Key points
- Poor performance of the Chinese stock market discourages consumer spending, contributing to high savings rates.
- Structural issues, prioritizing financing over investor returns, plague the market.
- Government pressure to boost domestic spending clashes with the need for capital for tech ambitions.
- Recent reforms show some progress but haven’t fundamentally changed the investor-unfriendly environment.
China’s persistently low consumer spending, a puzzle for both domestic and international economists, is deeply intertwined with the underperformance of its stock market. Despite a recent rally, major Chinese indexes remain near levels from a decade ago, following a significant market bubble burst.
This contrasts sharply with the robust growth of markets like the US S&P 500, where a $10,000 investment a decade ago would have more than tripled, compared to a meager $3,000 gain in China’s CSI 300. This underwhelming return on investment has pushed Chinese consumers towards saving rather than spending, contributing to the country’s extraordinarily high savings rate of 35% of disposable income.
The root of the problem lies in the structural design of China’s stock exchanges. Initially conceived 35 years ago to channel savings into infrastructure development, the focus has remained skewed towards financing, neglecting the crucial aspect of delivering returns to investors. This has led to a myriad of issues, including an oversupply of shares, questionable post-listing practices, and a general lack of investor protection, all weighing heavily on the $11 trillion market.
The conflicting priorities of the Chinese government further complicate the situation. President Xi Jinping is pushing for increased domestic consumption to meet economic growth targets, yet simultaneously needs the market to provide capital for ambitious technology development, even if profitability remains uncertain.
Experts like Liu Jipeng, a securities veteran, describe the market as a “paradise for financiers and a hell for investors,” highlighting the inherent bias towards financing over investor protection. Despite recent policy pronouncements emphasizing the importance of the stock market for wealth creation and pledges to “stabilize” the market, tangible improvements remain limited.
While initiatives like increased dividends and stricter IPO screening have been implemented, they haven’t fundamentally addressed the core issue of prioritizing investor returns. The recent increase in listings of unprofitable tech companies, while crucial for national technological ambitions, further fuels concerns that investor protection is being subordinated to funding needs.
The ongoing challenge underscores the complex interplay between economic policy, market regulation, and consumer behavior in China. Until the structural issues are comprehensively addressed and investor confidence is restored, the high savings rate and muted consumer spending are likely to persist, creating significant economic headwinds for China.
