China Securities Journal front page published an article by Hua Sheng: The wave-like "slow bull" of the Chinese stock market and the long-term goal of economic prosperity and development can definitely be achieved

● Vice President of the China Economic System Reform Research Association, Dean of the National Development and Policy Research Institute of Southeast University, Hua Sheng

The meeting of the Political Bureau of the Central Committee of the Communist Party of China held on September 26 proposed "to strengthen the introduction of incremental policies," which greatly boosted market sentiment and enhanced people's confidence. Relevant departments have conducted in-depth research and have successively introduced multiple incremental policy measures. Therefore, how to further focus on the consensus of all parties and implement the optimal incremental scale at the best comprehensive effort point has become the focus of attention.

Improving the Economic Fundamentals is the Foundation for a Stable and Strong Stock Market

After the National Day holiday, the stock index did not continue to rise, leading some people to feel frustrated or disappointed, even doubting the rise of the stock market. In fact, if the stock index continued to accelerate upward as it did before the holiday, the market would quickly turn into a "mad bull," resulting in an inevitable crash, with the most hurt being the majority of retail investors who followed the trend. A long-term bull market with wave-like development is both a policy goal and in the interest of a wide range of investors.

Some impatient individuals hope for at least a wave of "fast bulls" or "fierce bulls," pushing the stock index up to 4,000 points or even above 5,000 points before discussing stable development. They believe that compared to the mature markets of developed countries, the Chinese stock market still has significant room for growth. There has indeed been a valuation gap between emerging markets and the mature stock markets of developed countries, but it should also be noted that the long-standing difference in valuation levels between mature markets in developed countries and emerging markets stems from differences in corporate governance, legal environment, market maturity, and market risk. Narrowing or eliminating this gap is not an overnight task and cannot be achieved in one fell swoop.

Some believe that the continuous breakthroughs and innovative developments in emerging industries in recent years have made "overtaking on a curve" possible. Indeed, technological innovation is an important factor in driving up the market, as the U.S. stock market has been in a bull market for three consecutive years and continues to reach new highs. However, it should also be noted that the performance of the U.S. stock market is supported by a significant increase in corporate profits. In terms of price-to-earnings (P/E) ratio and price-to-book (P/B) ratio, compared to the 25 times P/E ratio and 1.8 times P/B ratio of the CSI 500 in A-shares, the average P/E ratio and P/B ratio of the representative S&P 500 index in the U.S. stock market are 29 times and 5.1 times; the tech-heavy Nasdaq index is 44 times and 6.5 times, which is not unreasonable compared to the 33 times P/E ratio and 4.0 times P/B ratio of the ChiNext, the 50 times P/E ratio and 4.6 times P/B ratio of the Beijing Stock Exchange 50, and the 71 times P/E ratio and 4.5 times P/B ratio of the Sci-Tech Innovation 50. Even so, investors in the international market are increasingly discussing whether the industrial application prospects of artificial intelligence have been prematurely and excessively priced in by the market, and whether the U.S. stock market has already reached a cyclical peak. It is evident that for the stock market to truly perform well and steadily in the long term, it must be based on the continuous improvement of economic fundamentals and corporate profits.

So, some may ask, since the Shanghai Composite Index has already exceeded 3,300 points before the National Day holiday, why do I say that the stock market still has at least 10% to 20% room for growth? This is mainly because the central government has launched a combination of economic incremental policies. For example, the stock repurchase and increase re-loan created by the central bank this time, along with the securities, funds, and insurance companies' swap convenience (SFISF), provide significant incentive space for listed companies with high dividend payouts Taking the Shanghai Composite Index as an example, since it concentrates on large-cap, high-performing, high-dividend companies, as long as credit funds are effectively implemented to narrow or even eliminate the interest rate spread between dividends and loan rates, the Shanghai Composite Index can surpass the phase high of 3,700 points and even approach the 4,000-point area, allowing most retail investors and mutual fund investors to turn losses into profits. Therefore, the aforementioned levels are not arbitrary subjective speculations, but merely an arithmetic issue.

Some may ask, wouldn't further interest rate cuts allow the stock index to reach higher levels? Interest rate cuts can certainly further boost the market, but since the interest rate spread between bank deposits and loans has already been compressed to a narrow range, further cuts would inevitably require a simultaneous reduction in deposit rates and the yields of wealth management and fixed-income products closely linked to deposit rates, which would significantly reduce the relatively stable property income of Chinese households. This raises a cost-benefit trade-off issue. Considering the overall balance of macro policies, the room for interest rate cuts is limited. In light of these circumstances, merely hoping to provide targeted credit support to a few hundred high-performing, high-dividend listed companies is neither realistic nor advisable to boost and maintain the A-share market with a circulating market value of several trillion yuan, and to activate the entire economy. It must be noted that the stock market is a battlefield of continuous games that never cease; both the notion of quick victories and pessimism are not advisable.

In summary, improving the economic fundamentals and the profitability of listed companies is the foundation for a stable and upward stock market, and it is also the reason and true highlight of the central government's introduction of a package of incremental policies.

Incremental Policies Focus on Core Issues

The distinct feature of this package of incremental policies is its clear targeting, specifically addressing the stock market and the real estate market, which are true barometers reflecting market conditions. This allows for objective and persuasive measurement and evaluation standards for the effectiveness of policy implementation, reflecting the government's determination to achieve economic stability and confidence in the effectiveness of the incremental policy package.

We have noticed that some widely discussed suggestions from various sectors did not make it into the policy package. A careful analysis reveals that this actually contains more meticulous considerations. For example, many experts have suggested using direct cash payments or large-scale issuance of consumption vouchers to stimulate consumption. However, universal cash payments are typically aimed at responding to sudden disasters or crises, rather than addressing cyclical or especially structural economic difficulties. Massive universal cash distribution not only carries a heavy burden but also usually has limited effectiveness in stimulating demand, thus lacking sustainability. More importantly, this approach may only replace part of people's consumption expenditures in form when addressing cumulative economic difficulties, and in the face of uncertain employment and income prospects, it can easily become a means for people to shift their savings, which may not effectively promote consumption.

Additionally, many believe there is no need to worry about inflation and advocate for the decisive launch of large-scale infrastructure projects. The reason this suggestion did not become a focus of the incremental policies is, on one hand, that in the context of overall saturation in infrastructure construction in our country, the traditional approach of large-scale infrastructure development is no longer suitable for current realities. On the other hand, it is also based on historical lessons. The current heavy debt burden of local governments is mainly due to excessive borrowing during periods of ample funds, leading to investments in many projects that lack economic benefits or have only minimal social benefits In addition, some have suggested that the central government issue national bonds to fully or partially repay local government debts, thereby allowing local governments to start afresh. Regardless of the feasibility of issuing hundreds of billions of yuan in central government bonds at once, under the current system, this would essentially reward local governments that borrow more, leading to serious adverse incentives and moral hazards. This approach would not genuinely solve the problem but instead create greater risks. As for the opinion suggesting that the market should gradually clear itself and restore macroeconomic supply-demand balance, this would mean that the government's macro-control would be ineffective when it should play a role, which is clearly undesirable.

Given that we are currently facing the overlapping challenges of counter-cyclical adjustment, structural economic adjustment, and institutional reform, the macro policy combination being implemented can be summarized as focusing on core issues and mutually reinforcing the "four arrows."

"Four Arrows" Interconnected

The first arrow targets the capital market. The prosperity of the capital market not only helps increase residents' property income, thereby enhancing social consumption capacity and levels, but also serves as an important channel for promoting economic development, especially technological innovation and the development of new productive forces. The greater the breakthroughs in innovative and disruptive technologies, the larger the returns, but the longer the cycles and the greater the investment risks and uncertainties. If the capital market does not restore its normal financing functions and cannot provide smooth exit and reinvestment channels for venture capital and equity investment, it will significantly hinder the development of technological innovation. Therefore, vigorously promoting the development and prosperity of the capital market is a dual-purpose move.

The second arrow targets the heavy debts of local governments. Local government debt is the crux of many current economic, market, and legal issues at the grassroots level, and it is also why fiscal debt measures and their scale have become the focus of market attention. After successfully replacing high-interest debts of local governments in the earlier phase, the biggest feature of this debt resolution is to exchange time for space, addressing the issue of debts owed by local governments. Debt resolution should not be simply understood as debt replacement, but rather as resolving the debt chain. This arrow of debt resolution is precisely aimed, having an immediate effect on invigorating the national economy, facilitating smooth operations, and strongly promoting investment and consumption demand.

The third arrow focuses on vigorously developing the private economy, enhancing entrepreneurs' confidence, and fully unleashing market vitality, which is to create a favorable business environment for enterprises. According to authoritative statistical data, private enterprises exhibit the "five-six-seven-eight-nine" characteristics in the national economy, and the private economy and private enterprises have become significant forces in creating GDP, conducting technological innovation, absorbing social labor employment, and contributing to national tax revenue. The vitality of the private economy is essential for the prosperity of the national economy. The draft Private Economy Promotion Law, currently seeking opinions, has formulated a series of provisions from multiple dimensions of protecting, encouraging, supporting, guiding, and developing the private economy. The draft amendment to the Supervision Law adds content such as "comply with legal procedures, perform duties fairly; respect and protect human rights" and "safeguard the legal rights and interests of supervisory objects and related personnel." Undoubtedly, this arrow is precisely aimed, and the re-launch and renewed prosperity of the Chinese economy are just around the corner.

The fourth arrow aims to stabilize the real estate market and reverse the downward trend in the property market. The combination of financial and fiscal policies can alleviate this downturn to some extent in the short term, but for the real estate market to truly emerge from its slump, it may require a considerable amount of time Land finance has long been the main funding source model for local governments in China. The fundamental transformation of this income structure is inevitable, and solving the problem requires integrating the development of the real estate market into the overall layout of new urbanization. The central government has already made a series of deployments regarding the development of new urbanization. Industrial workers are the main force of the working class, the backbone of creating social wealth, and the key force in implementing the innovation-driven development strategy and accelerating the construction of a strong manufacturing country. The main body of industrial workers in contemporary China is migrant workers. Addressing the housing and social welfare security issues for the millions of migrant workers and their families in their places of employment is not only a top priority for the effective implementation of the new urbanization strategy but also the fundamental way to achieve healthy development of the real estate market. This arrow, shot accurately and with sustained effort, will lay the foundation for the medium- to long-term prosperity and development of the Chinese economy in the next 5 to 10 years.

Strive to Achieve Incremental Policies with "Sound Implementation" and "Tangible Results"

The effective implementation of policy combinations will bring not only a temporary rebound in the stock market but also a reversal. So why are many people still confused about whether it is a rebound or a reversal? This is because, after the central government's major policy decisions, there is still a process of policy deployment and implementation by various departments and sectors, and there are questions about whether it can truly achieve sound implementation and tangible results. In this sense, details determine success or failure.

For example, aside from the first arrow mentioned above being precise, operable, and verifiable, there is considerable debate surrounding the second arrow. For this arrow to be effective, it requires sufficient scale and the establishment of a public information platform to address wage arrears and corporate debts, ensuring that funds are used for their intended purposes. Whether it can resolve the issues of local governments' wage arrears within the system and corporate debts will be the touchstone for the success of this debt reduction initiative.

The third arrow is to invigorate and develop the private economy, strengthening the confidence of private enterprises and entrepreneurs in prospering together with the country. The Private Economy Promotion Law reflects the central government's determination. For the Private Economy Promotion Law to truly take effect, it needs to align with the current economic development realities and fully recognize the role of the private economy as a driving force for advancing Chinese-style modernization. Theories, policies, and regulations need to be adjusted according to the real conditions of the national economy, providing private enterprises and entrepreneurs with a "reassurance." Predictable legal rules should be used to regulate the wealth gap and combat illegal activities.

Ensuring the safety of life and property and the legitimate rights and interests of private enterprises and entrepreneurs is the bottom line for stabilizing entrepreneurs' confidence. This requires relevant departments to issue specific, operable, and enforceable detailed regulations in accordance with the central spirit, such as strictly implementing the principle of two lines of revenue and expenditure, with all economic income from cross-provincial law enforcement cases, after deducting enforcement costs, being submitted to the central finance. The net income from law enforcement at the city, county, and district levels should be uniformly submitted to the provincial finance, fundamentally eliminating the soil for profit-driven law enforcement. For practices that impose restrictions on the rights of citizens or legal persons, such as detention, border control, freezing company accounts, and transferring money and property, relevant personnel should be informed of the basis for these actions, and efforts should be made to avoid undue harm to innocent citizens and faultless companies. Compensation should be provided for any damages caused.

The fourth arrow relates to the economic prosperity and development of our country in the next decade, requiring special discussions and detailed planning, schemes, and deployments with corresponding funding arrangements Overall, China's economic development is indeed facing various internal and external challenges, but it also presents rare historical opportunities. We believe that as long as we work hard and strive for progress without being impatient or reckless, with the continuous improvement of the economic fundamentals and the ongoing rise in corporate profits, the wave-like "slow bull" market in the Chinese stock market and the long-term goal of economic prosperity and development can certainly be achieved. Let us confidently welcome a bright tomorrow for the capital market!

Author of this article: Hua Sheng, Source: China Securities Journal, Original title: "Stock Market Outlook: Rebound or Reversal - Analysis and Outlook on Economic Increment Policies"