The China Briefing
China equities – higher demand, lower supply
China equities have continued their positive momentum over the last month
Please find below our latest thoughts on China:
- China equities have continued their good run since Chinese New Year. Both onshore and offshore markets have notched up gains of more than 15% (USD) since early February.1
- The improved market performance is due to a number of factors.
- First, the decision in January to mobilise the “national team” through significant buying of onshore ETFs provided a major confidence boost.
- By signalling a floor to the market, this has encouraged the return of some local “animal spirits” as seen by a notable pick-up in market turnover. China A daily trading volume has been more than RMB 1 trillion (approx. USD 140 billion) in recent days.2
- The Q1 results season has also been reassuring with a number of high-profile “beats”. While top-line growth has generally been as muted as expected, tighter control of costs has fed through into improved bottom-line profitability.
Chart 1: China Equities – Cash-to-Market Cap and Dividend Payout Ratios 
Source: Goldman Sachs as at 25 April 2024
- Alongside the improved earnings picture has been a notable increase in dividend payouts.
- The dividend hikes have, to an extent, been spurred by a recent regulatory push, but from a fundamental perspective there certainly appears to be room to increase dividends.
- Chinese companies in aggregate (ex-financials) have around USD 2.3 trillion of cash on their balance sheets, equivalent to around 27% of their prevailing market cap – considerably higher than most other global markets. Yet the dividend payout ratio of around 30% is relatively low in both an Asian and global context.3
- A further development is the frequency of dividend payments. Bellwether stocks such as state-owned banks have historically paid dividends only once a year. In their latest quarterly reports the banks mapped out plans to also pay interim dividends in future. More regular cash payments should be an appealing feature, especially for retail investors.
- A similar situation applies to share buybacks. While the momentum of buybacks has strengthened in Hong Konglisted stocks in recent years, it is still at a relatively nascent stage in onshore markets.
- China A-share companies bought back shares equivalent to around 0.2% of free float market capitalisation in 2023. As a point of reference, S&P 500 share buybacks have been 2.1% of listed market cap in the last 10 years.4
- Enhancing shareholder returns was a key feature of the once-a-decade guidelines – known as the “Nine Measures” – issued by China’s State Council in April.
- This is the third guideline document following 2004 and 2014 versions. These focused mainly on the expansion and opening up of financial markets, including setting the scene for the launch of the Stock Connect schemes.
- In contrast, the 2024 Nine Measures concentrates mainly on improving the quality of capital markets in areas such as stricter regulation of IPOs through higher thresholds, more forceful de-listing mechanisms, better shareholder returns, enhancing investor protection through improved disclosure, and encouraging long-term institutional equity ownership.
Chart 2: China A-Shares – Equity Issuance and Share Buybacks as % of Market Cap
Source: Wind as at 30 April 2024
- One particular area the measures address is the high level of equity issuance, which has long been a headwind for China A markets.
- Mainland China and Hong Kong’s combined stock market capitalisation has surged in the past two decades from less than USD 1 trillion in 2003 to currently around USD 14 trillion. This has basically kept track with economic growth – the ratio of stock market capitalisation to China’s GDP has been around 0.9 for the past 20 years.5
- Over this period the number of China A-listed companies has more than tripled to around 5,000.6 And even during the depressed market conditions over the last three years, equity fundraising in China A-shares (through IPOs and secondary offerings) amounted to RMB 1.28 trillion a year (approx. USD 175 billion).7
- The amount of equity issuance has already declined significantly in 2024.8 If this is the start of a more structural change which eases the earnings drag from equity dilution – combined with higher levels of share buybacks and dividend payouts – then the scene may be set for a more favourable balance of equity demand and supply going forward.
1 Source: Bloomberg, 2 May 2024
2 Source: Bloomberg, 2 May 2024
3 Source: Goldman Sachs, 25 April 2024
4 Source: HSBC, 16 April 2024
5 Source: Gavekal, 26 March 2024
6 Source: Wind, 31 March 2024
7 Source: HSBC, 16 April 2024
8 Source: Wind, 30 April 2024