Recently, the Chinese stock market has been skyrocketing under the stimulus policies implemented by the authorities. However, global investors are questioning how long the Chinese stock market can sustain this momentum. Analysts believe that under the harvesting mechanism of the Chinese Communist Party (CCP) elite, the Chinese stock market has essentially turned into a game of passing the buck, with a focus on who can run the fastest. Experts also point out that the design philosophy of the Chinese stock market is vastly different from that of Western countries.
After the National Day holiday, China’s A-shares resumed trading on the first day (October 8th) with an increase of over 10%. However, the Shanghai Composite Index and the Shenzhen Component Index fell to the daily low around 10:40 am, and the ChiNext Index hit its low point around 10:50 am, followed by a rebound but with fluctuating trends and narrowing gains.
One major reason for the narrowing gains was that the National Development and Reform Commission of the CCP did not announce a new economic stimulus plan as investors had anticipated during a press conference at 10 am, shaking investor confidence.
Some netizens commented that the rumored 800 yuan subsidy for the second child was not confirmed by the NDRC today, questioning why it is so difficult for the CCP to give money to the Chinese people.
American economist Davy J. Wong explained to the media that the Chinese stock market has been declining since 2017 and 2018. Firstly, Beijing believed that the financing function, deposit absorption, and investment functions of the stock market had been lost. Secondly, it was not conducive to Beijing’s intentions to use financial warfare to change the world. Thirdly, the debt problems of current state-owned enterprises, central enterprises, and listed companies are very serious, which requires a surge in the stock market to clear out inventory by distributing shares to individual investors.
“This kind of significant increase makes some funds believe that there are still investment prospects in the Chinese market and also shifts the domestic social contradictions, giving everyone hope.”
Professor Xie Tian of the University of South Carolina Aiken School of Business told the media that the massive stimulation by the CCP, with the government, securities firms, and media hyping up the market, has artificially inflated stock prices. In reality, this manipulation aims to draw money out of people’s savings and prop up the stock market. Simultaneously, it creates an illusion of a market surge during the National Day holiday in October.
“This is exactly the same approach as the stock market manipulation seen in the past. After artificially boosting prices, many people will inevitably be trapped inside again.”
Mr. Liang, who has long been following China’s political and economic developments, told the media that the government’s stock market speculation aims to use it as a trigger point, with accompanying policies. However, the policies announced on the 8th were not as significant as anticipated by many.
In recent years, more and more people have come to realize that the Chinese stock market is a place where investors are “harvested.” Amid the surge in the stock market, there are objective and calm voices warning of risks, and many institutions are also cautioning investors.
According to the Wall Street Journal, the Chinese stock market tends to fall into a painful collapse after a period of super prosperity. Since the introduction of the CSI 300 Index in 2005, there have been a total of five “super rebounds,” with the initial rebound recording the largest increase. The other four rebounds ended within 8 to 13 months.
In the past 20 years, the Chinese stock market has truly seen growth only for five years. Out of these five rebounds, only two were driven by domestic economic growth and rising corporate profits. The remaining three were driven by stimulus measures.
Nomura Holdings warned that investors should prepare for a decline following the largest surge in the Chinese stock market in 16 years, as the current economic foundation is much weaker than before the pandemic. The most pessimistic scenario is that the market frenzy could collapse after the surge, similar to what happened in 2015.
The website affiliated with the CCP’s NDRC has also started to signal risks: rapid surges in the stock market might lead to significant fluctuations.
Xie Tian stated that this surge is destined to collapse because the ultimate driving force behind stock market growth is company profits. However, the Chinese economy has not improved, investments are decreasing, the economy continues to slide, private enterprises are shrinking, and there is no driving force for rapid profit growth. In other words, there is no solid foundation or factor pushing the stock market higher.
“It’s difficult to say exactly when this collapse will happen. If many large investors pull out, it might happen in a short period, like one or two weeks; if it takes longer, it won’t exceed a few months, maybe two months, before the market collapses again.”
Davy J. Wong added that predicting the peak of the Chinese stock market is currently impossible and depends on when it reaches its preset target. Beijing’s stock market policy aims to allow local state-owned enterprises, state enterprises, and vested interest groups to profit from the stock market and sustain their operations in the coming years.
He believes that many Wall Street funds are gradually issuing new ETFs specifically for investing in the Chinese stock market. After their issuance, it may take 3 months for them to deploy their funds, so the policies should be maintained for about 4 to 6 months.
Renowned Chinese economist Hua Sheng suggested that the market could further increase by 10% to 20% currently, supported by policy, funds, and relatively low corporate valuations.
Mr. Liang analyzed that according to Hua Sheng, if it reaches 3700-4000, smart money should leave early to secure profits. However, if the expectation is more uniform, the market peak will shift forward. “Last week, there was already a surge of 10% to 20%, so after the market opens this week, there will definitely be some profit-taking. Many have already felt the risk and may start selling, but many people still want to get in.”
Mr. Liang believes that the recent surge driven by policy and emotions differs significantly from previous surges. Firstly, it took off suddenly, creating a daily surge unseen in over a decade without any accumulation. Secondly, everyone knows that it won’t last long and is discussing when to exit at the top.
“This has turned this surge into a pure game of passing the buck and running fast, and the crash might happen much earlier than anticipated, with the peak being much lower than expected.”
Davy J. Wong pointed out that a collapse in the Chinese stock market will be much worse than the property market crash. When property prices fall, many people exit the market. However, when have you seen Chinese stock investors exiting? The general public does not understand this because there are many stock market “Red Guards” in China who promote the idea that losses were due to personal greed, lack of technical understanding, or bad luck, but never teach people to exit stocks.
The CCP has traditionally focused on monetary policies to encourage people to invest in the real estate and stock markets rather than making structural reforms that can truly benefit the people and strengthen long-term growth potential. This stimulus model weakens the foundation for long-term growth and is bound to be ineffective.
Chairman Song Xiangqian of Jiahua Capital posted that there is no country in the world or any economic theory that can prove that relying on the wealth effect brought by boosting the stock market can effectively solve deflation and inadequate effective demand issues.
He wrote that if the stock market cannot act as a barometer for the economy, reflect the fundamental economic aspects, discover value, or allocate market resources effectively, then what is its value and significance? If the Chinese stock market is not linked to the fundamental economic indicators but solely correlates with policy, it rationalizes the speculative and gambling nature of the market, as well as the characteristics of bullish short-term and bearish long-term trends, with rapid rises and quick falls.
Mr. Liang stated that the Chinese stock market was initially created to finance state-owned enterprises, pumping money into these enterprises. This intention had significant flaws from the beginning. Over the years, various regulatory mechanisms have been weak, turning it into a place for institutions or major shareholders to make illicit gains.
Davy J. Wong argued that the Chinese stock market was originally designed as an arena for the privileged elite to circulate money, raise funds in a more affordable way, and expand their fortunes, rather than ensuring the protection of small and medium investors. Even in cases of financial fraud and market manipulation, fines imposed are reclaimed by the state, never returning to the individuals or investors who lost money.
He noted that information in the Chinese stock market is unequal, with many foreign investors having backstage negotiations, enabling their money to flow in and out, as well as access to more information. In trading, institutions often have priority over retail investors in placing orders, with quicker delivery times and access to more information about transaction conditions, even being able to anticipate price changes in advance. On the other hand, regular investors face delays, which could range from a few seconds to twenty seconds or more, making Chinese investors gamble in an imbalanced market.
Davy J. Wong added that the design philosophy of the Chinese stock market differs from that of Western countries. Its purpose is not to enable good companies to go public in a cost-effective manner, raise funds, and develop the economy for enterprise growth. Instead, it is geared towards channeling money from some investors back into the pockets of the privileged few.