Commentary: Can the Stock Market Replace Real Estate as China’s New Engine?

The article analyzes the engines driving economic growth, focusing on China’s transition from real estate to the stock market as a core driver. Economic growth can be examined through several lenses: factor inputs (population, land, capital, technology, management), aggregate demand (exports, investment, consumption), and sector-specific engines like real estate, industrialization, or urbanization. When one engine falters—such as unsustainable population growth or a real estate slowdown—other drivers, such as innovation or consumer demand, must take over. This context underpins the pressing question: can the Chinese stock market assume real estate’s previous role as a principal growth engine? [para. 1][para. 2]

Historically, Chinese household wealth has been intricately tied to the flourishing real estate market, which also fueled investment, consumption, and provided vital financing for local government infrastructure. However, recent years have seen property prices decline, real estate investment shrink with double-digit negative growth, and defaults proliferate among developers, crippling related industries and local government finances. Real estate’s contribution to consumption has waned, driving up household debt and dampening both the willingness and capacity to spend. Real estate's share in household wealth dropped from over 70% to between 50% and 60%, exacerbated by decreased liquidity. With real estate’s four major functions (wealth reservoir, investment driver, consumption promoter, land-based finance source) all weakening, attention has shifted to the stock market to see if it can assume these vital roles. [para. 3][para. 4][para. 5][para. 6][para. 7][para. 8]

A vibrant stock market can stimulate private investment more effectively than government or state-owned enterprise (SOE) investments, which often lack efficiency and fail to inspire private capital. According to Tobin’s Q theory, when the market valuation of companies is higher than their replacement cost (Q>1), firms are incentivized to invest in new projects, boosting overall investment; a low Q has the opposite effect. Higher stock prices also enable companies to raise capital more readily and motivate them to innovate. For example, companies like BYD and Xiaomi have recently secured tens of billions of yuan via private placements as market activity increased. Shareholders benefit too, pledging or selling appreciated shares to fund new ventures or personal consumption, further aiding economic recovery. Hence, fostering a healthy, ascending stock market is deemed crucial to offset declining real estate investment. [para. 10][para. 11][para. 12][para. 13][para. 14][para. 15]

Beyond investment, a thriving stock market can spur consumption through several channels: direct wealth effects (higher asset values encourage spending), expected income effects (anticipated gains boost confidence), and liquidity effects (stocks are more easily spent or borrowed against than property assets). However, these benefits are mostly felt by middle- and upper-income groups, since lower-income households hold fewer financial assets. To fully realize the consumption potential, income distribution reforms, rural land transfers, and enhanced social security are recommended. [para. 16][para. 17][para. 18][para. 19][para. 20]

The article notes a major transition in the composition of household wealth: while real estate’s total market value has fallen sharply, China’s A-share market capitalization reached around 110 trillion yuan by August 2025 (less than 80% of GDP, versus the US at 200%). Looking ahead, projections suggest China’s stock market could surpass 300 trillion yuan by 2030—more than a threefold increase—potentially displacing property as the primary store of household wealth and restructuring the national wealth distribution. [para. 21][para. 22][para. 23][para. 24][para. 25][para. 26]

However, the challenges are vast. Unlike the innovation-led US stock market, China’s is dominated by traditional sectors. For China to match the US in economic and technological prowess, policy changes—especially looser monetary policy and regulatory reforms—are needed, alongside a fundamental shift toward supporting innovation and broad-based consumption. Ultimately, the current pivot to the stock market represents a response to real estate’s decline and broader economic pressures, rather than a freely chosen strategy. Still, with policy support and evolving market philosophy, the Chinese stock market is poised to become a new growth engine. [para. 27][para. 28][para. 29][para. 30][para. 31][para. 32][para. 33][para. 34]