year. There are still 486 firms waiting for approval. Companies traded inside China have raised a total of 250.64 billion yuan via share placements in 2015, up 14% from the same period a year ago”, according to the WSJ.
It’s an interesting and high-risk strategy that Chinese policymakers are trying to accomplish – use the savings of the private sector in an attempt to restructure and recuperate large swathes of Chinese industry, much of it government-owned.
If they pull it off it will be one of the most remarkable financial engineering achievements ever accomplished. On the other hand, should it go awry, the consequences for both the Chinese and global economy will likely be horrendous.
While the equity market has pulled back slightly in recent weeks, keeping with recent tradition, the Shanghai Composite is soaring yet again today, adding close to 3% in just half a trading session.
In other words, just a standard trading session given what markets have come to expect.