In late September, China’s inventory market, beleaguered by weak financial indicators and a crumbling property sector, skilled an sudden rally. After earlier hesitation over main interventions, Beijing’s stimulus measures sparked a surge in Chinese language equities, briefly reigniting optimism. But what actually puzzled market observers was Beijing’s newfound strategy to managing the market itself.
After permitting the market to lose trillions of {dollars} in worth, with solely restricted state fund interventions when key psychological benchmarks have been breached, Beijing abruptly shifted to a full-scale rescue. This concerned ahead steering by press conferences, coverage changes, and media engagements to revive market confidence. For the primary time, inventory market efficiency seemed to be a direct coverage goal—marking a pointy departure from President Xi Jinping’s ordinary stance of maintaining monetary markets at arm’s size.
Xi has lengthy prioritized what he calls “actual” sectors—manufacturing, know-how, and infrastructure—over speculative monetary actions. Why the sudden curiosity in inventory market administration?
And if Xi is intent on fostering a bull market, why are we seeing solely incremental measures slightly than sweeping fiscal or consumption-driven stimulus? The reply lies in Xi’s imaginative and prescient of the inventory market: not as a instrument for exuberant progress however as a rigorously managed mechanism that aligns with China’s broader financial and political goals.
Xi’s wariness of economic markets is rooted within the 2015 inventory market collapse. China’s market had soared on the again of speculative frenzy and margin lending, solely to implode spectacularly that summer time, wiping out trillions of {dollars} in worth. Though inventory market participation in China stays comparatively low, it was retail traders—the smaller gamers who dominate China’s A-share market—who bore the heaviest losses. The concentrated affect on these particular person traders turned the monetary collapse right into a political disaster, casting an extended shadow over Xi’s management.
Central to Xi’s financial philosophy is a skepticism towards speculative extra. After the crash, in accordance with reporting in Lingling Wei and Bob Davis’s e-book Superpower Showdown, Xi confronted Xiao Gang, then-chair of China’s monetary regulatory physique, pointing to a cowl of the Economist that depicted Xi struggling to prop up the market. Rumors circulated inside Beijing’s elite circles that Xi suspected components throughout the monetary sector of orchestrating the collapse to undermine his authority.
The crash was a major setback for Xi’s financial agenda. On the time, China was making strides towards opening its capital markets, however the collapse halted that momentum. Whereas the Chinese language financial system grew by roughly 30 p.c between 2015 and 2020, the inventory market lagged far behind, reflecting a reversion to a extra closed and politically managed mannequin. Firm listings appeared extra tied to political connections than company benefit, and insider buying and selling remained rampant. Retail traders—typically derisively known as “leeks,” ready to be chopped and regrown—bore the brunt of the losses.
The episode cemented Xi’s mistrust of economic markets and strengthened his choice for state-led financial administration. The federal government responded by tightening controls over hypothesis, slowing capital market reforms, and refocusing on sectors corresponding to heavy business and know-how.
After years of viewing capital markets as frivolous and vulnerable to damaging bubbles, Xi now appears to acknowledge the worth of a well-performing inventory market. Authorities advisors counsel that Beijing, knowledgeable by the trauma of 2015, just isn’t aiming for a fast, unchecked bull market (a “mad bull”). As a substitute, the main target is on fostering a secure, measured bull market that helps China’s broader financial ambitions whereas avoiding one other crash.
As we speak, the weaknesses of China’s capital markets are much more evident. Chinese language corporations, going through growing overseas scrutiny, want home funding choices. With the actual property sector —the place greater than 70 p.c of family wealth is concentrated—collapsing, Chinese language residents require alternative routes to retailer and develop wealth. Criticism of Xi’s financial administration more and more factors to the dismal state of the A-share market.
Based mostly on conversations with coverage advisors who not too long ago briefed Beijing’s monetary management, there’s broad consensus amongst decision-makers that the inventory market could be leveraged as a instrument to channel capital into key sectors and deal with challenges, such because the pension fund shortfall ensuing from an growing older inhabitants. Based on these advisors, this shift is encapsulated in a four-pronged technique designed to align the inventory market with China’s broader financial goals.
For years, China’s property market served as the first avenue for family wealth accumulation. Actual property attracted the financial savings of tons of of tens of millions of individuals, ultimately producing speculative extra and unsustainable debt. Xi acknowledges the necessity to present these traders with a viable various, and the inventory market is being positioned to fill that position.
Shifting wealth from actual property to equities is a fragile course of, particularly in a tradition the place property is carefully tied to household safety and social standing. Not like A-shares, housing is one thing tangible that may be lived in or used to show monetary stability in marriage prospects. Retail traders in China, typically inclined to herd conduct, heighten the chance of one other bubble. To handle this, Beijing has stepped up regulatory measures, specializing in investor safety and selling using exchange-traded funds to encourage extra secure, diversified investments.
But Xi’s imaginative and prescient extends far past a easy redirection of family wealth. The declarations from the Third Plenum in July, coupled with Xi’s emphatic rallying cry throughout his latest go to to Hefei—urging the “monetary market to help science and tech breakthroughs” with the impassioned phrase “What number of instances can one attempt for greatness?”—crystalize Beijing’s intent. The message is obvious: China is laser-focused on leveraging the capital market to drive its strategic imperatives in superior manufacturing, high-tech industries, and inexperienced vitality.
These sectors demand appreciable funding throughout long-term horizons, from analysis and growth to market adoption. This arduous course of, typically likened to “crossing the valley of dying” in Silicon Valley parlance, entails each substantial dangers and the necessity for sustained, long-term capital—a burden the state can not bear alone. Complicating issues additional is Chinese language legislation, which criminalizes the lack of state property, including a authorized dimension to the inherent dangers of funding and making large-scale capital deployment in these sectors a fancy endeavor.
Xi’s technique is thus to domesticate a gradual, regular bull market, designed to draw institutional traders—pension, insurance coverage, and sovereign wealth funds—that may present the affected person capital to gasoline these strategic sectors.
Not like retail traders, institutional capital supplies stability and a long-term perspective, each essential for industries the place returns could take years, and even a long time, to totally materialize. But China’s institutional funding in equities stays comparatively modest, with pension funds allocating solely 10-20 p.c of their portfolios to shares—effectively beneath the 50-60 p.c typical in nations corresponding to Canada and Japan. To handle this, Beijing has signaled potential reforms aimed toward creating new funding automobiles aligned with worldwide requirements, in search of to rekindle curiosity in non-public fairness and enterprise capital.
Current recollections of heavy-handed interventions, regulatory uncertainty, and market volatility have left many institutional traders cautious. Within the second quarter of 2024—the newest knowledge accessible—overseas traders pulled a document $15 billion from China, reflecting deep pessimism in regards to the nation’s financial outlook. The problem now’s to shift the narrative, transferring past a interval of sluggish funding flows and capital flight, and to reestablish China as a compelling vacation spot for long-term capital.
Xi additionally sees the inventory market as a significant instrument for addressing China’s structural challenges, chief amongst them the demographic disaster putting immense stress on its underfunded pension system. Current reforms have allowed pension funds to allocate a larger share of their property to equities, providing the potential for increased returns than conventional bonds or fixed-income investments.
This technique bolsters the pension system whereas injecting long-term, stabilizing capital into the inventory market, which in flip helps market stability during times of volatility. Traditionally, China’s pension funds have been conservative, predominantly investing in low-yield property corresponding to authorities bonds. However as their liabilities develop, a extra dynamic strategy is crucial.
Coverage advisors aware of Beijing’s strategic deliberations have indicated that the federal government is contemplating easing restrictions on fairness investments to spice up returns and deal with the rising pension shortfall. These advisors have additionally urged the potential for permitting pension funds to put money into international markets, providing diversification whereas hedging towards geopolitical and foreign money dangers. Moreover, there’s dialogue round increasing different funding avenues, corresponding to actual property funding trusts, to diversify portfolios and mitigate market dangers.
Probably the most fast and urgent components of Xi’s inventory market technique is the push for company consolidation to create nationwide champions, constructed on extra worthwhile and sustainable enterprise fashions. China is ceaselessly criticized for “overcapacity” by its buying and selling companions, and one contributing issue is fierce home competitors, which drives corporations into profit-eroding worth wars, leading to overproduction.
One other motivation for consolidation and restructuring comes from the success of U.S. tech giants corresponding to Amazon, Apple, and Tesla, whose outsized affect bolsters the general efficiency of U.S. inventory markets. Coverage advisors in China have proposed a localized model of this mannequin, specializing in sectors crucial to state priorities corresponding to inexperienced vitality, superior manufacturing, and know-how. To this finish, Beijing has applied regulatory reforms aimed toward encouraging mergers and acquisitions, notably in strategic industries.
By leveraging the market to soak up wealth after the property collapse, channel capital into key sectors, bolster an underfunded pension system, and domesticate internationally aggressive tech giants, Xi is aligning the inventory market with state goals, according to his choice for state-led growth.
Regardless of the emphasis on fortifying capital markets, Xi’s technique is to not ignite a inventory rally for its personal sake however slightly to foster a gradual, regular bull market that underpins the actual financial system. This explains his incremental strategy to fiscal stimulus, regardless of the short-term boosts such insurance policies would possibly supply. By selling affected person capital, encouraging company consolidation, and utilizing the inventory market as a lever for addressing structural challenges, Xi seeks to domesticate a “gradual bull” that advances China’s broader financial targets whereas steering away from the perils of an overheated market.
For traders pissed off by China’s capital market, the federal government’s stabilization efforts and push for long-term capital could supply some reassurance. Sectors that align with China’s strategic priorities are poised to obtain substantial help, presenting promising funding alternatives.
But reforming China’s capital markets just isn’t straightforward.
Persistent points—transparency, regulatory inconsistency, and weak company governance—proceed to plague China’s inventory market.
The monetary business’s intricate and sometimes fraught relationship with state regulators complicates the panorama. Market sentiment stays fragile, and retail traders are acutely delicate to any shifts in coverage tone. Xi’s anti-corruption marketing campaign, which has ensnared quite a few high-ranking monetary officers, has solid a palpable chill over the sector, leaving monetary elites more and more demoralized and risk-averse amid rising uncertainty. Compounding this, the wage cuts underneath the “widespread prosperity” initiative have led to a major exodus of expertise, additional exacerbating the business’s rising challenges.
Regardless of the obvious contradictions, Xi’s pivot towards managing the inventory market is, in some ways, a mirrored image of his constant—even cussed—financial philosophy. Slightly than permitting the market to operate autonomously, Beijing is actively steering its course to deal with China’s financial challenges.
However can Xi actually tame the bull? His observe document in financial administration provides the market ample purpose for warning. Heavy-handed regulation, an overemphasis on management and safety, poor coordination between central and native governments, bureaucratic inertia, and the mismanagement of the COVID-19 response have all undermined earlier reform efforts. Guiding the bull whereas maintaining it in examine is a problem that even the boldest of matadors would possibly hesitate to face.
