Why is the Chinese Stock Market Surging ? Will it Keep Rising?

(Feat. China, Xi Jinping, Economic Growth, Real Estate Crisis, Government Stimulus and the U.S. 2024 Election)

The Chinese stock market is on fire, capturing the attention of investors worldwide. But what exactly is fueling this surge, and how long can it last? To understand the full story, we need to dive into the intricate forces at play behind the scenes. From political decisions to economic shifts, the journey to China’s current market boom is a complex one—let’s break it down and see where it’s headed next.

1. March 11, 2024 – China’s Two Sessions (annual political meetings) ended.

2. The Two Sessions refers to the concurrent two meetings of the Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC).

3. The CPPCC is attended by over 2,000 representatives from 34 sectors, including the Chinese Communist Party and various ethnic minorities.

4. The NPC brings together more than 3,000 representatives elected from provinces, autonomous regions, and directly administered cities.

5. In the 2024 Two Sessions, the Chinese Communist Party (CCP) set an economic growth target of around 5%.

6. This is much different from 2023.

7. In 2023, the key focus wasn’t economic growth but on solving the local government debt crisis.

8. However, with the collapse of real estate giants like Evergrande and Wanda, efforts to resolve local government debt in 2023 failed.

9. The real estate sector is at the heart of this issue.

10. More than one-third of local governments’ fiscal revenues come from selling land-use rights.

11. In China, all land is owned by the state, and when people buy apartments, they are essentially purchasing only the right to use the building on that land.

12. If fewer new properties are built and sold, land-use sales decline, putting financial strain on local governments.

13. China’s high growth rates have long depended on heavy infrastructure investments by local governments.

14. But with real estate slumping, local governments can no longer afford to expand infrastructure investments.

15. That makes 2024 a tough year to hit the 5% GDP growth target.

16. China needs a Plan B to achieve this growth target.

17. The government is now pushing two main strategies as Plan B : boosting domestic consumption and supporting the stock market.

Plan B-1. Domestic Consumption Boost – Yi Gu Huan Xin (以舊換新)

18. The plan to boost consumption starts with Yi Gu Huan Xin (以舊換新).

19. Yi Gu Huan Xin is the policy offers subsidies to replace old cars, appliances, and furniture with new ones.

20. In April 2024, the Ministry of Commerce announced various policies to stimulate durable goods consumption, including the Yi Gu Huan Xin initiative.

21. Local governments, like Shanghai, have also rolled out similar plans to boost sales of cars, home appliances, furniture, and home renovations.

22. This Yi Gu Huan Xin policy isn’t new—it was first introduced in 2009.

23. However, this time, the policy includes additional incentives for purchasing energy-saving, eco-friendly products.

24. For instance, if a Shanghai resident buys a 7,600 yuan ($1,050) energy-efficient air conditioner, they’ll receive a 10% discount under the Yi Gu Huan Xin policy, along with energy-saving subsidies and manufacturer discounts, bringing the price down to less than 5,000 yuan ($690).

25. With discounts of 30–40% available, sales have increased by more than 8% within the first month of the policy’s implementation.

26. The automotive sector is also benefiting, with subsidies of around $2,000 per vehicle, driving up car sales.

Plan B-2. Stock Market Support – Xin Guo Jiu Tiao (New 9 Guidelines)

27. To support the stock market, China introduced the Xin Guo Jiu Tiao (New 9 Guidelines) in April 2024.

28. These guidelines, issued by the State Council, aim to upgrade China’s capital markets and can be thought of as a Chinese version of a ‘Corporate Value Enhancement’ project —known as a ‘Value-up program’ in Asian markets

29. The New 9 Guidelines includes policies on IPOs, listings, delistings, securities firms, asset management oversight, and measures to attract medium- and long-term capital to the stock market.

30. The key difference between typical corporate value enhancement policies and China’s version is the enforcement mechanism: while most are voluntary and market-driven, China’s program is mandatory and comes with penalties.

31. For example, Japan’s ‘value-up’ program was a non-binding recommendation at the exchange level, while China’s version, enforced by the State Council, is mandatory and includes penalties.

32. Following China’s New 9 guidelines, companies whose cumulative cash dividends over the past three years fall below 30% of their average net income are classified as “special management stocks.”

33. Special management stocks are restricted to a daily price fluctuation of 5% and must undergo audits twice a year.

34. Major shareholders are also prohibited from selling shares if dividend payouts fall below the required threshold.

35. Companies are allowed to include share buybacks as part of their dividend performance, giving them the option to either pay dividends or repurchase shares.

36. The goal of these policies is to increase China’s historically low dividend payout ratio and share buyback rates.

37. The Dividend expansion policy is already showing results.

38. By May 2024, the average dividend payout ratio for Chinese listed companies had already risen from 31% to 42%.

39. A 42% payout ratio means that 42% of net income is returned to shareholders as dividends.

40. In addition, the Chinese government has set up a stock market stabilization fund with 2 trillion yuan ($275 billion) to buy shares.

41. Financial institutions like state-owned enterprises and insurance companies have been directed to increase their equity holdings.

42. In 2024, China even included market capitalization as a new performance metric for state-owned enterprises.

43. This means that both private and state-owned enterprises now need to pay close attention to their stock prices to improve their performance evaluations.

44. Broad, all-encompassing measures to boost the stock market have now been put into action.

Will the Rally Last?

45. While these measures have helped push the stock market higher, there’s doubt about whether the rally can continue without real improvements in company earnings.

46. The stock market’s rise didn’t last long, though.

47. Soon after, China’s stock market started heading downward again.

48. This decline happened just as the Chinese Communist Party held its Third Plenum.

The Importance of the Third Plenum

49. The CCP has a hierarchical structure with eight levels.

50. At the bottom are 90 million members of the Communist Youth League(CYL) and 130 million members of the Young Pioneers.

51. Above them are the 90 million Communist Party members, followed by the 2,287 delegates of the National People’s Congress (NPC) and the 205 members of the Central Committee.

52. The Central Committee is the key body, with 25 Politburo members and the seven-member Politburo Standing Committee, currently led by Xi Jinping.

53. Among them, the core organisation is the Central Committee.

54. The Politburo and Standing Committee members are all selected from the Central Committee.

55. The General Secretary (Xi Jinping), Premier, and other top leaders come from the Central Committee, making it the core of the CCP’s decision-making.

56. Every five years, a new Central Committee is elected.

57. And they holds 7 plenary meetings (Plenums) over its 5 year term.

58. These meetings are numbered sequentially from the First Plenum to the Seventh Plenum.

59. The First Plenum selects the top leaders, such as the General Secretary and the Chairman of the Central Military Commission (both roles currently held by Xi Jinping).

60. The Second Plenum handles the appointments of government officials for the next five years.

61. The Third Plenum is crucial for setting economic policies.

62. The Fourth Plenum serves as a mid-term review, the Fifth focuses on welfare policies and the national economy, the Sixth is for open discussions without a fixed agenda, and the Seventh prepares for the next Party Congress.

63. When a decision is announced by the Central Committee, it signals that China considers the matter highly significant.

64. This is why the Third Plenum is closely watched, as it outlines China’s key economic strategies and direction.

65. It’s similar to how the U.S. President and Congress outline their economic agendas, focusing on infrastructure, tax reform, and more, after elections.

66. For example, Donald Trump and Kamala Harris are currently outlining broad economic goals, but after the 2024 November election, they’ll present more detailed plans—shaping policies for the upcoming four-year term.

2024’s Third Plenum Focus: New Quality Productivity

67. The key theme of the 2024 Third Plenum was New Quality Productivity.

68. This concept was solidified with seven major tasks,

69. The seven major tasks focus on next-generation information technology, artificial intelligence, aerospace, new energy, advanced equipment, biomedical technology, and quantum science.

70. To address local governments’ financial troubles, the Plenum proposed granting local governments the authority to collect certain taxes.

71. However, the market was disappointed that no real estate stimulus was included, highlighting a weak plan for solving local governments’ financial crises.

72. This disappointment was further amplified when the second-quarter GDP growth rate was announced at 4.7%.

73. The 4.7% growth fell short of the 5% target set during the March Two Sessions and was below the market’s 5.1% expectation, as well as the 5.3% growth seen in the same period last year.

74. Despite efforts to boost domestic consumption and prop up the stock market, it’s clear that there are limits to how much growth China can achieve without addressing deeper structural issues.

75. In response, China has started making new moves.

AlphaZen Insights

So, we’ve broken down the key drivers behind China’s stock market surge—economic growth goals, a real estate crisis, and a whole lot of government intervention. But the big question still lingers: Can this rally keep going, or are we headed for a reality check?

In the next episode, we’ll dive deeper and finally answer those burning questions. We’ll explore whether these short-term boosts can turn into long-term gains, how real estate problems might spill over, and what the government’s next moves could mean for investors like you.

And with just a few weeks left before the 2024 U.S. Presidential election, understanding China’s economy is more important than ever. The global market is watching closely, and so should you.

Check the second episode. Trust me, you don’t want to miss this one. If you’re still wondering whether to ride this wave or sit tight, this post will have all the answers. Let’s get into it—things are about to get real!