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Yahoo
a day ago
- Business
- Yahoo
China's $11 Trillion Stock Market Is a Headache for Both Xi and Trump
(Bloomberg) -- At the heart of why consumers in China save so much and spend so little, and why Xi Jinping and Donald Trump will struggle to change that behavior even if they want to, lies the country's stock market. The US-Canadian Road Safety Gap Is Getting Wider Festivals and Parades Are Canceled Amid US Immigration Anxiety A Photographer's Pipe Dream: Capturing New York's Vast Water System Princeton Plans New Budget Cuts as Pressure From Trump Builds A London Apartment Tower With Echoes of Victorian Rail and Ancient Rome Even after a recent rally, Chinese indexes have only just returned to levels seen in the aftermath of a dramatic bubble burst a decade ago. Instead of incentivizing consumers to spend, poor equity returns have nudged them toward saving. A $10,000 investment in the S&P 500 Index a decade ago would now have more than tripled in value, while the same amount in China's CSI 300 benchmark would've added just around $3,000. Part of the reason, long-term China watchers say, is structural. Created 35 years ago as a way for state-owned enterprises to channel household savings into building roads, ports and factories, exchanges have lacked a strong focus on delivering returns to investors. That skew has spawned a host of problems from an oversupply of shares to questionable post-listing practices, which continue to weigh on the $11 trillion market. The country's leaders are under pressure to fix this. President Xi is counting on domestic spending to reach the 5% economic growth goal, especially as a tariff war with the US heats up over the massive trade imbalance. At the same time, Beijing has reasons to keep prioritizing the market's role as a source of capital: the country needs vast funding to nurture companies that underpin its tech ambitions — even if their profitability remains questionable. 'China's capital market has long been a paradise for financiers and a hell for investors, although the new securities chief has made some improvements,' Liu Jipeng, a securities veteran who teaches at China University of Political Science and Law, said in an interview. 'Regulators and exchanges are always consciously or unconsciously tilting toward the financing side of the business.' The limits of China's stock rally have again been evident this year. The CSI 300 has risen less than 7% despite a burst of optimism over AI, trailing benchmarks in the US and Europe. The underperformance — along with factors including an uncertain economic outlook — helps explain China's extraordinarily high savings rate, which stands at 35% of disposable income. Chen Long, who works in the asset management industry, has taken to social media platform Xiaohongshu to warn people of the risks of chasing the recent rally. 'Many ordinary people come in thinking they could make money, but the majority of them end up poorer,' Chen said in an interview, adding that he has been investing since 2014. 'State-owned companies primarily answer to the government rather than shareholders, while many private entrepreneurs have little regard for small investors.' Over the past year, China's top leadership has shown greater awareness of the stock market's importance as a vehicle for wealth creation. That's especially the case with an ongoing property slump and a fragmented social safety net, which exacerbates a sense of insecurity. The Communist Party's Politburo pledged to 'stabilize housing and stock markets' in a December meeting — a rare expression of support for equities at the high-level gathering. The body also called for 'increasing the attractiveness and inclusiveness of domestic capital markets' in July. There is no quick fix to boosting household confidence 'except for a stock market rebound,' said Hao Hong, chief investment officer at Lotus Asset Management Ltd. 'This is a topic that we economists have been discussing in the closed door meetings in Beijing.'' In some ways, the market's malaise has been decades in the making. 'The exchanges are motivated to fulfill the government's call for increasing companies' financing,' said Lian Ping, chairman of the China Chief Economist Forum, a think tank that advises the government. 'But when it comes to protecting investors' interests, there are few who are motivated to do it.' An explosive growth in new listings made China the world's biggest IPO market in 2022. Yet insufficient safeguards for shareholders and lax oversight of IPO frauds have led to share price crashes and delistings — what retail investors refer to as 'stepping on a land mine.' Take Beijing Zuojiang Technology, which listed in 2019. The company said in a 2023 statement that its product was modeled after Nvidia's BlueField-2 DPU. The company warned in January the following year that it was at risk of being delisted, citing an investigation for disclosure violations. It was subsequently removed from the Shenzhen bourse. The China Securities Regulatory Commission didn't immediately reply to a fax seeking comment. Recent years have seen greater efforts to screen poor-quality IPOs and crack down on financial fraud. There's also a push to reduce additional stock issuances by listed companies and share sales by major stakeholders, while encouraging more corporate profit to be passed on to investors. There has been visible progress. Initial public offerings shrank to nearly a third of 2023 levels last year. Shanghai and Shenzhen-listed companies handed out a combined 2.4 trillion yuan ($334 billion) in cash dividends for 2024, up 9% from the previous year, according to state media. 'The regulations and overall requirements after IPO have become stricter, in terms of reliability, transparency, or information disclosure,' said Ding Wenjie, investment strategist at China Asset Management Co. Reforms, however, have fallen short of transforming the market into one that prioritizes investor returns. Even with the rise in share buybacks, CSI 300 companies spent only 0.2% of their market value on repurchasing shares in 2024, far less than the nearly 2% spent by S&P 500 firms, according to calculations by Bloomberg. The recent policy push to attract more tech listings is also a worrying sign for some investors. Regulators are resuming the listing of unprofitable companies on the STAR board, dubbed China's Nasdaq, while allowing them for the first time for the Shenzhen-based ChiNext board — which is earmarked for growth enterprises. IPOs so far this year have increased by nearly 30% from the same period in 2024. That's an inevitable move to secure capital for firms that are vital to China's battle against the US for supremacy in AI, semiconductor and robotics, but also signals that authorities may again be putting funding needs ahead of investor protection. Fast-tracking more firms to list without tackling the core problems of corporate credibility will 'just add volume without restoring investor trust,'' said Hebe Chen, an analyst at Vantage Markets in Melbourne. Stock exchange officials have been actively reaching out to investment banks and encouraging companies to file for IPOs, according to people familiar with the matter. Some high-quality tech applicants could get access to so-called "green channels" for a faster review and approval process, the people said. 'The entire regulatory environments are still not up to the task of delivering the best out of those companies,' said Dong Chen, chief Asia strategist at Pictet Wealth Management. It requires a more comprehensive improvement of the institutional environment 'to provide the right incentives'' for companies to deliver values to their shareholders, he said. --With assistance from Zheng Li, Kelly Li, Mengchen Lu, Boyi Yu and Julie Chien. What Declining Cardboard Box Sales Tell Us About the US Economy Americans Are Getting Priced Out of Homeownership at Record Rates How Syrian Immigrants Are Boosting Germany's Economy Bessent on Tariffs, Deficits and Embracing Trump's Economic Plan Dubai's Housing Boom Is Stoking Fears of Another Crash ©2025 Bloomberg L.P.
Bloomberg
2 days ago
- Business
- Bloomberg
China's $11 Trillion Stock Market Is a Headache for Both Xi and Trump
At the heart of why consumers in China save so much and spend so little, and why Xi Jinping and Donald Trump will struggle to change that behavior even if they want to, lies the country's stock market. Even after a recent rally, Chinese indexes have only just returned to levels seen in the aftermath of a dramatic bubble burst a decade ago. Instead of incentivizing consumers to spend, poor equity returns have nudged them toward saving. A $10,000 investment in the S&P 500 Index a decade ago would now have more than tripled in value, while the same amount in China's CSI 300 benchmark would've added just around $3,000.
Forbes
08-08-2025
- Business
- Forbes
5 Factors To Consider When Investing In A Changing World
Daniel S. Kern, CFA®, CFP®, is the chief investment officer of Nixon Peabody Trust Company. The S&P 500 returned more than 13% per year from 2015 through the end of 2024, conditioning many investors to expect a continuation of double-digit equity returns. Unfortunately, several factors that have contributed to positive returns have either run their course or are likely going into reverse. Globalization is reversing amid trade conflict and a post-pandemic need to create less fragile supply chains. The Russia-Ukraine War was a turning point for countries that have underinvested in defense since the fall of the Berlin Wall. Plans by many of these countries for increased defense spending will create budget challenges, likely leading to higher budget deficits. Inflation remains above central bank targets in many countries. Supply chain disruptions, aging societies and climate instability are among the factors that may make inflation, rather than deflation, one of the defining challenges of the next decade. AI adoption may help mitigate some of these negative trends by helping businesses optimize their supply chains and automating repetitive tasks, but the timing and magnitude of the boost from AI is uncertain. I expect equity returns to remain positive over the next decade, but likely at a lower level and with more volatility than experienced over the past decade. Consequently, the strategies that were successful in the past decade may need to be adjusted in response to changes in the investment environment. Following are five considerations for investors as we look toward the next decade. 1. Inflation is likely to be higher and less stable. Deflation was the primary worry for central banks in the years that followed the Global Financial Crisis (GFC). Central banks intervened with rate cuts during periods of economic weakness, helping to cushion the blow when equity markets were under pressure. The rise in inflation during the pandemic was a preview of a world in which 2% could be the floor for inflation rather than the ceiling, largely as a result of supply shocks. Although tariffs are considered a one-time increase in prices rather than a persistent rise in the rate of inflation, realignment of supply chains may add stickier longer-term costs. Climate-related disruption of food supplies, as well as immigration policies that reduce the supply of labor, will likely make inflation more volatile. Investors should assess the implications of higher and less stable inflation for their investments. 2. The role of fixed income may change over the next decade. Bonds will be a less reliable hedge against equity downturns in an environment of higher and less stable inflation. The experience of 2022, when stocks and bonds both performed poorly, may repeat itself in future years. Consequently, investors should diversify portfolios to include inflation-resistant holdings. These may include real estate, infrastructure and real assets such as commodities. Government and investment-grade bonds provided limited income for much of the past decade and were commonly used for diversification rather than income. Short- and intermediate-term bond yields are now high enough to provide meaningful income supporting the returns needed to achieve financial goals. 3. U.S.-China competition may be the defining geopolitical trend of the next decade. Although most of the current focus of attention is on tariffs imposed on goods imported directly or indirectly from China, multinational companies that have significant sales in China face underappreciated risks. Chinese brands are increasingly competitive and may continue to capture market share from high-profile U.S. brands. Also underappreciated is the degree to which the U.S. services economy has benefited from Chinese tourists and students. Investors should revisit the outlook for holdings with direct and indirect exposure to China, looking for relative winners and losers in a decoupling between the U.S. and China. Investors can also explore opportunities outside the U.S. created by competition between the two countries, with China an important innovator in areas such as AI, electric vehicles and robotics. 4. The U.S. may be less 'exceptional' relative to the rest of the world. U.S. equities have far outpaced the world since the GFC, helped by leadership in technology innovation, higher profitability of U.S. firms, favorable demographics and energy security. Policy mistakes by several leading economies outside the U.S. also contributed to the performance gap between the U.S. and the rest of the world, in my opinion. Non-U.S. stocks have rebounded strongly during the first half of the year as countries such as Germany and China made long-overdue economic and policy changes. Although the U.S. is expected to continue to grow faster than other developed international markets, the growth premium between the U.S. and the rest of the world may narrow. Investing in international markets, which remain much less expensive than the U.S., should be an important strategy for investors seeking to diversify beyond the U.S. market, which remains expensive and highly concentrated. 5. Investors should consider whether private equity and private credit should be added to diversified portfolios. The case for including private assets is a shift in how capital is raised in today's economy. The stock of public equity is shrinking, with fewer companies going public (see Private Equity section, "U.S. public vs. private equity") and many successful private companies staying private for longer. In the credit markets, the share of credit coming from commercial banks has also been shrinking. Although returns from equities during the next decade may fall short of the double-digit returns of the past decade, there are abundant opportunities to be found in equity markets. Opportunities can also be found in credit markets, a welcome change after a disappointing decade for most bond investors. Investors who can adapt to the changing investment landscape will be well-positioned to reach their investment goals for the next decade. Investments in securities are not insured, protected or guaranteed and may result in loss of income and/or principal. This communication may include opinions and forward-looking statements. All statements other than statements of historical fact are opinions and/or forward-looking statements (including words such as 'believe,' 'estimate,' 'anticipate,' 'may,' 'will,' 'should' and 'expect'). Although we believe that the beliefs and expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such beliefs and expectations will prove to be correct. Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
