Over the last few decades, one of the main engines of Chinese growth has been the real estate sector. Growing at breakneck speeds, the sector demanded cement, iron, and various other components at rates that ended up establishing an entire supply chain in and out of China.
More importantly, real estate growth was fueled and financed largely by middle- and upper-middle-class Chinese investors seeking safe and growing investments for their savings. Knowing that the government would always support, finance, and subsidize construction companies across the country with easy lines of credit and low interest rates, this investment seemed safe and profitable. The government continues to encourage migration from rural areas to urban areas throughout the country.
Over the last few years, however, the tides have turned. We’ve seen companies like RiseSun Real Estate, Modern Land, and Fantasia, among others, declare bankruptcy, with real estate giant Evergrande narrowly avoiding that fate after defaulting on its debt. The real estate crisis sounded alarms around the world about the viability of continuing the formidable rate of Chinese growth.
The economic impacts are well-known, but there was another enormous – yet silent – impact on the future of the Chinese Communist Party (CCP) at the same time: the rise of Chinese stock markets as an alternative investment destination.
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Along with the real estate crisis, several Chinese technology companies began being rejected by the U.S. Securities and Exchange Commission (SEC) and were unable to enter the various stock exchanges of the United States. The lack of transparency and the growing tensions between China and the United States were among the reasons behind the U.S. government’s decision to block the Chinese companies.
The Chinese government was not very fond of the idea of seeing major technology companies listed on U.S. exchanges, as they would be subject to U.S. law and independent audits. For Chinese leader Xi Jinping, the ideal scenario would be to have these technology companies listed on markets under Chinese jurisdiction, given their strategic character.
To this end, the strengthening of the stock exchanges in Beijing, Shanghai (regular and Star), and Hong Kong was imperative. With large Chinese companies restricted to local exchanges, Chinese citizens who used to see the real estate sector as a good and lucrative investment opportunity began investing in the capital market, attracted by the Chinese powerhouses in the technology sector. The money that went to the real estate market began going to the capital market instead.
Yet this poses a new problem for Xi Jinping, and the magnitude of its impact is still uncertain. With an enormous and growing portion of the population investing in the country’s own stock exchanges, outside observers are able to measure variations in popular support for the government, confidence in public policies, and samples of popular satisfaction or dissatisfaction with the government’s economic policies and narratives for the first time since the emergence of the People’s Republic of China. As investing in the market becomes more popular, market valuations become a proxy measurement for confidence in China’s economy – and its government.
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Since listed companies count on the direct participation and influence of the Chinese Communist Party itself, the government’s positioning, announcements, or responses to certain public policies may result in a drop (or increase) in the market value of certain companies. As a result, popular confidence (or part of it) in what the government does or fails to do is reflected in the fluctuations in the value of strategic companies for the CCP, allowing external observers to measure satisfaction or popular rejection toward the government for the first time.
For a government that does not want any lack of confidence in the party to be publicized, the Chinese financial market does not help. A functioning stock market is generally not a friend to a centralized, single-party, and communist government.
Yet Xi may not have a choice. These companies need to list somewhere to remain economically viable, and seeing them list on the United States was a big issue: China was losing direct control and jurisdiction over certain companies, and to ts biggest rival, no less. On the other hand, the real estate crisis demanded another destination for Chinese savings to avoid economic stagnation.
Measuring popular reactions via the financial market is not simple, but it is a big step for those who had nothing to go off of before (public opinion polls, for example). The rise in China’s stock markets thus opens up yet another window to observe the relationship between the government, party, and people.