What Do China’s Targets of Economic and Market Stability Signify?

Recently, a series of changes in situations both domestically and internationally have brought direct and indirect impacts on the Chinese economy and stock market, dragging the A-shares and Hong Kong stock market into a continuous decline. Such market volatility not only brings panic to the capital market, but is also not conducive to the stability of the real economy. The country’s Financial Stability and Development Committee under the State Council has held a special meeting on March 16 to study the current economic situation and capital market issues and put forward some targeted policy frameworks, which are of positive significance to stabilize the stock market and the economic situation. After the disclosure of relevant meeting information, both A-shares and the Hong Kong stock market reacted positively with a sharp rebound, reflecting the stock market’s recognition of the policy.

According to ANBOUND’s researchers, the special feature of the meeting is not only to respond to the market’s concerns in a timely manner and enhance the level of communication between the policy and the market, but also to highlight that the stability and development of the capital market are as important as the overall goal of stabilizing the economy. This will play an important role in the construction and development of the multi-level capital market including the stock market.

In retrospect, the disruptions brought by the deterioration of the external geopolitical environment, the change of domestic macro policy expectations, the outbreak of long-term conflicts in China concepts stocks, and problems in the internet platform and real estate sectors all contributed to the previous decline in the stock market. The substantial and persistent decline in the stock market indicates a significant change in market expectations, while the distortion between macroeconomic data and micro-market perceptions has also increased fear of future uncertainty. These changes in market expectations not only bring about valuation adjustments in asset prices, but also affect the real economy and magnify risks in economic operation. Therefore, timely policy response and communication are of short-term practical significance for guiding market expectations and maintaining the stability of the capital market. The meeting held by the Financial Stability and Development Committee has responded to the concerns of the capital market, not only a aimed at “maintaining stability” of the capital market, but also expected to be followed by a series of targeted measures that will play a significant role in economic development and stability.

In terms of long-term development, ANBOUND has repeatedly stressed the role and importance of the capital market in China’s economic development. First, when the economy develops to a certain extent, the capital market will constitute an important part of the financial market and become one of the most active parts and the key platform of financial resources in the credit era; an open capital market is crucial for the allocation of global financial resources. Second, capital market is indispensable for corporate financing, an important channel for financial resources to inject into the real economy, and an important mechanism for capital to stimulate market innovation and scientific and technological innovation, which are extremely important to enterprises. Third, it is a place where investors can earn investment returns, allocate their assets and generate wealth. Developing capital markets to allow more people to benefit from economic development is an important means to achieve common prosperity. If the capital market continues to develop poorly, it will increase the burden on the country. It is therefore, particularly salient for the Chinese economy to develop the capital market well and maintain its stable and positive expectations. This is also a kind of politics, and the embodiment of politics. From this perspective, “stabilizing the market” is equivalent to “stabilizing the economy”.

Although the reform and development of the Chinese capital market have indeed seen obvious progress in recent years, it should also be noted that it is still far from mature, and requires the protection of the policy to ensure its “stable development”. Such kind of protection should be on the basis of respecting the capital market and the operation rules of the financial market.

On the one hand, regulatory policies need to be proactive in the construction of the market and the maintenance of market order, as well as actively solve existing issues, instead of dealing with them perfunctorily. As far as the current situation is concerned, the problems of China concepts stocks, including audit disputes and VIE structure risks, are not short-term problems and should be dealt with before the contradictions become intensified. Regulatory policies will need to be guided by the goal of “long-term and stable development”, proactively communicating with the market, and improving policy transparency. Only in this way can market investors form accurate perceptions and avoid the spread of market panic. The capital market has its own rules of operation. The authorities’ passive response will certainly cause the market to worry about policy uncertainty, which will lead to market overreaction. Therefore, the foresight and continuity of regulatory policies are highly critical.

On the other hand, for the long-term development of the capital market, excessive intervention in some specific areas should be avoided. In particular, for a period of time, some policy measures issued by relevant authorities to deal with the disorderly expansion of capital and risks often lack considerations, bringing great interference to the normal operation of the capital market. Although these frequent policy measures play a certain role in capital operation, they have also caused interference to the normal operation of the capital market. This makes enterprises and investors unable to form stable expectations for the development of businesses and have to withdraw from the capital market, thus affecting the stability of the market.

The meeting held by the Financial Stability and Development Committee particularly emphasized that the relevant departments should effectively assume their responsibilities, proactively introduce policies that are beneficial to the market, cautiously introduce contractionary policies, and respond to market concerns in a timely manner. For any policy that has a significant impact on the capital market, the relevant departments should coordinate with financial authorities in advance to maintain the stability and consistency of policy expectations. Researchers at ANBOUND believe that these positive responses also indicate that a consensus is being formed in policy implementation on the general trend of capital market development. This is the main factor behind the current positive market response.

To stabilize the economy, the stability and development of the capital market also require consideration of stability with development as a precondition. Relevant policies should not excessively intervene in the ups and downs of the stock market. Instead, they should maintain the fairness of the market, avoid panic and speculation in the market, and truly achieve “stable expectations” and thereby create a “healthy market”. The so-called “stable expectations” refer to the smooth upward development and stability of the market environment. “Healthy market” here means a capital market that is able to develop steadily in the medium to long-term, allowing investors to earn reasonable returns.

Wei Hongxu
Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK