What Does China’s Stock Market Need to Rally?
The Chinese A-share market has been on a downward spiral since the Shanghai Composite Index peaked at 3,723 points just before the Lunar New Year in 2021. Now, the index struggles to hold above 3,000 points, leaving investors—both individual and institutional—anxiously awaiting signs of a new bull market.
So, what conditions are necessary for the A-share market to stage a comeback? To begin with, one critical aspect is government policy. Bull markets typically require favorable policies; without them, stock markets seldom experience sustained ralliesOver the past year, it seems that the policies enacted have favored bullish momentum, including reducing transaction stamp duties, significantly slowing the pace of new IPOs and refinancing, regulating major shareholders' selling behavior, halting certain types of trading, and increasing the costs of quantitative trading. While these measures have been welcomed by investors, the stock market remains stagnant, which suggests that other factors are at play beyond mere policy initiatives.
Another key element is the fundamental performance of the companies listed on the exchangeThe speed of economic recovery has not matched expectations, resulting in unimpressive earnings growth for many companiesIn 2023, profits and revenues of listed companies have been largely flat compared to 2022. For instance, in the first quarter of 2023, revenue decreased by 1.15%, and net profit fell by 4.29%. As of now, the mid-year results for 2023 have yet to be fully released, leaving the overall performance still under scrutinyEven though the current earnings do not provide robust support for a bull market, the prevailing low valuations suggest that there may not be a substantial decline in the index either.
Lastly, and perhaps most critically, is the issue of capital influx. Sustained rises in the stock market require a continuous inflow of new capital, which is currently lacking in the A-share market
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New capital can derive from several key sources: first, the so-called "national team", which has been a crucial support force since the beginning of this year, with entities like Central Huijin increasing their stakes in broad-based ETFsThis alone has led to an influx of several hundred billion yuanSecond, foreign investments initially injected some momentum but have recently turned into outflowsThird, industry capital, including company buybacks and shareholder purchases, has been relatively smallLastly, individual investors have shown a trend of capital withdrawal this yearConsequently, due to the lack of new capital, the market finds itself struggling not just to rally but even to maintain the elusive 3,000-point threshold.
Where is the fresh capital?
Many investors are pinning their hopes on the government potentially introducing a stabilization fund to support the stock marketHowever, it appears that the buzz around this idea has not translated into concrete actionFor such a fund to materialize, the government would likely need to issue special treasury bonds designed explicitly for stock market investments; otherwise, the question remains, where would the funds come from?
Some speculate that a potential interest rate cut by the Federal Reserve might redirect dollars back into the A-share and Hong Kong marketsWhile this scenario is plausible, it is equally possible that funds will flow elsewhere, especially given the U.S.'s perception of China as a significant competitorThis may explain why global markets, in a trend of overall gains, see the A-share market lagging behind and even declining.
Moreover, industry capital has its constraints, with limited self-owned funds making substantial buybacks or increases in shareholdings highly unlikely
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Unlike the robust buyback rallies seen in the U.S. market, such phenomena appear far-fetched in China.
The most viable source of new capital is likely the average citizenChina boasts the highest savings rate globally, which implies that many households generate a significant amount of surplus funds each yearThis surplus inevitably finds its way into investments, making it a crucial source of new capital for markets.
For instance, in 2023, the average disposable income per capita in China is 39,218 yuan, with average consumer spending at 26,796 yuan. This means that the average household has a surplus of 12,422 yuan (39,218 - 26,796). Given a rough estimate of the population at 1.4 billion, China's overall household surplus would amount to 173.9 trillion yuan.
These unspent funds certainly need to be investedThe Chinese investment landscape generally divides into four categories: bank savings, bonds (such as money market funds, bank wealth management products, government bonds, bond funds, and savings-type insurance), real estate, and stocks (including equity funds).
In 2023, the new savings amount to 166.7 trillion yuan, covering the majority of these savingsWhen excluding bank deposits, the net influx into bond and real estate markets, as well as stocks, was only 72.08 billion yuan. Hence, it's reasonable to conclude that neither the stock market nor the real estate market could perform well this year.
The situation was even more dire in 2022, where not only did we face the pandemic challenge, but also experienced stock market declines, the peak and consequent decline of the real estate market, and a bear market in bonds
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Statistics from that year suggest that the aggregate surplus of households was around 172.83 trillion yuan, with new deposits reaching 178.4 trillion yuan, exceeding the total surplus, suggesting that households not only refrained from investing any money but also withdrew around 55.66 billion yuan from various markets back into savings.
Looking back to the years between 2018 and 2021, households consistently allocated 31.4 trillion to 56.4 trillion yuan annually towards non-saving investments, which had typically ensured that one or more markets—be it stocks, bonds, or real estate—received capital infusions to drive prices higher.
For example, when the stock market was volatile in 2018, funds primarily flowed into real estateFrom 2019 to 2021, both stock and real estate markets attracted significant capital, leading to peak prices in both sectors by 2021.
In the first half of 2023, the average disposable income per capita reached 20,733 yuan, with consumer expenditures at 13,601 yuan and surplus at 7,132 yuan. With 1.4 billion people, the total surplus stands at 99.848 trillion yuan and new deposits at 92.7 trillion yuan. This left a remaining surplus of about 71.48 trillion yuan, similar to the annual amount in 2023, explaining the continued sluggishness in both stock and real estate markets during the first half of this year.
Additionally, the booming bond market has drawn capital away from both stocks and real estate, compounding the woes in these sectors.
When will new capital enter the market?
If these circumstances continue, it begs the question of how long the stock and real estate markets will remain distressed
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