Since the late September of 2024, China's monetary and financial policies have undergone a significant easing that surpassed market expectations. This was accompanied by a series of new measures aimed at invigorating the economy, leading to heightened confidence among investors. Between September 24 and the following trading days, the Shanghai Composite Index surged from 2770.75 to 3336.50 points, marking an impressive increase of 20.4%. Despite differing opinions on the sustainability of this rally in the capital market, the underlying positive fundamentals of the Chinese economy remain intact. It is of strategic importance to elevate the capital markets for the development of China's economy, indicating a firm foundation for continued growth in the stock market.

At present, China is navigating a critical transitional phase regarding its economic momentum, striving to identify new growth drivers. In this context, boosting the capital market plays a vital strategic role in enhancing the economy.

First and foremost, the capital market stands as a significant force in accelerating technological progress and developing new productive capabilities. The shift from being a "manufacturing powerhouse" to an "innovation powerhouse" involves advancing research and application in high-tech industries. The diverse financial instruments within the capital market, such as equities and bonds, are essential for directing social capital into crucial emerging industries, thereby providing funding for technological research and project development. Such support is pivotal for upgrading industrial structures and driving both technological innovation and an evolution in the supply chain, ultimately cultivating new productive capacities.

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Furthermore, the capital market is a key avenue for China to assert its pricing power. In the global value chain system, possession of a strong capital market correlates with control over pricing authority. In this realm, pricing power relates to market participants' influence on the prices of assets, including stocks, bonds, and commodities. The interplay between the capital market and pricing power is significant; effectively structured capital markets ensure optimal global capital allocation by establishing price via supply and demand dynamics. To enhance its global financial market stature, China is constructing influential index frameworks like the Shanghai Composite Index and the CSI 300 Index. This also provides an avenue for Chinese enterprises to engage more extensively in the globalization process, thus improving their standings within the global value chain.

Moreover, a robust capital market is crucial for optimizing the financial structure. The development of capital markets fosters a higher ratio of direct financing, mitigating risks faced by the overall economic system and allowing for more efficient distribution of financial resources. The reform of the stock issuance registration system initiated in China has simplified the direct financing process. As a more layered capital market framework continues to develop, direct financing ratios are expected to rise, facilitating structural adjustments in the economy and aiding in the transformation and upgrading of businesses. Additionally, advanced capital markets attract foreign investors to hold RMB-denominated assets, prompting the internationalization of the currency.

The capital market also possesses the ability to directly affect and amplify wealth effects. Wealth effects manifest through the investment returns of households in the capital market that influence marginal propensities to consume, thereby enabling household disposable income increases and elevating consumption tendencies. A thriving capital market can help create a more equitable distribution of wealth by providing diverse investment opportunities and tools. Additionally, the capital infused from listed companies and institutional investors into the real economy can stimulate a renewed enthusiasm for entrepreneurship and investment, subsequently leading to a virtuous cycle of increased quality company listings and financing.

It should also be emphasized that efforts to invigorate the capital market are reflective of an innovative approach to macroeconomic governance. The recent influx of incremental policies aimed at rejuvenating asset prices serves to bolster confidence and invigorate the economy, while also leveraging the wealth effect to promote consumption and investment. Rapid market responsiveness to pro-policy sentiment provides immediate leverage to attract incremental funds such as household savings, bank wealth management products, and foreign investments into the market. Concurrently, a series of incremental policies can foster a cohesive positive expectation among market participants through the herd effects prevalent in financial markets. This strategy exemplifies a shift in macroeconomic governance from pure quantity management to a synergistic combination of stock and incremental management.

The Chinese stock market possesses a solid basis for sustained growth. First, the current valuation levels in the stock market are relatively low, rendering it an appealing long-term investment option. From January 4, 2002, to September 30, 2024, the average price-earnings ratio for Shanghai A-shares was 20.5 times. However, as of September 30, 2024, the ratio plummeted to 13.4 times, significantly below its historical average. In comparison, as of the same date, the average price-earnings ratios for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite indexes stood at 28.8, 28.2, and 43.9, respectively, while Japan's Nikkei 225 had a ratio of 21.1 times. Compared to the high valuations in the US and Japan that carry inherent adjustment risks, China's stock market presents lucrative long-term investment prospects. As a rational valuation framework is established and the price-earnings ratio rises, the wealth effect within the capital market is anticipated to multiply.

Secondly, the rebound in nominal GDP growth driven by a pivot in macro policies will likely enhance the profitability of listed companies. Recently, China's macro policies—covering fiscal, monetary, and real estate regulations—have undergone a transformation with measures such as reductions in reserve requirements, interest rates, and stock mortgage rates being implemented. Expectations are that with these more lenient policies, inflation will gradually return to a 2%-3% historical norm, while the continually negative producer price index could see a normalization upwards, indicating a clear rebound in nominal GDP growth. This improvement is bound to not only boost listed companies' profitability but also fortify investor confidence.

Foreign investment in securities is trending toward China due to attractive prospects, underpinning the stock market's upward trajectory. The capital flowing in from the 'northbound funds' exhibits both profit-seeking tendencies and volatility. Despite experiencing substantial outflows, it should be noted that shifts in foreign short-term capital typically reflect changes in the Chinese stock market rather than instigate them. As such, fluctuations in short-term capital often amplify price volatility but do not fundamentally alter market directionality. The present stabilization and rebound in the Chinese stock market, combined with the commencement of a US interest rate cut cycle, is expected to attract significant external capital inflows, aiding in the persistent ascendance of the stock market.

Additionally, measures taken to avert and resolve financial risks related to real estate, small and medium-sized financial institutions, and local debts have shown initial effectiveness. The property market in China is demonstrating positive shifts, while risks related to small and medium-sized financial entities in operations and governance have been effectively curtailed. Moreover, governance efforts targeting local debt risks are progressing steadily, which not only mitigates potential systemic financial risks but also creates a stable environment for the development of the Chinese stock market.

Furthermore, ongoing reforms in the capital market facilitate the sustainable long-term development of the stock market. Since 2024, the China Securities Regulatory Commission has introduced several measures aimed at regulating stock market operations. These include the cancellation of various margin financing activities, tighter restrictions on shareholder sell-offs, harsher penalties for financial fraud and insider trading, limits on fund manager salaries, and improved guidelines for market capitalization management. These initiatives not only help to enhance the institutional framework of the stock market but also promote sustainable market growth. In parallel, ongoing government efforts to optimize investor composition encourage the influx of mid- to long-term funds into markets, supporting improved market liquidity.

To bolster China's capital market effectively, a series of actions must be undertaken. In light of the crucial phase of transitioning the real economy, it is essential for China to harness the powers of capital markets to promote high-quality growth, thus strengthening the role of capital markets in serving the real economy while aiding in constructing a modern socialist nation.

This involves implementing expansive fiscal policies promptly. Given the heightened market expectations, it would be prudent to issue special government bonds in phases and scales, aimed at repairing household and corporate balance sheets, supporting infrastructure investments, stabilizing the real estate sector, and nurturing growth in other key areas.

Secondly, it is imperative to continue preventing and resolving systemic financial risks across critical domains. There should be a concerted effort to restructure and replace local government debts, which may require the central government to take on additional responsibilities. Better provision of reasonable financing for real estate enterprises and addressing residents' home financing needs equally will be essential. The orderly advancement of reforms for small and medium-sized banking institutions should also expand capital supplement pathways and optimize ownership structures.

Thirdly, there should be a rollout of targeted measures focused on invigorating the stock market. First, optimizing the initial public offerings (IPO) process for A-shares is essential. Given the significant market demand, it is crucial to reinstate a regular IPO mechanism to increase stock availability and restore the financing functionality of the market, broadening exit routes for equity investments and fostering the growth of venture capital and private equity. Second, there should be improvements in the mechanisms for short selling, which can mitigate excessive price surges and potential bubbles; authorities should reconsider actual restrictions on large-scale stock sales by certain institutional investors, allowing for more flexible risk management and asset allocation within stipulated regulations. Third, upping the proportions of social security and insurance company funds entering the capital market could also be considered. Fourth, it is essential to enhance risk awareness among individual investors through reinforced risk education via both online and offline channels, offering clear warnings about the risks associated with stock and fund investments. Fifth, based on the current scale of the capital market, there is room to consider utilizing special government bonds to fund a stock market stabilization fund, substantively enhancing market stability.