Stock Market As Crucial Indicator Of China’s Policy Effectiveness – Analysis

By Yang Xite

At the start of 2025, China’s stock market remains highly volatile. Geopolitical tensions and a sluggish domestic economy have combined to erode investor confidence in the market’s outlook. According to a Bloomberg report on January 12, the CSI 300 Index dropped more than 5% in the first seven trading days of the year, marking its worst start since 2016. At the same time, the MSCI China Index has fallen by 20% since its peak last October, potentially entering bear market territory. A Bloomberg survey of 15 Chinese fund managers and strategists revealed that more than two-thirds favor Chinese government bonds and U.S. dollar assets over domestic stocks. Despite a strong rally on January 14, with all three major A-share indices rising, the market still faces significant uncertainty.

In fact, China’s stock market was already highly volatile in 2024, with a sharp drop in the first part of the year followed by a rebound in the fall, which saw gains of 30% to 40%. This rebound was triggered by the Chinese government’s announcement to cut reserve requirement ratio and interest rates, injecting large amounts of liquidity into the market and sparking investor enthusiasm. However, the effect was short-lived, and the market quickly corrected after a brief surge, leaving many investors “trapped” or forced to sell at a loss. In December, the Central Economic Work Conference adjusted monetary policy again, shifting from the “prudent and flexible” approach of the past 14 years to a “moderately loose” stance, with an emphasis on stimulating domestic consumption as the key driver for economic growth. But compared to the brief market boost priorly in early 2024, this latest policy’s “honeymoon period” was much shorter. Just two days later, on December 13, all three A-share indices closed lower, each falling by more than 2%.

In the current complex economic environment, it is clear that there is a disconnect between government policies and market reactions in China. Although short-term stimulus measures continue to be introduced, the market’s expectations and confidence in these policies have not been fundamentally restored. As a result, the public’s expectations of government policies may not have been effectively addressed.

Yet, how do ordinary Chinese assess the effectiveness of these policies? This depends not only on whether the government has addressed the most urgent needs of the public, but more importantly, on whether the government can genuinely reflect people’s sense of gain in the process of policy implementation. Researchers at ANBOUND believe that while basic life needs and household essentials are important, they represent only the most essential survival needs. With the continued growth of China’s economy and the expansion of the middle class, the public’s demands are gradually shifting toward higher-level development and investment needs. Therefore, the government needs to adapt to the times, shifting from merely satisfying basic needs to focusing more on promoting the long-term development and wealth accumulation of the public. Especially during this critical period of economic transformation, responding to and meeting the public’s diverse needs in areas such as quality of life, social security, and investment opportunities have become a key measure of policy effectiveness.

For the government, addressing the complex economic landscape and social development requires both strategic foresight and practical execution. It must balance long-term planning with the flexibility to tackle immediate challenges. In policy selection and implementation, the focus should be on precision and clarity, as well as avoiding generic approaches. The government will also need to prioritize areas that can deliver swift results, energize the market, and restore public confidence, creating a powerful leveraging effect for its policies.

Researchers at ANBOUND believe that the capital market is increasingly intertwined with the daily lives and wealth management of ordinary people. How to effectively reform and build the capital market is directly related to the public’s investment needs and the potential for future economic development. As such, whether the government can effectively promote the stable growth of the stock market has become a key indicator of its performance. In fact, the sustained stability of the stock market not only reflects the fundamentals of the economy but also directly affects the public’s sense of wealth security and investment confidence, serving as an important manifestation of the government’s policy effectiveness.

For a long time, China’s stock market has remained stagnant at low levels, a performance that clearly doesn’t align with the country’s long-term macroeconomic and capital market development goals. Regardless of changes in GDP data, Chinee stock market has consistently been in a state of “detachment from the macroeconomy”, remaining sluggish. On the surface, the stock market seems disconnected from China’s comprehensive national strength and development potential, failing to effectively reflect the true state of the economy. Theoretically, under relatively stable macroeconomic conditions, maintaining stock market stability and fostering steady growth should be much easier than driving the development of physical industries like semiconductors. Moreover, the Chinese capital market currently faces a shortage of investment targets, with a lack of sufficient high-quality investment options. In this context, even if certain industries are struggling or economic growth is slowing, the stock market can still show some performance. This is because, for most of the general public, the stock market represents a potential investment channel and a hope for the appreciation of their capital.

If the stock market can be kept stable and driven upward through sound policies and market mechanisms, it would undoubtedly provide the public with a hopeful investment platform. In the current economic environment, maintaining “hope” is crucial because expectations themselves are a powerful driver of economic vitality. People’s investment expectations not only influence their investment decisions but also directly affect their willingness to consume and their future consumption behaviors. If these expectations are properly guided, they can become an invisible force driving economic growth. Against this backdrop, many macroeconomic policies focus on stimulating consumption and expanding demand, aiming to boost economic growth by encouraging public enthusiasm for consumption. At the same time, social security policies are promoting the shift of savings toward commercial pension insurance, aiming to alleviate the immense deficit pressure on the social security system.

However, the current policies are mostly “persuasive” in nature, and their impact tends to be limited. If they do not accurately address the real needs of the public, they are unlikely to generate a meaningful response. Especially when people’s confidence and expectations have not been fundamentally restored, relying solely on administrative persuasion and incentives will not tap into their deeper motivations for investment and consumption. The real challenge for policy, then, is to truly understand and meet the public’s needs, rather than just offering surface-level encouragement and advocacy.

Understanding the public’s development and investment needs is key to current economic policy. China’s economy has entered a new phase, with GDP surpassing RMB 120 trillion, demonstrating the potential and strength to support greater investment opportunities. As a result, China should be capable of providing a broader development platform for the stock market. While the government has set many ambitious goals for revitalization, whether these goals can ultimately be realized depends on their alignment with the growing real needs of the public, especially the need for wealth growth and investment returns. Only when policies are organically connected to the needs of the people can they truly enhance their sense of gain. In this context, promoting the healthy development of the stock market has become a crucial task. The stock market is not only a direct investment platform but also an important tool for the government to leverage and stimulate economic growth. Therefore, ensuring the long-term, healthy development of the stock market should become one of the core directions of government economic policy and occupy a more prominent position in future policy-making.

Achieving the healthy development of the stock market is a critical issue that policymakers must address. Researchers at ANBOUND emphasize several key principles from a macro-policy perspective that deserve focused attention. First, policy design must take into account the actual needs of the market and the long-term development of the stock market. In China, the stock market’s performance is closely linked to government policies, so it is essential to establish a policy framework that supports sustainable market growth, rather than relying solely on short-term stimulus measures or surface fixes.

Second, the healthy development of the stock market depends on a stable policy environment. Once a solid market system is in place, policies should aim for consistency, minimizing frequent interventions, and avoiding the “composition fallacy”, i.e., the over-implementation of policies that, while seemingly effective on their own, may disrupt market balance and long-term sustainability.

Finally, stock market regulation should evolve into a service-oriented, development-focused, and protective model, with a particular focus on safeguarding the interests of small and medium-sized investors. While regulatory bodies should take a firm stance against violations, the overarching goal should be to foster the market’s healthy development, rather than resorting to abrupt, campaign-style regulatory actions.

Final analysis conclusion:

2025 is a crucial year for China’s development, marking both the final year of the 14th Five-Year Plan and the beginning of the 15th Five-Year Plan. In the context of focusing on stabilizing the economy, China needs to prioritize policies in areas with high leverage and strong catalytic effects, addressing the public’s development and investment needs. ANBOUND believes that maintaining and ensuring the continued stability and growth of the domestic stock market will be an important focus. This will also serve as a key measure by which the public evaluates the effectiveness of government policies.

• Yang Xite is a Research Fellow at ANBOUND, an independent think tank.