The recent surge in Chinese stocks, marked by an 8.48% rise in the CSI 300 on September 30, 2024, presents a pivotal moment in China’s growth strategy—one that has likely been misunderstood or overlooked by many in the West.
The CSI 300’s rally, led by healthcare and tech stocks, represents the most significant day of trading in 16 years, closing at 4,017.85. Concurrently, Hong Kong’s Hang Seng index rose 3.09%, with consumer stocks driving the growth, while the Hang Seng Mainland Properties Index soared 8.11%. These numbers, though striking, only begin to tell the story of a more profound strategic shift in Beijing’s financial policy—a shift from reliance on property markets to a focus on the capital markets.
A key factor that seems to have eluded many on Wall Street is the strategic nature of this move. While some have framed this surge as a short-term response to recent stimulus measures, like the Wall Street Journal asking, “Will China’s surprise stimulus work?” on September 29, 2024, Beijing’s actions are far from tactical. Rather, this marks a long-term repositioning of the country’s economic growth strategy away from property markets toward leveraging the capital markets.
The core of Beijing’s strategy lies in the measures announced on September 24th by Mr. Pan, Managing Director of the People’s Bank of China (PBoC). Under this new policy, all qualified listed companies on Chinese stock exchanges will have access to unlimited funding from the PBoC to conduct share buybacks, using their own shares as collateral. This effectively establishes a sustainable price floor for stocks, defined by major or controlling shareholders, including funds and equity trading companies. The central bank is now poised to accumulate shares at low valuations, with the expectation of reselling them at higher prices once the market rebounds. The proceeds from these gains could subsequently be funnelled into central and local government budgets. (Source)
The implications of this new strategy are significant. Beijing is positioning itself to tap into the huge pool of RMB 297 trillion in resident savings by August 2024 to fuel stock market growth. (Source: Peoples Bank of China, Sept 13th, 2024) The aim is not only to boost consumption and investment in the short term, but also to provide a sustainable source of funding for key industries, from electric vehicles to renewable energy. With the housing property sector’s contribution to GDP falling from 27% before the crisis to less than 18% today, Beijing is proactively and finally shifting its focus to capital markets to ensure continued economic growth.
The scale of this ambition cannot be overstated. By encouraging domestic investors to channel their savings into the stock market, Beijing aims to replicate, if not surpass, the success of Western capital markets. By way of comparison, the US stock market was valued at USD 55.2 trillion in July 2024, roughly twice the size of US GDP in 2023. In contrast, China’s stock market is valued at RMB 85 trillion in September 2024, which is only 67% of its GDP 2023. (Source) In addition, the US Federal Reserve’s pre-taper balance sheet reached a peak of USD 9 trillion, and current money market funds in America total USD 6.4 trillion. (Source) Taken together, this is less than 30% of the size of the US stock market. Meanwhile, China’s household savings alone are more than three times the size of its stock market, highlighting the immense untapped potential.
This strategic pivot is designed to be more than a reactive stimulus. Drawing comparisons to the Federal Reserve’s previous balance sheet expansions, the People’s Bank of China has outlined a comprehensive plan to provide liquidity not only through direct intervention, but also by involving the RMB 30 trillion insurance sector to further support equity investment if necessary.
The big question remains: How far can China’s stock market go? Even before the latest measures, Chinese equities were trading at just over 10 times estimated earnings for the next 12 months – a significant discount to the S&P 500, where the price-to-earnings ratio is over 20. Insiders including relevant decision makers are already forecasting a doubling of the CSI 300, which seems not only plausible but likely in coming months. (Source)
Beijing’s policymakers appear to be well aware of the global context in which they operate. For example, the fact that OPEN AI, with a valuation of $150 billion, is forecasting a loss of $5 billion on revenues of $3.7 billion this year, only underlines the potential for Chinese champions in sectors such as electric vehicles and renewable energy to command valuations on a par with their American counterparts. (Source)
In conclusion, this strategic shift from housing to capital markets in China represents a new era of economic growth that is likely to have a profound impact on global capital flows. While time will tell the full impact, the stage is set for China’s stock market to experience unprecedented growth, fuelled by the immense domestic savings base and robust government support. It is now up to global investors to recognise the full extent of this transformation.