Bullish stock mkt can ignite nation's consumption

A series of major policies have been introduced since the end of the third quarter last year to boost consumption and stabilize economic growth. Amid rising external instability and uncertainty, one key task for China this year is to effectively expand domestic demand, among which invigorating consumption should be prioritized.

Under realist estimation, increasing Chinese people's property income may serve as an important way to boost their consumption capacity and confidence for now, and over a longer period ahead.

Real estate, wealth management products, and the stock market are the three major sources of Chinese people's property income.

Real estate now counts as the major asset of Chinese people. Statistics show that the proportion of housing assets in residents' non-financial assets has remained above 90 percent since 2000, and housing accounted for over 60 percent of their total assets.

But China's housing prices have been declining since the fourth quarter of 2021. Despite the introduction of short-term housing support policies, real estate investment returns will remain suppressed amid the downward trend of housing prices. Residents' income from real estate will likely continue to decline, which is a negative factor for the growth of property income.

On the other hand, yield from wealth management products will continue to contract.

For one thing, commercial banks and their subsidiaries need to follow the stricter rules regarding liquidity, credit and information disclosure when designing wealth management products. Investments incurring higher risk appetite used in the past are now abandoned.

Furthermore, China's interest rates have been declining over the past decade. The five-year loan prime rate has dropped from 4.85 percent in October 2019 to 3.6 percent this May. Yield for 10-year treasury notes has dropped from around 3.2 percent to 1.65 percent. Therefore, yield for three-month yuan-denominated wealth management products has narrowed from the 6 percent average level in 2013 to lower than 2 percent at present.

As China will maintain its moderately relaxed monetary policies in the next two to three years to keep ample market liquidity, interest rates will remain low and the yield from wealth management products will stay at a low level.

Different from real estate and wealth management products, a prosperous capital market can help buoy market entities' confidence in the economy when the fiscal policies are active and monetary policies moderately relaxed.

Previous experiences show that a bullish stock market drove up consumption in China.

From April 1999 to June 2001, the benchmark Shanghai Composite Index jumped from 1,100 points to 2,200 points. The growth rate of social retail sales rose from the 6.5-7 percent level in the second quarter of 1999 to 10.1 percent by the end of 2001.

When the SCI was around 1,100 points in November 2005, it spiked to a record high of 6,124 points in October 2007. Social retail sales, which already stood at a relatively high level in 2005 by showing 13 percent annual growth, further expanded the annual increase to 16 percent in October 2007. The upward momentum carried on the following year, with the social retail sales showing a peak growth of 22 percent year-on-year in September 2008.

The SCI rallied about 800 points to above 3,500 points in the two-year period from February 2016 to January 2018. Under such typical slow bull scenario, the social retail sales kept growing by 10 percent on a yearly basis, which was 3 percentage points higher than the GDP growth in the same period.

By the end of the third quarter, individual investors in China held 30 percent of the circulating market capitalization of A shares, only next to the 47.1 percent held by general legal persons. This reflects the high participation of Chinese individuals in the capital market, whether via direct stock market investment or mutual funds.

If each individual directs about 100,000 yuan to his/her stock market account, which is a relatively low estimation, the total capital pool would reach 20 trillion yuan if 200 million Chinese invest in the stock market. Such a huge amount of capital will help to drive up the stock market and in turn increase individual investors' property income, boosting their consumption abilities and willingness.

As a parameter for economic vibrancy, a bullish stock market is usually interpreted as economic growth. Consumers and companies' outlook will be thus improved.

On top of that, the consumption tendency of wages, bonuses, and stock investment returns increases gradually. That is to say, the consumption tendency of bonuses is greater than that of wages, while the consumption tendency of stock investment returns is even greater.

Companies can acquire capital with lower costs when the stock market moves up. They can thus expand production, hire more hands and increase employees' wages and bonuses. This can be transformed into higher consumption capabilities and willingness.

The social security fund will also benefit from a bullish stock market. It can grant more pension to the elderly group, stimulating their consumption.

At present, the Chinese stock market is well-grounded for recovery. More A-share industries are at historic lower levels. The TTM of SCI (or Trailing 12 Months, a gauge of stock price performance over the past 12 consecutive months), was only 14.4 times in mid-May, which was much lower than the average level of 25.6 times over the past three decades.

Among the 28 monitored industries, 20 of them saw their price-to-earnings ratio below historic average. The A-share market's trading activity can be further energized. Ever since the start of 2025, the average daily trading value at the three major exchanges has been around 1.43 trillion yuan, which is 23 percent lower than that in the fourth quarter of last year.

To introduce more liquidity into the market and help increase Chinese people's property income, China should implement more effective relaxed monetary policies. The reserve requirement ratio can be further cut by 0.5 percentage point in the third quarter if necessary. If the US Federal Reserve starts to cut interest rates, China could in turn reduce its benchmark interest rates by an amount it deems most suitable.

Central Huijin Investment, an arm of China's sovereign wealth fund that functions like a stabilization fund, should play a bigger role. A special re-loan can be set up to inject adequate liquidity into Central Huijin.

The mechanism via which long-term capital enters the market can be further optimized, including extending their revision period. The threshold for foreign capital investing in the Chinese market can be further lowered. Efforts should be made to nurture first-rate investment banks and institutions. National commercial banks should be allowed to set up subsidiaries of securities firms. Large banks may be allowed to conduct investment banking businesses via their overseas investment subsidiaries.

Favorable tax policies should be implemented for individual investors. Retail investors whose account funds are below 300,000 yuan should be exempted from the 0.05 percent stamp duty. Stamp duty has been eliminated in mature markets like the United States, Japan and Germany.

China's securities transaction stamp duty was 127.6 billion yuan in 2024, accounting for 0.8 percent of the country's total fiscal tax revenue. This portion is almost negligible for the country's total tax income, but such expenditure for individuals may significantly impact their investment confidence.

The writer is a council member of the China Chief Economist Forum and head of the Guangkai Chief Industry Research Institute.

The views do not necessarily reflect those of China Daily.