China’s stock markets have become an extension of state policy, with the Communist Party influencing both strategic decisions and market activity.
In short
- The Chinese stock market is closely aligned with the government’s priorities
- President Xi uses the stock market to support state-owned enterprises
- Information asymmetry and insider control lead to major distortions
Once driven by market forces, China’s stock market now serves as a strategic tool in a tightly controlled mixed economy. Under previous governments, there was a clear push toward market-friendly reforms that allowed for some responsiveness to global financial trends. But with President Xi Jinping at the helm, the landscape has changed.
Xi Jinping has now deeply integrated the stock market into the state’s strategic goals. This has not only increased the importance of government guidelines, but has also significantly widened the gap between state policy and market expectations.
Support for state-owned enterprises
The first Chinese securities house began trading stocks in 1869. On the eve of World War II, the Shanghai Stock Exchange had become one of the largest in the world. However, after the founding of the People’s Republic of China in 1949, the government ordered the closure of the stock exchange.
The reforms eventually led to the revival of the stock market. From the beginning, the authorities tasked the securities market with financing state-owned enterprises. This made the securities market in China a financing tool, unlike mature market economies that are mainly driven by investment. This initial focus on financing led to several inherent deficiencies of the Chinese market.
The peculiarities of stock trading in China
The way supply and demand are formed in the Chinese stock market is unique. The total number of listed companies is strictly controlled by the government. These companies are selected by brokerage firms and expert panels, rather than by market dynamics.
The market is segmented into state-owned shares, corporate shares, private shares and foreign shares. State-owned and corporate shares, which account for 65 percent of all shares, cannot be listed or transferred. China Securities Regulatory Commission (CSRC) guidelines state that shareholders’ rights and obligations depend on the type of shares they hold, legitimizing different prices and rights for the same shares. This fragmentation significantly reduces market efficiency.
Facts & Figures
Shanghai Composite Index, 2023-2024
Stock markets before and after Xi Jinping
The development of China’s stock market can be divided into two distinct eras, with President Xi’s coming to power representing the turning point. In the earlier period, increased involvement of financial institutions and the growing sophistication of individual investors contributed to the restructuring and partial privatization of state-owned enterprises and accelerated the listing of new companies. During this period, the stock market played a positive role in promoting China’s transition to a market economy – although admittedly, opacity and behind-the-scenes practices were widespread.
When Xi Jinping came to power in 2013, the Chinese Communist Party (CCP) began to tighten its control over Chinese companies. Companies with significant global assets such as Anbang, Dalian Wanda, Fosun, HNA, Huarong Asset Management and Alibaba’s Ant Financial faced liquidation, divestment, nationalization or were pressured to sell their assets.
Under President Xi, a new “top-down national system” was introduced, particularly in the post-pandemic era, to accelerate technological progress in strategic sectors through centralized leadership. To achieve this, the CCP plans to list companies in industries such as semiconductor manufacturing, biotechnology and electric vehicles. The Chinese government has therefore been reluctant to allow large technology companies to list on U.S. exchanges because doing so would subject them to U.S. laws and independent audits.
Chinese leaders know that the country needs both foreign and domestic investment to compete with American technology. While foreign investors traditionally invested in offshore stocks of Chinese companies, they can now invest directly in Chinese stocks, bonds and futures on the domestic market.
Rescue package without lasting changes
The Chinese stock market has had a weak performance since the end of 2021, losing around $6 trillion in value. In February 2024, the Chinese government intervened to support stock prices. Yi Huiman, the country’s top market regulator, was abruptly fired and served as a scapegoat for the stock market’s ongoing decline.
However, the authorities have failed to address the root cause of the collapse in confidence. Shareholders have lost faith in China’s growth prospects and in the government’s willingness to develop a comprehensive policy agenda to address major problems. The lack of a solid stimulus package to stabilize and reduce financial risks, as well as the strict zero-COVID policy, have contributed to this decline.
More from Junhua Zhang
Escalating tensions between the US and China have also hurt China’s economic growth. Competition has expanded from technology to trade and finance, with the Biden administration imposing restrictions on certain US investments in China. As a result, major pension and endowment funds of the US and its allies have reduced their investments in China to avoid political risks.
Although the market has since recovered, the February bailout package did not resolve fundamental issues. For example, the CSRC implemented a controversial solution by restricting real-time trading data. This lack of transparency led many investors to assume the worst and preemptively sell stocks, further undermining market confidence and stability.
Scenarios
Most likely: More active but still unstable stock market
The coming decade is expected to see significant changes in the world’s major stock markets. The US saw a remarkable rise of 152 percent, India an impressive 227 percent, Japan 111 percent and Germany 81 percent. Taiwan’s stock market continues its upward trend, while China’s A-shares have suffered a 20 percent decline. However, this downturn suggests that China’s A-shares have significant growth potential in the future.
Currently, 60 percent of household wealth in China is invested in real estate, while only about 5 percent is invested in stocks. If there is a prolonged downturn in the real estate market, this could lead to wealth transfers and stimulate a more active stock market.
The reality of China’s stock market is complex. Multiple levels of government, from the central government to various local levels, influence market activities. This makes standard tools for evaluation or performance difficult, as earnings, book values of assets and market prices can be manipulated. Today, even state-owned enterprises engage in such practices.
The political landscape further adds to the uncertainty. The CSRC has announced it will increase penalties for fraudulent IPOs, accounting fraud and embezzlement of funds by major shareholders. But due to the CCP’s extensive control and the lack of independent legal oversight, problems such as a lack of transparency and insider trading are likely to persist.
The Xi administration views the market as an auxiliary tool rather than a driving force or regulatory factor. Today’s CCP leadership is more confident in implementing its own industrial policies compared to its predecessors. As a result, China’s stock market will continue to serve as a source of additional financing for industries selected by the leadership. This means that it will remain miles away from Western-style stock markets, where performance and market value determine a stock’s fate.
For industry-specific scenarios and tailored geopolitical information, contact us and provide you with more detailed information about our consulting services.
Sign up for our newsletter
Get insights from our experts in your inbox every week.
