Is China slowly changing how it finances itself?

**Kashish Kapoor** (0:04)
Today, I have two interesting stories for you. In the first one, we will talk about what does China's IPO boom say about the country. And in the next one, we will understand why did IEA, that's International Energy Agency, change its mid-year electricity outlook for 2026 Hello and welcome to The Daily Brief show by Zerodha, where our aim is to cut through the noise and bring you the biggest news in the financial markets in a way that's one level deeper as compared to other news channels. I'm your host, Kashish Kapoor. Today is 29th of July, Wednesday. On Monday, China's largest chip maker, CXMT, debuted on Shanghai's star market and rose 466% in a single session. Its market capitalization hit 488 billion dollar, making it the most valuable listed company in mainland China overnight. Chinese retail investors oversubscribed CXMT's offering by 212 times. Perhaps to those of you who may have checked out our recent story on memory chips, this IPO may not be a surprise. But what's interesting is the stock it displaced from the top, the state-owned industrial and commercial bank of China. It is the world's largest bank by assets, and also the biggest symbol of how China has financed itself. Over the past year, several of China's largest IPOs have been in the AI value chain, i.e. chipmakers, GPO designers, robotic firms and whatnot. Tech now accounts for more than 30% of the market's capitalization, up from well under 20% just a few years ago. Among the listed companies worth more than $15 billion, technology firm account for more than 45%.
Now, this is a dramatic departure from the system that built modern China. For most of its economic miracle, China's financing ran through a very different pipeline that didn't involve any sort of private financing at all. At the core of it were state-owned banks like ICBC that directed credit at extremely cheap interest rates that weren't set by the markets, but by the state. So, what's changed? What does this say about China's capital market? Is it genuinely opening up or is this the same state-directed machinery wearing a new hat? The story starts with understanding the state financing system itself and the nature of its double-edged sword. China's economic reforms began in 1978, but while the economy seemed to open up, one key part of its economy was deliberately not, and that was finance. Banks were wholly considered instruments of state policy. Their job was to channel the nation's capital towards whatever the state deemed strategically important. That was steel, highway, real estate, toys, smartphones, that too at extremely cheap rates. They complemented this with very low returns on the bank deposits that an average Chinese citizen would have. China deliberately suppresses deposit rates, which aren't set by a market. While China's nominal GDP would grow at 16 to 20% a year, the nominal deposit rate would sit at 3 to 4%, hardly budging. In fact, often, due to high inflation, the real return earned from this deposit would actually be negative. Well, Chinese households could go for other asset classes that gave them better returns, right? Not really. And that's where China's capital controls come into play. Not so long ago, Chinese citizens were restricted from investing in stocks and bonds that were denominated in foreign currencies. While the rule isn't as blunt today, restrictions on investing outside, especially the US, continues to exist. The state also makes it difficult for people to buy foreign currencies. China has cracked down heavily on wealthy individuals who try to use the Hong Kong Exchange to send money out. On the company side, until the 2000s, the state made it extremely difficult to issue corporate bonds. There were strict quotas on IPOs. The central government literally assigned how many companies each Chinese province could list publicly. And an opaque merit review process meant regulators could freeze IPOs at will.
A large chunk of shares in listed companies were held by the state and couldn't be traded. Additionally, local governments, which play a key role in China's economic development, have historically been prevented from creating their own financial instruments. Until 2009, they couldn't raise their own bonds either. In essence, the state was making the low-rated deposit the only game in town, trimming other asset classes that could have given it competition.
In economic speak, this combination of low-interest rates and capital controls is called financial repression.
And it was done in service of China's own state-owned enterprises, local governments, and eventually private companies.
This is what funded China's behemoth industrial economy that we see today. India has also had a history of undertaking similar policies. But every economic policy comes with trade-offs.
And financial repression is no exception here. We've covered before how China's economy is suffering from a problem of overcapacity and extremely heated competition. The financing system is where those side effects come from. Cheap capital can result in construction of an extraordinary amount of industrial capacity built very fast. But without any disciplining factor, this can quickly turn into too many factories. That, in turn, creates too much supply, which results in bloody price wars and eventually diminishing returns.