BANGKOK — The Chinese government is taking steps to stimulate consumer spending by driving up share prices. This initiative involves mandating that pensions and mutual funds increase their investments in domestic stocks, with the goal of revitalizing sluggish markets.
Officials in Beijing announced that starting this year, mutual funds are required to boost their holdings of onshore stocks, known as A-shares, by a minimum of 10% annually over the next three years.
Additionally, commercial insurance funds will now be obligated to allocate 30% of their annual new premium income towards the stock market, starting this year. “This indicates that hundreds of billions of yuan will flow into A-shares each year,” stated Wu Qing, the chairman of the China Securities Regulatory Commission.
This decision emerged from a meeting that included high-ranking financial officials and representatives from relevant ministries and the central bank. Wu pointed out that implementing these measures would enhance the equity allocation capabilities of long-term funds, progressively expanding investment scales and enhancing the capital market’s structure and supply, thus supporting its recovery.
The ruling Communist Party made this announcement just before the Lunar New Year, which is China’s most significant holiday. Celebrations that begin on January 29 often see families indulge in spending for food, travel, and traditional gifts of money, reflecting hopes for prosperity.
After the announcement, stock markets in Hong Kong and Shanghai experienced an upward trend initially but later reversed those gains. Ultimately, the Shanghai Composite index closed up 0.5%, while Hong Kong’s Hang Seng index fell by 0.4%.
China’s equity markets are substantial but have languished below their peak values established before the 2008 global financial crisis. The stagnation in share prices, alongside declining property values, has contributed to a reluctance among Chinese households to spend, leading to diminished consumer demand and slowed economic growth.
In China, less than 5% of household wealth is invested in equities, a stark contrast to the nearly 30% in the United States. Established in the early 1990s, Chinese markets mainly serve state-run companies seeking substantial fundraising, although they operate under the tight control of the Communist Party.
Previous government efforts aimed at encouraging more spending and reducing saving habits have yielded mixed results. For instance, a program promoting the purchase of energy-efficient vehicles through subsidies has seen increased sales, but stock prices have remained relatively stagnant since a brief rise late last year.
Wu mentioned that pension funds will need to revise their performance assessment methods, and companies will be urged to increase share buybacks and raise dividends to provide better returns to shareholders. He emphasized that this move marks a significant institutional shift for the entry of long-term funds into the stock market, noting that it addresses a long-standing issue.
Additionally, on Wednesday, the government unveiled 20 measures intended to attract foreign investment, aiming to simplify cross-border transactions. Currently, foreign investors hold approximately 4% of the total market value of Chinese equities, in contrast to around 20% in the U.S. and 30% in Japan.
However, foreign investments have been undermined by sell-offs from overseas investors and major shareholders, coupled with high market volatility. According to Lei Meng, a China equity strategist at UBS Securities, the appetite of long-term investors for the stock market has decreased significantly. “The proposed reforms for market value management directly confront this issue, impacting investors’ perceptions of profitability,” Lei stated.
Historically, similar governmental measures have struggled, as they often attempt to impose controls that go against prevailing market sentiments. “These approaches can be likened to trying to start a fire with wet wood; they frequently turn out to be ineffective and transient,” commented Stephen Innes of SPI Asset Management.
