Is the long-term recovery of China's stock market stable and sustainable?
China is taking decisive action to sustain economic growth and counter deflationary pressures in its equity market. In a move to address irrational price competition, the Central Commission for Finance and Economic Affairs has called for the need to curb such competition, particularly in the EV industry, which has been pledged to be regulated by the State Council.
In May 2025, the People’s Bank of China (PBOC) introduced a 10-point monetary policy liquidity package, injecting ¥1 trillion into the economy. This package includes a 0.5 percentage point cut in the reserve requirement ratio (RRR), a 0.1 percentage point cut in the 7-day reverse repo rate, and targeted refinancing facilities for technology firms and small-to-medium enterprises (SMEs). These measures aim to stabilize markets and promote innovation-driven growth, lowering borrowing costs and boosting sectors aligned with policy goals like AI, semiconductors, and rural development.
To address deflation and irrational competition, Beijing has taken steps since July 2025 to curb price wars and reduce overcapacity in industries such as solar panels, steel, and electric vehicles. Measures include industry agreements to cut production by 30% and regulatory campaigns against unrealistic price competition, aiming to lift profit margins and stabilize market pricing.
The Chinese government is also planning to develop humanoid robots for elderly care and accelerating the upgrade of elderly care goods and health care services to stimulate consumption of the "silver hair" segment. Retirees could be incentivized to shift to lower-tiered cities or rural areas with lower costs of living and better living conditions, and unoccupied housing projects in lower-tiered cities could be turned into social housing developments for older adults.
To boost domestic demand and investment, the Ministry of Finance issued plans for 2 trillion yuan of ultra-long-term special sovereign bonds to fund local government investments, complementing fiscal stimulus and supporting private sector growth, particularly outside manufacturing. Additional reforms encourage foreign-invested enterprises to reinvest profits in China via tax benefits, faster approvals, and financing support, aiming to stabilize foreign direct investment and enhance capital inflows critical for sustained growth.
These measures are designed to reorient China’s growth model from quantity to quality by rescuing over-leveraged sectors (like real estate), rationalizing capacity, reducing deflationary pressures, and supporting innovation-led industries. Early results include significant gains in equity indices like MSCI China (+21.3% after May 2025) and a narrowing valuation gap with global peers, suggesting improved market fundamentals and investor optimism.
Despite the equity market rebound, China equities have registered a net fund outflow this year, indicating global investors' lack of high conviction in China equities. The Chinese economy is showing early signs of improvement, with stronger-than-expected retail sales in May. However, there is a risk that retail sales growth could decelerate without incremental stimulus. Subsidized trade-in consumption programs launched last year, which contributed to strong retail sales in the first half, will likely lose steam in the coming months. Affordable housing projects could be developed in the outskirts of top-tiered cities to attract younger, educated migrants.
US-China tensions have eased, but tariffs on Chinese imports have increased, and excess manufacturing capacity could sustain deflation. China's equities are at the cusp of a turnaround, with earnings expectations bottoming and valuations ticking up. Despite the challenges, China's proactive policy measures are expected to support the economy and foster a more sustainable and innovative growth path.
References:
- Bloomberg
- Reuters
- Caixin Global
- South China Morning Post
- Wall Street Journal
- Recognizing the need for investment in innovative sectors, the People's Bank of China (PBOC) has announced targeted refinancing facilities for technology firms and small-to-medium enterprises (SMEs), as part of a 10-point monetary policy liquidity package.
- To stimulate consumption in the "silver hair" segment, the Chinese government is planning to develop humanoid robots for elderly care and accelerate the upgrade of elderly care goods and health care services, potentially incentivizing retirees to shift to lower-tier cities or rural areas.
