China’s historically high savings had traditionally been channelled into the property sector, fuelling rampant speculation, overinvestment in real estate, and diminished productivity. When the property bubble burst in 2022, it triggered a prolonged economic slump.
To avoid repeating this cycle, the Chinese leadership under President Xi Jinping has decided that these savings should be redirected toward reformed and well-regulated domestic stock markets, modelled after those in the US. It is seen as essential for China to transform its speculative stock market into a primary funding source for both industrial upgrading and the development of an advanced manufacturing sector. “Patient capital” is viewed as critical for this national endeavour, where domestic institutional asset owners and asset management firms will help drive China’s long-term industrial growth and economic transformation.
China’s economy and social compact are undergoing profound transformations under Xi’s leadership. The country has pivoted from a growth model reliant on speculative real estate investments to one focused on a sustainable, innovative, high-tech economy.
Central to this shift is the reformation of China’s stock market to channel its substantial savings into advanced manufacturing and technological innovation, fostering “patient capital” and public-private collaboration.
Xi realises that China has to squarely address structural challenges such as an ageing population, demographic pressures, and the need for greater economic resilience while positioning China as a global leader in critical industries like electric vehicles (EVs), renewable energy, quantum computing and AI.
See also: China’s Two Sessions set development directions
Through a blend of regulatory reform and market-driven competition, Xi’s vision aspires to redefine China’s economic trajectory, securing long-term national prosperity and strategic leadership in a bipolar world.
Beyond real estate developers, diverse and substantial vested interests are deeply entrenched in China’s property market. These include local governments’ lop-sided reliance on land sale revenues, as well as banks that extend loans to homebuyers, thereby sustaining middle-class wealth creation and supporting industries across the entire value chain. Additionally, there are the vested interests of government officials, though this has diminished over the years due to Xi’s decade-long anti-corruption campaign.
Xi is redefining China’s social contract to align with his vision of self-sufficiency, technological advancement and national security. This marks a strategic shift from the country’s historically investment-led growth model. Previously, China’s political and social contract centred on this tacit agreement: economic growth and rising prosperity in exchange for political stability.
See also: Chinese stocks rise on ambitious growth target, tech support
In the current geopolitical context, Xi’s vision emphasises self-reliance, national pride, national security, and stable long-term growth. It pivots toward an economic model grounded in patient capital, robust public-private collaboration, and a commitment to sustainable growth. Rather than pursuing unsustainable, rapid, unfettered growth, the focus is now on fostering a technologically advanced, self-sufficient economy capable of withstanding external pressures and, at the same time, meeting China’s strategic goals.
Public-private synergies
At the heart of Xi’s strategy lies an economic framework that fosters collaboration between the public and private sectors in achieving state-defined objectives. Industry-specific consortia integrate private enterprises, state-owned companies, and research institutions to address shared goals in areas critical to China’s strategic priorities.
It has, for instance, yielded remarkable success in renewable energy, where Chinese firms have become global leaders in EVs, solar panels, and batteries. Such public-private synergy epitomises China’s broader strategy of harnessing private-sector innovation within the framework of state-guided priorities, nurturing and building tomorrow’s promising industries.
Xi’s emphasis on “High-Quality Development” underscores this vision. He used the term 128 times in 2023 alone, nearly doubling its mention compared to the previous five years — a period that already saw a fivefold increase from 2017. This analysis of his speeches, written works, and meeting summaries reflects the centrality of this slogan in his economic agenda.
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Unleashing the Crouching Tiger
Under its traditional industrial policy model, the government selected a handful of state-owned “tigers” within its economic “zoo”, feeding them generously with resources and subsidies. Over time, these tigers became bloated and uncompetitive.
In contrast, the current approach involves nurturing hundreds of tigers, providing initial support but eventually compelling them to compete fiercely. As the competition intensifies, the supply of resources is steadily reduced, ensuring only the strongest and most innovative tigers endure. This shift is exemplified by the significant decline in subsidies per EV in China since 2020, reflecting the emphasis on fostering a resilient and competitive industry.
In the final leg of this Darwinian framework, the surviving “ferocious tigers” would be unleashed onto the global market, poised to compete in the worldwide marketplace. Much like Silicon Valley, where failed companies release technical expertise and talent into the ecosystem, this process enriches the surviving firms, fostering innovation and growth through Schumpeterian creative destruction.
This model has already proven successful in the EV industry. Without a doubt, his approach will be adopted in the most advanced manufacturing industries, forging and shaping a competitive and resilient industrial ecosystem.
Wedding state resources with private sector competition
China’s new development model, inspired by the “Silicon Valley approach,” emphasises fostering high-tech industries through targeted policy support for private enterprises and public-private partnerships. Crucially, this model compels companies to engage in fierce competition within China’s vast and rapidly evolving domestic market. Over time, only a select few emerge as winners, earning Beijing’s backing to become domestic champions and prepare for global expansion.
The transformation of China’s EV industry illustrates this approach. In 2019, China had over 500 registered EV companies; today, that number has dwindled to about 50 and will further reduce to about 10 surviving players. Unlike the traditional industrial policy of selecting and nurturing winners, this strategy draws lessons from Silicon Valley’s success, adapting its principles to China’s unique context. By combining state resources with the competitive dynamism of the private sector, China has created a powerful model for driving high-value industrial growth and global competitiveness.
China has a huge domestic market, a vast pool of engineering talents, and ample financial resources. The government firmly believes that nurturing and growing competitive winners through this method is superior.
Multi-domain Sino-US tech race
Between 2025 and 2050, US-China technological competition will centre on critical technologies that define economic strength, military capabilities, and geopolitical influence. This strategic contest spans not just these transformative domains, including AI, semiconductors, and quantum computing, but also 5G and 6G communications, biotechnology, and genomics. It also extends to autonomous systems such as drones, self-driving vehicles, and robotics, alongside advanced energy innovations like renewable energy, nuclear fusion, and energy storage.
Additionally, the contest also extends to the sky and hyperspace, encompassing satellite technologies, space exploration, and the development of space infrastructure, underscoring the breadth and depth of this rivalry.
China has already achieved global leadership in key technologies, including telecommunications, drones, unmanned aerial vehicles, solar panels, graphene, high-speed rail, EVs and lithium batteries. It is also closing in on the global technological frontiers for drugs, machine tools, and robots.
Beijing embraces the stock market
Historically, China’s property market heretofore served as the primary vehicle for household wealth accumulation, drawing savings from hundreds of millions of citizens. However, this reliance on real estate led to speculative excesses and unsustainable debt. Recognising the limitations of this model, Xi seeks to provide households with a viable alternative, positioning the stock market as a key instrument for long-term wealth creation.
Discussions with policy advisors who recently briefed Beijing’s leadership on the financial sector reveal a strong consensus among decision-makers: the stock market can be instrumental in channelling long-term capital to advanced manufacturing and addressing structural challenges, such as the pension fund shortfall.
This strategic shift is underpinned by a comprehensive four-pronged plan to align the stock market’s role with its industrial policies.
Transitioning from real estate to equities as a store of household wealth presents significant challenges in a society where property symbolises family security and social status. Housing is tangible, provides a sense of permanence, and often serves as a marker of financial wealth in matters like marriage prospects — qualities that equities lack. Additionally, retail investors in China are prone to herd behaviour, increasing the risk of volatility and speculative bubbles. To mitigate these risks, Beijing has strengthened regulatory oversight, prioritising investor protection and promoting exchange-traded funds (ETFs) to encourage stable, diversified investment practices.
The announcements from the Third Plenum in July 2024, combined with Xi’s impassioned address in Hefei—where he rallied the financial market to “support science and tech breakthroughs” with the resounding call, “How many times can one strive for greatness?”—underscore Beijing’s resolve. The message is unambiguous: China intends to leverage its capital markets to propel strategic priorities in advanced manufacturing, high-tech industries, and green energy.
Xi’s vision centres on cultivating a slow and steady bull market designed to attract institutional investors such as pension funds, insurance companies, and sovereign wealth funds. These entities bring the “patient capital” essential for strategic sectors, where returns may take years or decades to materialise. Unlike retail investors, institutional capital offers stability and long-term perspectives, which are crucial for fostering growth in advanced industries.
Yet, institutional investment in China’s equity market remains limited. China’s pension funds, for instance, allocate only 10% to 20% of their portfolios to stocks, significantly lower than the 50% to 60% allocations typical in countries like Canada and Japan. To address this disparity, Beijing is exploring reforms aimed at creating investment vehicles that align with international standards while also reinvigorating interest in private equity and venture capital.
Xi’s strategy reflects a transformative shift in China’s economic philosophy. By repositioning the stock market as a cornerstone of wealth creation and innovation funding, Beijing aims to reduce reliance on real estate while fostering long-term, sustainable growth. This approach combines regulatory reform, institutional investment, and strategic cultivation of the stock market to channel capital into the industries that will shape China’s future prosperity. Through this framework, China is not merely adapting to changing domestic and global realities — it is actively reshaping its economic trajectory to achieve enduring technological and industrial leadership.
The critical task now is to reshape the narrative, moving beyond a period of sluggish investment flows and capital flight to reestablish China as an attractive destination for long-term capital. Xi views the stock market as a crucial tool for addressing China’s structural challenges, foremost among them the demographic crisis and the immense strain it places on the underfunded pension system.
Recent reforms have enabled China’s pension funds to allocate a larger share of their assets to equities, unlocking the potential for higher returns compared to traditional bonds and other fixed-income investments. This approach strengthens the pension system and injects long-term, stable capital into the stock market, enhancing its resilience during periods of uncertainty and volatility.
Historically, China’s pension funds have adhered to conservative investment strategies, favouring low-risk assets like government bonds. However, as liabilities grow, a more dynamic, return-seeking, and diversified approach has become germane.
Policy advisors privy to Beijing’s strategic considerations suggest that the government is exploring further easing restrictions on equity investments to boost returns and address the burgeoning pension shortfall. Additionally, they have proposed allowing China’s pension funds to invest in global markets, a move that would enhance diversification and help hedge against geopolitical and currency risks.
A cornerstone of Xi’s stock market strategy is the drive for corporate consolidation to create national champions. These champions, built on more profitable and sustainable business models, are intended to lead critical sectors aligned with state priorities, including green energy, advanced manufacturing, and technology. To support this vision, Beijing has enacted regulatory reforms designed to facilitate mergers and acquisitions, particularly within strategic industries, to ensure these sectors are robust and globally competitive.
This multifaceted strategy addresses pressing economic challenges and positions the stock market as a linchpin in China’s broader efforts to secure long-term financial stability, economic resilience, and strategic technological leadership.
Beijing’s geopolitical and domestic imperatives
The critical question investors must grapple with is this: Figuratively speaking, if a marathon runner, after 40 years of steady progress, suddenly collapses in pain, is it a temporary muscle cramp or a fatal heart attack? The answer lies in assessing whether the runner still has the physical energy and stamina to continue after a period of limping and complete the race. Or has he suffered a major cardiac infarction and will never compete in a marathon again?
China’s fiscal measures announced thus far represent significant first steps toward addressing the financial strains faced by local governments (LGs), banks, and real estate developers. For LGs, new policies allow for the issuance of special refinancing bonds to replace higher-interest off-balance-sheet debt with lower-interest government bonds. This debt restructuring reduces interest payments, freeing up resources to pay contractors and civil servants, improve public services, alleviate excessive taxation on private businesses, and make new capital investments.
For real estate developers, LGs are permitted to issue additional special bonds to purchase idle land plots or buy back excess housing inventory. If implemented effectively, this approach could act as a de facto bailout for distressed developers, depending on its scale and execution.
Meanwhile, the People’s Bank of China (PBOC) has reiterated its commitment to restoring inflation. Governor Pan Gongsheng has emphasised the central bank’s role in anchoring inflation expectations. These statements aim to instil confidence and stability in the market.
Large state-owned banks are set to receive capital injections from the Ministry of Finance through the issuance of special sovereign bonds. This will enhance their ability to expand loan portfolios without compromising capital adequacy ratios. Some of this expanded lending capacity will be directed toward purchasing newly issued central government as well as LG bonds.
However, the degree to which this recapitalisation will incentivise banks to align with Beijing’s broader economic initiatives and extend credit to various sectors remains uncertain.
China’s low central government debt provides a significant fiscal buffer, especially compared to debt levels in countries such as the UK, the US, France, Italy, and Japan. This financial headroom gives Beijing considerable flexibility in navigating its economic challenges and in implementing the necessary reforms to stabilise the economy and restore growth momentum.
The ultimate test will be whether these measures can enable China to recover from its current economic woes and continue its long-term upward trajectory, much like a marathon runner getting back on his feet after taking a tumble.
Tan Kong Yam, professor of economics at Nanyang Technological University, is a founding member and deputy chairman (China) of APS Asset Management
