China’s stock market experienced significant fluctuations before and after the National Day holiday. Experts believe that the sharp rise in the stock market driven by the Chinese Communist Party (CCP) authorities is aimed at bolstering Party leader Xi Jinping’s position of power amid concerns of potential internal power struggles and a risk of being ousted in the face of economic crisis.
In late September, bolstered by an injection of 800 billion yuan from the People’s Bank of China, the stock market saw a rapid surge. However, following the failure of anticipated incremental monetary stimulus policy announced by the National Development and Reform Commission, on October 9th, the A-share market’s three major indexes opened significantly lower, with the Shanghai Composite Index plummeting nearly 7% and eventually falling below 3300 points, while the ChiNext Index dropped more than 10%, causing distress among investors.
The People’s Bank of China disclosed today (October 10th) its decision to establish a “convenient interchange for securities, fund, and insurance companies,” accepting applications effective immediately with the initial operation scale set at 500 billion yuan, aimed at encouraging institutional investment in the stock market. This policy was proposed in late September but was implemented following the sharp decline in the stock market the previous day and announced just before the market opening today.
In the morning session today, the Shanghai Composite Index rallied by nearly 3%, briefly breaching the 3300-point mark and reaching above 3350 points, only to decline in the afternoon.
Professor Sun Guoxiang from the Department of International Affairs and Business at South China University commented to Dajiyuan that the recent round of stimulus economic policies by the authorities seems to have not achieved the expected outcomes. The exodus of major capital may be one of the contributing factors. Large funds have access to more market information and resources, enabling them to swiftly withdraw capital before market fluctuations.
Chinese media reported that from September 24th to October 8th, as the Chinese stock market surged, over 100 listed companies announced a reduction in shareholdings, with as many as 57 companies doing so from October 1st to 8th.
On the other hand, in recent days, many investors have observed low credit loan rates and sought to raise funds to invest in the stock market. Yesterday, it was suspected that an investor used high leverage, investing 50 million yuan in stocks, leading to liquidation and subsequent suicide. However, the authorities have labeled this news as a “rumor.”
Both the CCP authorities and banks issued warnings yesterday, strictly prohibiting illegal stock speculation using loans and reclaiming loans upon detection. However, banks acknowledged the practical difficulties in prevention.
Professor Sun Guoxiang remarked that with the losses incurred by many young investors and those speculating with loans, societal discontent may escalate. “Speculating with loans is undoubtedly one of the biggest risks. Once the stock market fails to stabilize effectively, highly leveraged investors will face greater financial risks, potentially leading to a large-scale financial crisis.”
A seasoned Chinese capital market professional, Xu Zhen, told Dajiyuan that one of the reasons behind the sharp drop in the market on the 9th may be attributed to the profit-taking stage by investors who had been holding onto their positions for some time, along with substantial sell-offs driven by small to medium-sized shareholders of listed companies and institutional investors aiming for short-term gains. He estimated that the market will consolidate within the range of 3200 to 3600 points for some time, advising individual investors against leveraged stock trading within this range.
“The fleeting glory of the stock market, continued economic stagnation, and perhaps laying low and saving expenses instead of engaging in stock trading may be the safest lifestyle for the common folk,” he remarked.
Regarding the People’s Bank of China’s initiative to promote the interchange among securities, funds, and insurance companies to encourage leveraged stock trading by institutions, Professor Sun Guoxiang expressed that while these measures theoretically aim to inject liquidity into the market, reduce corporate financing costs, and stimulate reinvestment by investors, the poor market response indicates deeper-seated confidence crises and structural economic issues such as insufficient consumer demand, a real estate crisis, and declining corporate profits that cannot be easily resolved by short-term policies.
Following press conferences held successively by the People’s Bank of China and the National Development and Reform Commission, the authorities yesterday notified that Finance Minister Lou Fuan will attend a press conference on the 12th of this month at 10 a.m., introducing measures to enhance the countercyclical strength of fiscal policies.
Chinese affairs expert Wang He told Dajiyuan that the CCP authorities aim to stabilize the situation and pacify various sectors, but given the current financial constraints, they cannot inject 40 trillion as in 2008 to rescue the market. The current policy space is already quite narrow. “With the stock market at 3300 points now and no substantial policies from the Ministry of Finance, the market is inevitably heading for a significant downturn.”
The stock market crash in 2015 was rumored to involve a financial coup linked to collusion between officials and business figures, leading to subsequent mass arrests by the authorities. Given Xi Jinping’s ongoing crackdown on the financial sector in recent years, there are speculations that the recent market slump might be related to dissatisfaction and resistance from senior figures within the financial sector.
Professor Sun Guoxiang noted that there is currently no concrete evidence to prove that the market turmoil is a result of a “financial coup” or political resistance but is more likely sparked by the authorities’ stimulation policies that contradict economic principles, compounded by internal structural issues within the financial market.
Wang He stated that Xi Jinping has been rigorously tightening the financial system since 2021, making it less likely for a repeat of the 2015 financial coup. The recent surge in the stock market, driven by policy maneuvers, reflects a mix of government policy incentives and irrational capital-raising impulsions within society.
There are opinions suggesting that Xi Jinping, who has personally triggered another bull market driven by stimulus measures, has virtually no way out and faces the risk of abdication in case of failure.
Wang He told Dajiyuan that currently, the Xi administration’s governance in political, economic, and social aspects is in a state of chaos, facing an unprecedented predicament. Particularly, the intense internal struggles within the CCP, including pressure from party elders, as well as the fierce power struggles between central and local authorities, are causing significant instability in Xi Jinping’s power structure. To reverse this situation, Xi Jinping must stabilize the economy, hence the authorities’ push for a surge in the stock market with no retreat available.
“However, his main pressure lies in whether the economic turmoil will trigger a coup or internal strife. While economic shocks are severe, it is the political struggles that will ultimately be decisive.”
Professor Sun Guoxiang also mentioned that China’s economic performance has always been a critical pillar for the CCP regime’s legitimacy. If the economy falters, it could be perceived as a result of Xi’s policy errors. However, whether this will lead to abdication depends on changes in the internal power structure of the CCP.
Xu Zhen remarked that the CCP authorities hope to rescue the economy, consumption, and local debts through a rising stock market, though this wishful thinking may eventually spark a financial crisis. “A financial crisis will inevitably lead to a social crisis, and when the public’s grievances converge on the CCP, just as in a bloodless revolution, a political crisis for the CCP is imminent.”