Consumers of brokerage research on China’s economy and companies have long known that they need to read between the lines. Securities firms are often circumspect in their judgements to avoid alienating powerful interests that could damage their business.
So it’s curious that the head securities regulator went to the trouble of meeting with more than 30 brokerages and fund firms, to admonish them to be careful in what they say. Liu Shiyu, chairman of the China Securities Regulatory Commission, told the firms to take the interests of the party and the state into account, when publishing research.
The first conclusion to draw from this display of sensitivity is that officials remain jittery over the state of the economy and are determined to control the narrative more tightly. China’s growth is slowing, the stock market has slumped and a trade war with the US shows little sign of ending.
One interpretation might be that the real situation is worse than indicated by official data; the government’s intervention may also reflect concern that negative commentary will cause confidence to deteriorate further.
Most foreign investment banks, such as Goldman Sachs Group Inc. or Morgan Stanley, publish research on the Chinese economy or mainland-listed A shares in Hong Kong, which has its own securities watchdog and is (theoretically at least) beyond the reach of the Beijing-based regulator. With overseas securities firms operating in China through joint ventures, any onshore research is issued by the mainland partner. (UBS AG, which manages its joint venture despite holding a minority stake, is an exception.)
But even Hong Kong-based research isn’t completely unguarded, partly because everyone knows these are the rules of the game when working in emerging markets. We have only to remember how Indonesia’s government snapped ties with JPMorgan Chase & Co. in January last year after the Wall Street bank downgraded the nation’s equities.
JPMorgan was barred from doing business with government entities, a penalty that remained in force even after it upgraded its stance on Indonesian stocks. The ban was lifted only in May this year.
Research reports out of China, even those published offshore, frequently leave a lot unsaid. Investors are accustomed to scrutinising the charts closely when the accompanying comments are anodyne.
To be sure, this is far from an exclusively Chinese issue. Removing conflicts of interest and ensuring transparency were key motivations for Europe’s MiFID II regulations that came into force this year.
But access to policymakers and corporate executives is even more important for securities firms in a relatively opaque market such as China, creating a bigger incentive to avoid commentary that could put such relationships at risk. It’s notable that about 61 per cent of stocks in the benchmark CSI 300 Index have no “sell” ratings among the analyst recommendations compiled by Bloomberg — in a market that’s slumped more than 20 per cent this year. The ratio for the S&P 500 Index is about 41 per cent.
This isn’t China’s first attempt to encourage cheerleading commentary when confronted with bad news. Previous efforts haven’t worked too well, and there’s little reason to believe this time will be different.
Ultimately, research that is excessively rose-tinted in the face of contrary evidence will lose credibility. Analysts who aspire to be taken seriously will still find a way to get their message out; for the time being, they’ll just have to be a little more careful in the words they choose.