In China's lackluster stock market, a new approach to capitalism is evolving as companies, responding to Beijing's prompting, engage in share buybacks and distribute record dividends to investors awaiting a much-needed revival.
Investors view the unprecedented wave of buybacks and dividends as a significant change in the market culture, highlighting a newfound emphasis on shareholder returns reminiscent of the corporate governance transformation underway in Japan.
The yield on Chinese stocks has climbed to approximately 3%, the highest since 2016, rewarding investors who have steadfastly remained engaged in a market that has been stagnant for years and now faces further challenges following Donald Trump's presidential comeback in the U.S.
Jason Lui, BNP Paribas' head of Asia-Pacific equities and derivatives strategy, noted, "China's regulators and policymakers are trying to engineer this culture of shareholder return." This strategic shift could reshape the capital market, evidenced by the growing emphasis on enhanced shareholder returns.
The increase in buybacks and dividends was part of a Chinese regulatory initiative introduced in September to raise stock prices and bolster consumer confidence. Despite these efforts, the CSI 300 index has struggled, declining over 27% since 2021 compared to a 65% increase in the S&P 500. The market value of Chinese stocks has stagnated around $11 trillion for a decade.
Numerous factors like concerns over the indebted property sector, deflationary pressures, lack of substantial stimulus, and geopolitical tensions have contributed to negative sentiment, resulting in a foreign investment outflow. In addition, the potential impact of tariffs imposed by Trump adds to market concerns.
Even after Beijing's demonstration of support for the market in September, stock prices failed to maintain their momentum, with gains halving due to disappointment over the speed and extent of implementation.
To incentivize investors through challenging times, Bhaskar Laxminarayan, chief investment officer for Asia at Julius Baer, emphasized the importance of adequate dividends to compensate for potential valuation stagnation, stating, "You're being paid for that patience. If you're not, then it's not worth it."
Chinese companies paid out a record 2.4 trillion yuan ($329.7 billion) in dividends in 2024, with share buybacks reaching a record high of 147.6 billion yuan last year according to regulatory data.
In a significant market development, Wu Qing, head of the China Securities Regulatory Commission, revealed that over 310 companies are expected to distribute dividends exceeding 340 billion yuan in December and January, reflecting a notable increase from the previous year.
As the market matures towards prioritizing shareholder returns, investors are increasingly turning to dividend-focused exchange-traded funds (ETFs), with significant inflows since 2020. This shift has led to a noticeable outperformance of the CSI Dividend Index compared to the CSI300 and CSI growth indices.
Policy interventions aimed at boosting shareholder returns and valuations for mainland companies have shaped the investor focus towards high-yielding firms, fostering a balanced approach emphasizing both growth and yield in the market.
The trend of rising dividends is deterring mainland investors from shifting towards bonds by providing a more attractive yield compared to government bonds. Notably, companies like Contemporary Amperex Technology and Tencent have seen their stock prices rise following their announcements of buybacks or dividend payments.
Goldman Sachs predicts that Chinese companies, both domestically and internationally listed, could return a total of 3.5 trillion yuan to shareholders in 2025, representing a substantial surge.
Herald van der Linde, head of equity strategy for Asia-Pacific at HSBC, highlighted the meaningful shift, stating, "Companies don't know where to put their cash, so they return it now to shareholders." This transformation in mindset reflects a significant departure from previous practices.
As the market continues to evolve, with companies increasingly focusing on rewarding shareholders, the current landscape represents a notable departure from the past, bringing a newfound balance between growth and yield, marking a significant cultural shift in the Chinese market.