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

The article examines the evolving engines of China’s economic growth, focusing on whether the stock market can assume the critical roles once played by real estate. Historically, China has relied on various growth engines, including population, capital, technology, exports, investment, and sectors like real estate and industrialization. As each engine falters, a new one of equivalent power must emerge—prompting the question of whether the stock market can succeed real estate, especially now that real estate's contribution to GDP and wealth generation is waning. [para. 1][para. 2]

Over the past two decades, real estate served four fundamental functions: acting as the principal reservoir of household wealth, stimulating investment, promoting consumption, and providing land-based finance for local governments. With persistent declines in property prices and sharp negative growth in real estate investment, these functions have eroded. Real estate investment once comprised over 10% of GDP, driven by rapid urbanization, but recent years have seen widespread defaults and significantly weakened local government finances. Diminished property values have led to reduced household wealth—from over 70% concentrated in real estate to around 50–60%—depressing consumption and increasing household debt. Accordingly, policymakers and investors are looking to the stock market as the next growth engine and source of economic vitality. [para. 3][para. 4][para. 5][para. 6][para. 7][para. 8][para. 9]

A rising stock market can invigorate private investment through the well-known Tobin’s Q framework: when market valuations exceed replacement costs (Q > 1), firms are incentivized to invest and expand. Conversely, low stock valuations have suppressed investment in recent years. Higher stock prices also enable companies to raise funds more easily, bolster their ability to pledge shares for loans, and stimulate entrepreneurial activity—reviving investment capacity across sectors. Empirical evidence this year, such as sizable private placements by companies like BYD and Xiaomi, underscores this potential. Thus, with real estate faltering, policy focus has shifted toward leveraging a buoyant stock market to drive private investment and broader economic growth. [para. 11][para. 12][para. 13][para. 14][para. 15][para. 16][para. 17][para. 18]

The stock market’s “wealth effect” also extends to consumption. As stock values appreciate, households—particularly those with significant equity holdings—experience greater disposable income and increase consumption, influenced both by direct and expected income effects, as well as liquidity advantages versus real estate. However, stock-driven consumption is structurally skewed toward wealthier households. Effective policies to boost overall consumption could require broader income distribution reforms and support for rural residents. Nevertheless, with a weakening real estate pull, a robust and growing capital market is poised to become a new engine of prosperity, as reflected in recent policy statements emphasizing increased property income for residents. [para. 19][para. 20][para. 21][para. 22][para. 23][para. 24][para. 25]

China’s wealth reservoir is quietly shifting from real estate to the stock market. At its peak, real estate was valued at over 450 trillion yuan (over four times GDP), but its valuation has since shrunk by 30%. Meanwhile, the A-share market has risen to about 110 trillion yuan (less than 80% of GDP), with room for substantial further growth; projections suggest the stock market could surpass 300 trillion yuan by 2030 if it approaches the valuation ratios of global peers like the U.S., India, and Japan. Such a transition would fundamentally shift the national wealth structure, aligning household investment with the broader goals of economic transformation. [para. 26][para. 27][para. 28][para. 29][para. 30][para. 31][para. 32]

Yet, challenges remain. While global trends (such as low/negative interest rates in the U.S., Japan, and Europe) have powered capital markets, China must determine how swiftly it can follow suit to support both its real economy and financial markets. The composition of leading companies in China’s stock market—dominated by traditional sectors like banks and oil—also lags the innovation-driven growth seen in the U.S., where tech giants propel market capitalization. The vast gap in capital expenditure between top U.S. and Chinese tech companies highlights the need for a more supportive capital market and policy environment to foster technological advances. [para. 33][para. 34][para. 35][para. 36][para. 37][para. 38][para. 39]

Ultimately, shifting China’s growth engine to the stock market is less a matter of choice than necessity. Overcoming today’s economic growth challenges will require comprehensive reforms spanning household income, social security, fiscal, and monetary policies, alongside developing the “innovation function” to replace traditional growth logics. For the capital market to become a sustainable engine, it must generate real investment, consumption, and innovation, not just rising valuations. Recent increases in new stock account openings indicate growing investor confidence. With ongoing policy reform and improved governance, China’s stock market is poised—though not guaranteed—to be the new engine of economic growth. [para. 40][para. 41][para. 42]