Five points aimed at boosting capital markets mentioned at China's top leadership meeting

Editor's note: Chen Jiahe is the chief investment officer at Novem Arcae Technologies. The article reflects the author's opinions and not necessarily the views of CGTN.

Alongside a rapid stock market rally this week, the top leadership of China held a meeting on Thursday to discuss the current economic situation and set out the country's economic working plan. Among the affairs that were discussed at the meeting, there was a chapter especially related to the capital market. Let us take a close look at the chapter and find out what it will mean to the markets and investors.

This very important meeting was held by the Political Bureau of the Central Committee of the Communist Party of China (CPC). In a paper published after the meeting, there are mainly five points mentioned that aim at supporting and developing the country's capital market.

The first point is an overall target: China aims to support and develop the capital market in the long term. This is a very clear sign that Chinese policymakers are now prioritizing growth of the capital market. As the nation's per capita GDP is now around $13,000 per capita, the capital market is becoming increasingly important to its economic growth.

Alongside the emphasis on the importance of the capital market, the capital market has reacted very positively in recent trading days. The Shanghai Composite Index increased from 2,736 points to just above 3,000 points in the first four trading days of this week, or 9.4 percent. The Heng Seng Index also increased by 9.1 percent during the same period, following a 5.1 percent increase in the week before.

The confidence of investors comes not only from the meeting held on Thursday, but also comes from the multiple policies given by the central bank and the securities regulatory committee that aim at boosting the capital market. More liquidity is being provided by the central bank to support the stock market. Informed investors have perceived these positive signs and are rushing into the market with a huge amount of buying orders.

The second point mentioned at the meeting is the introduction of more long-term capital for the market, including the social security fund, the capital of insurance companies and the money that comes from wealth management projects.

For the health and development of China's capital market, long-term capital and money are critical. If the market is filled with speculators and daily traders, then it will become a speculative market and will provide a very turbulent financial return for investors. Also, companies within such a market cannot receive stable financial support. On the contrary, long-term capital that aims at achieving financial return years later will be the cornerstone for the stability of the market.

Meanwhile, the current valuation of the capital market is also very attractive to long-term capital. As we know, low valuation is critical for making a good investment return in the long run. According to the Choice Financial Terminal, on Thursday, the P/E (price-to-earnings) ratio for the Shanghai Composite Index was only 13.3 times. The Shanghai and Shenzhen 300 Index was trading at 12.1 times P/E ratio, and the Heng Seng Inex was trading at 9.6 times P/E ratio. In contrast, the S&P 500 Index was trading at 27.3 times P/E ratio and the NASDAQ Index was trading at 35.9 times P/E ratio on the same day.

The third point mentioned at the top meeting is encouraging the mergers and acquisitions of listed companies. Currently, there are over 5,000 listed companies in the Chinese mainland stock market and around 2,600 companies listed in the Hong Kong Stock Exchange. For many of them, their sizes are smaller compared with their leading global counterparts. More mergers and acquisitions of the listed companies will enable them to grow more rapidly. Meanwhile, mergers and acquisitions can also reduce the number of weak companies and increase the overall efficiency of company assets.

The fourth point mentioned at the meeting is aimed at reforming the mutual fund industry in China. By the end of August 2024, there were 163 mutual fund management companies managing over 30 trillion yuan ($4.28 trillion) in the country.

With a history of less than three decades, China's mutual fund industry has many weak points, including the lack of seasoned investment managers, small management size for many medium and small fund management companies, lack of long-term vision and engagement of speculative investment tactics, etc. As mutual funds are one of the most important buyers of stocks and they are also managing the money of millions and millions of individual investors, a thorough and well-designed reform of the mutual fund industry can improve the overall operation of the country's capital market by a very large extent.

The fifth and also final point mentioned at the critical meeting about the capital market is the protection of individual investors. Compared with institutional investors and global investors that are coming to invest in China, individual investors as a whole group are weaker with their investment skills. As many individual investors are working on their own, their research and investment decision-making are much less rational. Therefore, the protection of individual investors has always been a priority task for Chinese authorities. As this point has again been mentioned at the meeting on Thursday, we can expect more policies coming out in the future that will help and protect individual investors.

With the five points mentioned at the economic meeting of the Political Bureau of the CPC Central Committee on Thursday, alongside the supporting policies introduced in recent days, as well as the strong performance of the stock market and the relatively low valuation of many good companies, there are enough reasons to believe that China's capital market is now an ideal place to invest. Finding good companies with fair or even cheap valuations can reward investors fruitfully in the long term.

(Cover via CFP)