As China’s economic future comes into sharper focus, a critical message for global investors is becoming clearer: do not buy Chinese stocks expecting a massive fiscal stimulus to prop up the economy. Instead, the true bull case for Chinese equities lies in the country’s structural transformation and a powerful shift in capital allocation. The Chinese economy is undergoing a profound transition, and a large-scale stimulus is not only unnecessary, but it could hinder the long-term goals of modernization and sustainable growth.
The prospect of fiscal stimulus in China has dominated global markets for some time. Pundits and international traders have speculated wildly about whether the Chinese government will roll out an enormous spending package to invigorate growth. Predictions have ranged from RMB 2 trillion to 10 trillion in potential stimulus measures. Yet, this narrative misses the bigger picture: China does not need a bazooka of fiscal stimulus, and relying on such expectations risks misunderstanding the country’s economic strategy.
Over the past few months, China’s government has rolled out a set of smaller, targeted measures aimed at stabilizing the economy. These include cuts to the reserve requirement ratio (RRR), lowered mortgage rates, special local bond sales, and cash-for-clunkers programs. While these are certainly beneficial, they are not the massive intervention that some global investors are hoping for. Instead, they represent a modest effort to boost growth, particularly after China’s GDP growth target of 5% was set for the year.
These smaller, measured actions should be interpreted as a signal that China’s leadership is not rushing to flood the economy with liquidity. And, this approach is wise: if anything, China’s recent past shows that over-reliance on stimulus can be more damaging than beneficial. The enormous fiscal packages deployed during the 2008 global financial crisis, followed by an unchecked real estate boom, contributed to China’s current debt challenges and led to the “three red lines” policy, which has curbed reckless borrowing in the property sector.
One of the most compelling reasons to consider Chinese equities today is the enormous amount of household savings in the country. Chinese households are sitting on a staggering $20 trillion in bank deposits, with relatively few options for investment. Capital controls prevent easy access to foreign markets, and regulators have already begun dismantling wealth management products that once offered an alternative investment route with implicit guarantees. This leaves the stock market as one of the few viable outlets for these funds.
The People’s Bank of China (PBOC) has taken steps to ensure that the equity market becomes a more attractive option for both institutional and retail investors. Notably, it has introduced a collateral replacement scheme that encourages institutions to increase their holdings of risk assets, and a program designed to boost bank lending for share buybacks. These moves, while not headline-grabbing in the way a large stimulus might be, could have a significant and sustained impact on equity markets.
China’s economic woes have been overblown in some international circles. The perception that China is teetering on the edge of Japan-style stagnation fails to take into account the fundamental strength of China’s savings and its ability to direct this wealth toward productive investments. Domestic markets, which tend to understand these dynamics better, have already shown their confidence in China’s equity markets. After a period of volatility, they are now stabilizing and beginning to move upward.
Much attention has been given to China’s property sector, which has been a key driver of growth over the past two decades but has also been the source of significant financial risk. Recent years have seen a controlled demolition of the property market, with regulators instituting stringent credit controls, such as the “three red lines” policy, to prevent developers from over-leveraging. This has curtailed speculative building and has brought a measure of stability to the market. While some fear that the property sector’s downturn could have wider repercussions for the economy, this restructuring is necessary for China to shift away from its over-reliance on real estate.
China’s decision to limit the property sector’s dominance is a sign that it recognizes the need for economic rebalancing. This ongoing transition from a property-driven growth model to one focused on advanced manufacturing, technology, and services will be critical for the country’s long-term success. As the real estate bubble is deflated in a controlled manner, China’s economy will be in a better position to allocate resources toward more sustainable sectors.
China’s government is not just focused on managing the property sector—it is actively laying the groundwork for the next phase of its economic transformation. Key to this is the rise of high-tech industries, including clean energy, semiconductors, aerospace, robotics, and biotech. These sectors will drive the next wave of growth, and they need a vibrant equity market to thrive.
Flooding the economy with stimulus to shore up short-term growth would be counterproductive to this vision. Instead, China is fostering a more mature and sustainable growth model, with a focus on innovation and technological advancement. This approach, sometimes described as “establish the new before abolishing the old,” reflects a long-term strategy that prioritizes the modernization of China’s economy over quick fixes.
China wants to be a leader in sectors that will define the global economy of the future. It wants Silicon Valley’s innovation, Japan’s car manufacturing expertise, Germany’s scalable small-to-medium enterprises, and Korea’s conglomerates—without falling into the traps of pollution, political capture, or income inequality. To achieve this, China does not need to revert to the old playbook of large-scale stimulus; it needs to allow its economy to evolve naturally, with equity markets playing a critical role.
Some have raised concerns that China is facing deflation, but these fears are overstated. While there are deflationary pressures in certain sectors, they are largely the result of increased production rather than falling demand. China’s “new three” industries—solar power, batteries, and electric vehicles—are rapidly increasing output, and this surge in supply is driving down prices. However, this type of deflation is fundamentally different from the demand-driven deflation that plagued Japan during its “lost decades.”
In China, demand is still growing, albeit at a slower pace than before. Real disposable income for households increased by 6.1% in 2023, and lower-tier income growth has been robust, even as the income of top-tier professionals has plateaued. This shift is consistent with economist Simon Kuznets’s theory that inequality rises in the early stages of development before eventually falling as wealth becomes more widely distributed.
China’s economic transformation is not just about technological innovation or high-growth sectors; it’s also about creating a more equal and high-trust society. Xi Jinping’s anti-corruption campaign has been one of the most far-reaching and impactful elements of his tenure, significantly cleaning up the financial and corporate sectors. The crackdown on corruption has also instilled a greater sense of trust in Chinese society, making it possible for high-trust business models, such as shared bikes and vending machines, to flourish.
This shift toward a more equitable and trustworthy society is crucial for China’s long-term economic stability. Sustainable growth requires a level playing field, and China’s efforts to clamp down on corruption and ensure that its financial system operates transparently are essential steps in this direction.
The bull case for Chinese stocks is not predicated on the expectation of a massive fiscal stimulus. Instead, it is rooted in the country’s structural transformation, the $20 trillion in household savings looking for a home, and the emergence of high-tech industries that will drive future growth. China’s government is wisely avoiding the pitfalls of over-stimulating the economy, focusing instead on creating a sustainable path forward.
While international markets may have whiplashed over expectations of a stimulus package, domestic markets are acting with more clarity. As China continues its economic transition, investors should recognize that the absence of a massive stimulus is not a sign of weakness but a sign of strength. China is positioning itself for long-term success, and its equity markets will play a central role in this future.
