Taking a strategic, structured approach to the development of its capital markets now matters more to China than ever before. Its legacy growth model has reached its limits. For many years, China’s growth was driven by industrial expansion, property development, and a bank-centric financial sector. Under that legacy model, China’s stock market has remained anaemic, volatile and often disconnected from the country’s stellar, sustained economic growth.
For long periods, China’s stock market performance is nowhere near as strong as its robust GDP growth would suggest, and the correlation between the two is unusually weak compared with other major economies.
Of A-shares, ADRs, and property
While China’s A-share market did not reflect China’s dynamic growth between 2000 and 2018, Chinese firms’ American Depositary Receipts (ADRs) did, as illustrated in Chart 1.
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The lion’s share of Chinese household wealth has been concentrated in bank deposits and property, which can no longer absorb as much Chinese household wealth as it used to. This overallocation to real estate contributed to the underdevelopment of a broad range of quality financial assets. Policymakers now want part of that savings pool to move toward equities, mutual funds, pensions, and insurance products.
Too much household wealth is tied to the property sector. If confidence in the equity market improves, a larger portion of this capital can be redirected into financial assets that support both household wealth accumulation and national industrial development.
A more balanced capital allocation means less money trapped in empty apartments and low-yielding deposits, while a stronger stock market can have a positive wealth effect, which may boost household confidence and spur consumption.
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Geopolitical pressure is pushing financial self-reliance
As US-China rivalry intensifies, Beijing increasingly sees its financial sector as a strategic vulnerability. Just as China reduced its dependence on other nations in trade and manufacturing, it now wants to reduce dependence on Wall Street listings, Western financing channels, and external capital-market pressure points.
China is already an industrial powerhouse, and it has now set its sights on becoming a global financial powerhouse. The next 20 years may involve for Chinese finance what the previous 20 years involved for its industry: a state-guided but market-based system designed to strengthen national development.
This is not a standalone stock-market reform. It is a national development strategy with three inter-connected goals:
Economic Rebalancing — shift savings away from property and toward productive financial assets
Financing Technology — funding innovation, advanced manufacturing, AI, chips, and other strategic industries
Financial Sovereignty — build a deeper and sophisticated domestic capital market
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Harnessing a slow bull
It is not in the interest of all stakeholders to have frenzied, speculative markets time and again, followed by crashes. Policymakers want markets characterised by steady appreciation, better total shareholder returns, more stable income generation, lower volatility, and sustained long-term investor confidence. In short, the government wants the stock market to evolve from a “speculative casino” into a reliable and credible platform for wealth creation and capital allocation.
Standing in the way of China’s ambition for its capital markets is the fact that retail investors still dominate turnover, while foreign and institutional participation remains low. Often, the stock market is driven by stories, rumours and retail sentiment. The China Securities Regulatory Commission (CSRC), under chairman Wu Qing, has taken many measures to address these issues.
To this end, several policy levers are already being used or emphasised, with authorities encouraging listed companies to improve shareholder returns through larger dividend payouts and share buybacks. The aim is to build confidence among China’s households that equities are reliable income-generating assets, rather than purely speculative, casino wannabes.
The CSRC is addressing the issues that have eroded confidence in China’s stock market, such as sub-par listings driven by connections to powerful figures, corruption, poor disclosures, insider trading and weak protection for minority shareholders. The state is also encouraging the development of larger, more capable brokers and financial intermediaries, with the long-term ambition of creating Chinese firms that can play roles comparable to the major global investment banks.
On the global stage, Hong Kong remains essential for China because it offers features the mainland does not fully replicate, like a convertible currency, legal protection familiar to foreigners, access to international capital and a valuable IPO platform for Chinese firms.
China’s emergent financial sector model includes Hong Kong — that is, mainland China plus Hong Kong.
The trinity of finance, technology and industrial policy
China’s capital-market reform should be seen as being closely tied to industrial strategy. Beijing plans for the stock market to be a market mechanism by which it can finance high-tech firms, support industrial upgrading, reduce its dependence on Western technology as well as finance, and channel capital into sectors targeted for development under its five-year plans.
This new vision is timely: after having built an immensely successful manufacturing ecosystem in the last 30 years, China believes resources must now shift to its financial system.
The success of this strategic shift is by no means guaranteed. The key challenge is whether China can build a rule-based, rigorous, sophisticated and confidence-inspiring financial system for both foreign and domestic investors.
Investment implications
There are several likely beneficiaries if Beijing is committed to this goal of building a financial powerhouse — brokers, investment banks, stock exchanges (especially Hong Kong), life insurers, asset managers, selected financial institutions aligned with the deepening of capital markets, and firms linked to sectors favoured by Beijing and its five-year-plan priorities.
If policy support for financial-system strengthening is sustained, the financial sector could become a major medium-term beneficiary of China’s next development phase.
Conclusion
China’s next ambitious national development strategy is to build a financial system, including capital markets, that can simultaneously achieve the following goals:
Supporting national development while funding technological innovation
Giving households a more attractive long-term investment alternative to property
Strengthening financial autonomy
The “slow bull strategy” is therefore not merely about stock prices. It is about whether China can replicate in finance what it has already achieved in industry: a system where state direction and market participation are combined to serve long-term strategic goals. Its ultimate success will depend on regulations and their enforcement, improving governance, building strong and robust financial firms, creating sophisticated financial products, increasing investor education and strengthening risk management, amongst others. It remains to be seen if China can eventually build a robust and sophisticated financial ecosystem on a par with its industrial ecosystem.
Tan Kong Yam is a founding member and Chairman (China) of APS Asset Management
