Chinese stocks surge forward as reforms take hold

Chinese stocks are outperforming their global peers by the largest margin in eight years, a sign that policymakers’ efforts to revive the market are paying off even as many foreign investors are reluctant to return.

The MSCI China index has risen 35 percent this year, compared with a 14 percent gain in the MSCI world index of developed markets stocks, the largest margin of outperformance since 2017.

This year’s rise comes after several global fund managers last year described China – whose stock market has been in near-continuous decline since peaking in early 2021 – as… “Not investable”following a government crackdown on the private sector and a long-term real estate crisis.

However, Beijing is seeking to improve corporate governance at state-owned enterprises and private companies, and has launched massive monetary and fiscal stimulus, including measures to boost economic growth. Buyback of financing shares.

Investors say these measures – along with a campaign to increase Insurance sector stock purchases The coordinated purchase – by the so-called National Team of State Enterprises – began to transform the stock market into a practical alternative to real estate.

“Part of the reason money has gone into real estate is because the stock market has been viewed as a bit like Macau,” said Brendan Ahern, chief investment officer at KraneShares, an exchange-traded fund provider that offers products that invest in China. He was referring to the tendency of locals to view the market as a casino rather than a place to allocate long-term savings.

He added: “If you can make the stock market an attractive source of revenue, that will arguably divert money from going back to real estate. This makes sense for the government.”

Mark Headley, head of investment management firm Matthews Asia, said the government views the reforms as necessary to help its capital markets compete with the United States.

“The Chinese government and the Chinese people have finally realized that just owning a fifth apartment somewhere is not the ideal savings plan,” he said.

China’s stock market is small compared to its economy. The country accounted for 16.8 percent of global GDP in 2024, but contributed only 10.3 percent of the global stock market market capitalization, according to the World Bank. China represents only 3.35 percent of the MSCI World All-Country Index.

However, Archie Hart, portfolio manager at Ninety One in London, said the number and quality of Chinese stocks had improved significantly over time. Of the more than five thousand listed companies in mainland China, 2,504 have a market capitalization of more than $1 billion, according to data provider Wind.

“I look at it from a very long-term perspective,” Hart said. “Thirty years ago, your choices were owned by the state.” “Today you have an incredible array of e-commerce companies, technology companies, manufacturing companies, and consumer brands.”

Regulators have stepped up efforts to improve stock market returns and corporate governance at state-owned enterprises in China. Measures include linking managers’ KPIs to stock price performance and return on equity.

When the stock market crisis worsened at the beginning of last year, Beijing brought in Wu Qing, Nicknamed “The Butcher Broker”As head of the country’s securities regulatory authority in a move to reduce volatility and stabilize the market.

In a speech this year, he referred to foreign investors as “important participants in China’s capital market” and said he would accelerate measures to open up capital markets to the outside world.

In September last year, the China Securities Regulatory Commission encouraged listed companies “to make legal and compliant use of mergers and acquisitions, stock incentives, cash dividends, investor relations management, information disclosure, and share buybacks to raise the value of their investments.”

“There is a major effort by regulators in these agencies to make mainland Chinese companies credible to international investors,” said Amar Gill, secretary-general of the Asian Corporate Governance Association.

But some in the industry see resistance within parts of government to market reforms that could reduce state influence over corporate decision-making.

“I would say there is tension between the agencies, the organizers and the party,” Gill said. “The party still wants to control state-owned companies and to some extent private companies as well, while regulators are looking to see how they can make these companies focus on shareholder value.”

China’s outperformance this year comes as global investors seek to diversify their investment portfolios, which are often heavily concentrated in the United States.

However, US-China tensions and macroeconomic uncertainty are preventing many from reconsidering mainland stocks, even as Hong Kong proves attractive, and other Asian markets such as South Korea and Japan are widely viewed as less risky.

“It will take two to three years of steady returns to attract local and foreign investors,” Headley said.

Foreign inflows into the mainland Chinese market have been weak this year, according to EPFR data that tracks ETFs and mutual funds based outside China. Mainland stocks received just $1.2 billion in net foreign investment this year.

Some foreign investors remain unconvinced that China’s reforms have gone far enough, with many seeing recent initiatives as signs that Beijing wants to increase its control over companies and markets.

“There is still a significant tendency to be skeptical” in Western countries toward China, ACGA’s Gill said.

Ryan Manuel, managing director of Bilby, which analyzes government policy using artificial intelligence, said there remains tension between China’s capital markets reform and the government’s focus on controlling strategically vital sectors.

“The muscles of industrial policy are stronger than the muscles of capital markets reform,” Manuel said.

However, options are limited for Chinese investors. “Where else would you put your money in China with the real estate market at a standstill?” Manuel added.

Additional reporting by Haoxiang Kong Kong