Critics Blame President Xi Jinping’s Control Obsession for Struggles in Chinese Stock Market

China and Hong Kong stock markets leak $1.5 trillion in January alone
Xi Jinping’s obsession with control is the biggest problem, critics say
The outlook suggests the potential for a rebound similar to Japan
Goldman Sachs: “Active fiscal easing and economic adjustment to consumption are necessary”

It’s not just the Chinese economy standing at a crossroads. The Chinese stock market is struggling with the continuous exit of foreign investors. However, views on the Chinese stock market are divided. While there are predictions that it will follow the path of decline like Japan, which experienced the “Lost Decades,” there are also analyses suggesting hints of recovery hidden in the recent glamorous revival of the Japanese stock market.

According to The Economist, the Chinese stock market has been losing momentum this year. While the S&P 500 index in the U.S. has broken the 5000 mark, setting a record high, the Chinese and Hong Kong stock markets saw $1.5 trillion in funds pulled out just in January. The Chinese and Hong Kong stock market capitalization has evaporated about $7 trillion since hitting a peak in 2021.

Several factors are mentioned for the sluggishness of the Chinese stock market, including weak domestic demand, deflation, and real estate problems. However, the loudest voices point to the most significant issue being President Xi Jinping himself. The regulation of tech companies that started in 2020 has shattered investor confidence, and even the strict “Zero-COVID” policy that started the slump in domestic demand failed. Strict controls on mortgage loans led to defaults by real estate developers.

Recently, Xi seems to have recognized that the policies were misguided and is belatedly taking measures to suppress short-selling and ordering state-owned asset management companies to buy stocks. Earlier this month, he replaced the secretary-general and chairman of the Securities Regulatory Commission, which oversees the stock market. However, he remains cautious about large-scale stimulus measures.

The Economist noted, “Xi is exacerbating the situation rather than accepting the need for widespread change. The real obstacle to change is Xi’s firm belief that he must have complete control.” It added, “To regain investor confidence, he needs to reconsider the state’s role in the economy, but it doesn’t seem like President Xi is willing to let go of his control.”

In contrast, there are predictions that even if the Chinese stock market repeats Japan’s “Lost Decades,” it can eventually be overcome. Goldman Sachs explained, “Whether China is heading to the extreme of a Japanese-style recession remains to be seen, but what’s important is that there are ways to make money even in a prolonged bear market similar to Japan’s lost 30 years.”

Goldman Sachs predicts that consumer goods, artificial intelligence (AI), and industrial robots will support the Chinese stock market in the future. It also recommended “buy” for 40 stocks. However, Goldman Sachs also advised that active fiscal easing and economic adjustment from production to consumption are necessary for a rebound.

Japan is also creating an investment boom through several processes, including a weak yen through easing monetary policy and corporate governance reform. As a result, the Nikkei 225 index of the Japanese stock market set a record high for the first time in 34 years on the 22nd.

Seth Fischer, Chief Investment Officer (CIO) of Oasis Management, emphasized, “Japan has been working to create a productive corporate environment and a good environment for stock investment for the last 10 years. People don’t believe that China can do the same as Japan. They need to learn from Japan.”