Why China should engineer a stock market boom to boost consumption

History shows China's stock booms spur spending by households.

A leading Chinese economist says Beijing can achieve its long-coveted goal of boosting domestic consumption by using financial policy measures to engineer a boom in the stock market.

In this briefing:

• The history of China’s stock market shows booms coincide with sharp upticks in domestic consumption.

• Lian Ping (连平) has six policy proposals for boosting the health of the stock market, with a view to expanding the role of consumption in the Chinese economy.

Stock market booms have historically boosted Chinese consumption

Lian Ping (连平), director of the China Chief Economist Forum and professor at East China Normal University, argues that the wealth effects created by a rise in stock prices will enable Chinese households to spend more on consumption.

In a recent opinion piece (连平：提振消费需要资本市场持续向好), Lian points out that the relationship between stock market performance and household consumption is well-attested by China's recent economic history.

During the period from April 1999 to June 2001, the Shanghai Stock Exchange Composite Index (SSE Composite) surged from 1100 points to 2200 points.

Growth in retail sales lifted from 6.5-7% in the second and third quarters of 1999 to 10.1% by the end of 2001, for a four percentage point acceleration.

From November 2005 to October 2007, the SSE Composite saw an even stronger growth surge, rising from 1100 points to a record high of 6124 points.

Retail sales growth lifted from an already high level of around 13% at the end of 2005, to over 16% by October 2007, for an acceleration of 3.9 percentage points.

The aftermath of the Global Financial Crisis saw another mini-boom in Chinese stocks that helped to boost consumption following a modest lag.

The SSE composite rose from 1730 to 3400 points during the period from October 2008 to July 2009, nearly doubling as Beijing's four trillion yuan stimulus package took effect.

Retail sales growth expanded from 15% in July to a stunning 18.4% by the end of 2010.

Lian identifies several other boom periods for the SSE Composite since then, including:

• May 2014 - June 2015.

• February 2016 - January 2018.

• December 2018 - December 2021.

"In summary, since the end of 1999, the domestic stock market has undergone roughly six medium-to-large booms," Lian writes.

"Two of them saw share market gains simultaneously drive recoveries in domestic consumption growth.

"Two played an advance role in spurring consumption by increasing household wealth.

"Overall, the strong performance of the stock market makes a positive contribution to spurring consumption by increasing household income.

"We should not underestimate the role of gains in the stock market in driving consumer spending."

How Beijing can use policy to incubate a boom in Chinese stocks

Lian argues that the conditions are especially ripe at present for using the wealth effects of a boom in Chinese stocks to drive domestic consumption.

As of the end of 2024, China was host to over 200 million A-share investors, with a total potential investor base of more than 750 million people.

"Policies for driving consumption absolutely cannot overlook this demographic," Lian writes.

"It is necessary to implement vigorous policies to strengthen the appeal of the stock market, drive even more liquidity into the market, effectively support smaller investors, and use gains in the asset earnings of households to achieve the goal of spurring consumption."

Lian makes six policy recommendations for improving the health of China’s stock market with a view to boosting domestic consumption levels. These include:

1. Looser monetary policy.

2. Using sovereign investors as stock market stabilisation funds.

3. Optimising the entry of long-term funds into the market.

4. Reducing barriers to foreign investment.

5. Creating a cohort of leading investment banks and institutional investors within China.

6. Preferential tax policies for retail investors.

One: Implement more vigorous and loose monetary policy.

Lian advocates reducing both the required reserve ratio and the policy interest rate in order to further expand the money supply.