In late September, China’s stock market, beleaguered by weak economic indicators and a crumbling property sector, experienced an unexpected rally. After previous hesitation over major interventions, Beijing’s stimulus measures sparked a surge in Chinese equities, briefly reigniting optimism. Yet what truly puzzled market observers was Beijing’s newfound approach to managing the market itself.
After allowing the market to lose trillions of dollars in value, with only limited state fund interventions when key psychological benchmarks were breached, Beijing abruptly shifted to a full-scale rescue. This involved forward guidance through press conferences, policy adjustments, and media engagements to restore market confidence. For the first time, stock market performance appeared to be a direct policy target—marking a sharp departure from President Xi Jinping’s usual stance of keeping financial markets at arm’s length.
Xi has long prioritized what he calls “real” sectors—manufacturing, technology, and infrastructure—over speculative financial activities. Why the sudden interest in stock market management?
And if Xi is intent on fostering a bull market, why are we seeing only incremental measures rather than sweeping fiscal or consumption-driven stimulus? The answer lies in Xi’s vision of the stock market: not as a tool for exuberant growth but as a carefully managed mechanism that aligns with China’s broader economic and political objectives.
Xi’s wariness of financial markets is rooted in the 2015 stock market collapse. China’s market had soared on the back of speculative frenzy and margin lending, only to implode spectacularly that summer, wiping out trillions of dollars in value. Although stock market participation in China remains comparatively low, it was retail investors—the smaller players who dominate China’s A-share market—who bore the heaviest losses. The concentrated impact on these individual investors turned the financial collapse into a political crisis, casting a long shadow over Xi’s leadership.
Central to Xi’s economic philosophy is a skepticism toward speculative excess. After the crash, according to reporting in Lingling Wei and Bob Davis’s book Superpower Showdown, Xi confronted Xiao Gang, then-chair of China’s financial regulatory body, pointing to a cover of the Economist that depicted Xi struggling to prop up the market. Rumors circulated within Beijing’s elite circles that Xi suspected elements within the financial sector of orchestrating the collapse to undermine his authority.
The crash was a significant setback for Xi’s economic agenda. At the time, China was making strides toward opening its capital markets, but the collapse halted that momentum. While the Chinese economy grew by roughly 30 percent between 2015 and 2020, the stock market lagged far behind, reflecting a reversion to a more closed and politically controlled model. Company listings appeared more tied to political connections than corporate merit, and insider trading remained rampant. Retail investors—often derisively referred to as “leeks,” waiting to be chopped and regrown—bore the brunt of the losses.
The episode cemented Xi’s distrust of financial markets and reinforced his preference for state-led economic management. The government responded by tightening controls over speculation, slowing capital market reforms, and refocusing on sectors such as heavy industry and technology.
After years of viewing capital markets as frivolous and prone to destructive bubbles, Xi now seems to recognize the value of a well-performing stock market. Government advisors suggest that Beijing, informed by the trauma of 2015, is not aiming for a rapid, unchecked bull market (a “mad bull”). Instead, the focus is on fostering a stable, measured bull market that supports China’s broader economic ambitions while avoiding another crash.
Today, the weaknesses of China’s capital markets are even more glaring. Chinese companies, facing increasing foreign scrutiny, need domestic funding options. With the real estate sector —where more than 70 percent of household wealth is concentrated—collapsing, Chinese citizens require alternative ways to store and grow wealth. Criticism of Xi’s economic management increasingly points to the dismal state of the A-share market.
Based on conversations with policy advisors who recently briefed Beijing’s financial leadership, there is broad consensus among decision-makers that the stock market can be leveraged as a tool to channel capital into key sectors and address challenges, such as the pension fund shortfall resulting from an aging population. According to these advisors, this shift is encapsulated in a four-pronged strategy designed to align the stock market with China’s broader economic objectives.
For years, China’s property market served as the primary avenue for household wealth accumulation. Real estate attracted the savings of hundreds of millions of people, eventually producing speculative excess and unsustainable debt. Xi recognizes the need to provide these investors with a viable alternative, and the stock market is being positioned to fill that role.
Shifting wealth from real estate to equities is a delicate process, especially in a culture where property is closely tied to family security and social status. Unlike A-shares, housing is something tangible that can be lived in or used to demonstrate financial stability in marriage prospects. Retail investors in China, often susceptible to herd behavior, heighten the risk of another bubble. To address this, Beijing has stepped up regulatory measures, focusing on investor protection and promoting the use of exchange-traded funds to encourage more stable, diversified investments.
Yet Xi’s vision extends far beyond a simple redirection of household wealth. The declarations from the Third Plenum in July, coupled with Xi’s emphatic rallying cry during his recent visit to Hefei—urging the “financial market to support science and tech breakthroughs” with the impassioned phrase “How many times can one strive for greatness?”—crystalize Beijing’s intent. The message is clear: China is laser-focused on leveraging the capital market to drive its strategic imperatives in advanced manufacturing, high-tech industries, and green energy.
These sectors demand considerable investment across long-term horizons, from research and development to market adoption. This arduous process, often likened to “crossing the valley of death” in Silicon Valley parlance, entails both substantial risks and the need for sustained, long-term capital—a burden the state cannot bear alone. Complicating matters further is Chinese law, which criminalizes the loss of state assets, adding a legal dimension to the inherent risks of investment and making large-scale capital deployment in these sectors a complex endeavor.
Xi’s strategy is thus to cultivate a slow, steady bull market, designed to attract institutional investors—pension, insurance, and sovereign wealth funds—that can provide the patient capital to fuel these strategic sectors.
Unlike retail investors, institutional capital provides stability and a long-term perspective, both crucial for industries where returns may take years, or even decades, to fully materialize. Yet China’s institutional investment in equities remains relatively modest, with pension funds allocating only 10-20 percent of their portfolios to stocks—well below the 50-60 percent typical in countries such as Canada and Japan. To address this, Beijing has signaled potential reforms aimed at creating new investment vehicles aligned with international standards, seeking to rekindle interest in private equity and venture capital.
Recent memories of heavy-handed interventions, regulatory uncertainty, and market volatility have left many institutional investors cautious. In the second quarter of 2024—the most recent data available—foreign investors pulled a record $15 billion from China, reflecting deep pessimism about the country’s economic outlook. The challenge now is to shift the narrative, moving beyond a period of sluggish investment flows and capital flight, and to reestablish China as a compelling destination for long-term capital.
Xi also sees the stock market as a vital instrument for addressing China’s structural challenges, chief among them the demographic crisis placing immense pressure on its underfunded pension system. Recent reforms have allowed pension funds to allocate a greater share of their assets to equities, offering the potential for higher returns than traditional bonds or fixed-income investments.
This strategy bolsters the pension system while injecting long-term, stabilizing capital into the stock market, which in turn supports market stability during periods of volatility. Historically, China’s pension funds have been conservative, predominantly investing in low-yield assets such as government bonds. But as their liabilities grow, a more dynamic approach is essential.
Policy advisors familiar with Beijing’s strategic deliberations have indicated that the government is considering easing restrictions on equity investments to boost returns and address the growing pension shortfall. These advisors have also suggested the possibility of allowing pension funds to invest in global markets, offering diversification while hedging against geopolitical and currency risks. Additionally, there is discussion around expanding other investment avenues, such as real estate investment trusts, to diversify portfolios and mitigate market risks.
One of the most immediate and pressing elements of Xi’s stock market strategy is the push for corporate consolidation to create national champions, built on more profitable and sustainable business models. China is frequently criticized for “overcapacity” by its trading partners, and one contributing factor is fierce domestic competition, which drives companies into profit-eroding price wars, resulting in overproduction.
Another motivation for consolidation and restructuring comes from the success of U.S. tech giants such as Amazon, Apple, and Tesla, whose outsized influence bolsters the overall performance of U.S. stock markets. Policy advisors in China have proposed a localized version of this model, focusing on sectors critical to state priorities such as green energy, advanced manufacturing, and technology. To this end, Beijing has implemented regulatory reforms aimed at encouraging mergers and acquisitions, particularly in strategic industries.
By leveraging the market to absorb wealth after the property collapse, channel capital into key sectors, bolster an underfunded pension system, and cultivate internationally competitive tech giants, Xi is aligning the stock market with state objectives, in line with his preference for state-led development.
Despite the emphasis on fortifying capital markets, Xi’s strategy is not to ignite a stock rally for its own sake but rather to foster a slow, steady bull market that underpins the real economy. This explains his incremental approach to fiscal stimulus, despite the short-term boosts such policies might offer. By promoting patient capital, encouraging corporate consolidation, and using the stock market as a lever for addressing structural challenges, Xi seeks to cultivate a “slow bull” that advances China’s broader economic goals while steering clear of the perils of an overheated market.
For investors frustrated by China’s capital market, the government’s stabilization efforts and push for long-term capital may offer some reassurance. Sectors that align with China’s strategic priorities are poised to receive substantial support, presenting promising investment opportunities.
Yet reforming China’s capital markets is not easy.
Persistent issues—transparency, regulatory inconsistency, and weak corporate governance—continue to plague China’s stock market.
The financial industry’s intricate and often fraught relationship with state regulators complicates the landscape. Market sentiment remains fragile, and retail investors are acutely sensitive to any shifts in policy tone. Xi’s anti-corruption campaign, which has ensnared numerous high-ranking financial officials, has cast a palpable chill over the sector, leaving financial elites increasingly demoralized and risk-averse amid growing uncertainty. Compounding this, the salary cuts under the “common prosperity” initiative have led to a significant exodus of talent, further exacerbating the industry’s growing challenges.
Despite the apparent contradictions, Xi’s pivot toward managing the stock market is, in many ways, a reflection of his consistent—even stubborn—economic philosophy. Rather than allowing the market to function autonomously, Beijing is actively steering its course to address China’s economic challenges.
But can Xi truly tame the bull? His track record in economic management gives the market ample reason for caution. Heavy-handed regulation, an overemphasis on control and security, poor coordination between central and local governments, bureaucratic inertia, and the mismanagement of the COVID-19 response have all undermined previous reform efforts. Guiding the bull while keeping it in check is a challenge that even the boldest of matadors might hesitate to face.
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