Investors in Chinese assets have experienced a magical transformation over the past month. In the first half of the month, pessimism reached its peak, with a feeling akin to the end of the world. However, as the month drew to a close, enthusiasm was suddenly ignited, as if entering a golden age that lasts for a millennium.

The surge in the stock market is more reflected in the virtual economy, and with its soaring enthusiasm, the so-called "rational voices" will swarm, believing that the "irrational" prosperity is unsustainable and that the market driven by "animal spirits" will be ephemeral. Some people will even compare this time with the market in 2015.

For this reason, let's explore what will happen next with the rapid rise in the stock market? How should investors understand the reasons for this rise and the logic behind it? What is different from the past?

Attentive investors will notice that during the press conferences of various ministries and commissions a week before October 1st, the policies for stabilizing growth this time were interpreted.

Compared to the stimulus policies after 2008, there has been a clear shift. The past stimulus policies focused on infrastructure construction and relied on local governments to lead investment (investing in real estate and various emerging industries). This time, there is a clear shift towards the consumer end of residents, stimulating the growth of domestic demand, and no longer emphasizing the industrial end. After all, the world is now facing our overcapacity.

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How to stimulate consumer spending by residents?

First, let the pockets of the common people swell. There are three ways to make the pockets of the common people swell:

1. Increase the property income of the common people, that is, to boost the real estate market and the stock market. Many people have discussed before, feeling that the decline of the residents' balance sheet is the main problem faced by our country at present. In fact, in an era of credit money, as long as the central bank dares to directly participate, there is no such thing as a decline in the residents' balance sheet. The Federal Reserve has demonstrated this to the world in 2008 and 2020, and "Abe's three arrows" have also demonstrated to global economic decision-makers.

So, at this press conference, our central bank governor said, "If 500 billion is not enough, we can add another 500 billion. If the second 500 billion is not enough, we can add a third 500 billion," which means the central bank can provide unlimited liquidity. The market started to soar at that moment, and confidence surged.

2. Issue consumption vouchers to low- and middle-income groups. This direct way of giving money to stimulate consumption has been practiced by mature economies in 2020, and the results were quite good. This time, we also learn from it.3. Enrich the residents' pension insurance and enhance social welfare, so that residents can consume without worries.

It can be said that this time is a significant transformation of our policy, shifting from the past "digging and working" to create excess capacity, to "resting and eating" to digest capacity.

Before the National Day, the market was fully stretched, and many people thought of it as "irrational prosperity," which is a short-term reaction under the United States' interest rate reduction and the appreciation of the renminbi.

However, during the National Day holiday, in the relatively rational American and Hong Kong markets, there was also a rapid rise in Chinese assets. This indicates that it is not how "irrational" domestic investors are, but rather the global investors' long-term optimism towards China's policy shift towards stable growth this time, and also a recognition of Chinese assets being in a value lowland.

Moreover, this time the central bank's policy towards the capital market has a significant breakthrough:

Firstly, financial institutions and major shareholders of listed companies are allowed to borrow from commercial banks to enter the stock market. In the past, we have always explicitly prohibited this. In the past, if there were credit funds entering the stock market, they would be severely punished. This time, not only is it allowed, but it is also encouraged, and the interest rate is very low, enjoying the preferential interest rate of special loans.

Secondly, the central bank can directly buy and sell government bonds, which is also a significant policy breakthrough. In the past, we have always envied the Federal Reserve and the Bank of Japan for being able to directly buy and sell government bonds, providing liquidity to the market. This can avoid market liquidity crises, especially in extraordinary times. The central bank's direct involvement can prevent economic crises caused by liquidity crises.

In our country, funds have always been heavily sedimented in the banking system, and what remains in the capital market is the leftovers. This time, the opening up of bank credit funds, of course, investors see hope, and confidence is subsequently enhanced.

The Chinese economy has experienced continuous clearing and continuous expansion and stable growth. The policy space available is not like in 2008. Therefore, every policy introduced is worth repeated discussion and should be introduced cautiously. The best policy should have the effect of "using a small force to move a great weight." Therefore, it is necessary to cherish the "levers" that still have room left.

From the current national conditions, the capital market is a good "lever."The stabilization of the asset market has a positive impact on the entire macroeconomy. Firstly, it avoids the decline of residents' balance sheets, which is conducive to stabilizing confidence and also stabilizes the credit market. At the same time, the vibrancy of the asset market can effectively prevent falling into a liquidity crunch.

However, returning to our stock market, achieving a sustained and healthy bull market is not an easy task. Currently, the market has seen a rapid rise stimulated by policy confidence, which is just the reaction of investors under the condition that A-shares have been extremely suppressed in the past. Subsequent profit-taking investment behaviors may cause significant market fluctuations.

Sharp rises and falls are the most damaging to investors' confidence. Therefore, how to implement reserve policies well, allowing the market to rise rapidly and then enter a slow bull market, is the priority issue that decision-makers need to consider in the future to protect this market.

Currently, relying on financial institutions and listed companies to buy stocks with loans has increased the difficulty of operations after the market rises. After all, loans need to be repaid, and the market fluctuations are large. Micro entities need to be cautious about taking responsibility. This is different from the 2020 Federal Reserve and the Bank of Japan directly buying ETFs and stocks.

We need to see that whether from the perspective of A-share valuation, the proportion of stock market value to GDP, or the matching degree of MSCI's investment in A-shares and China's economic volume (China's GDP is 5 times that of India, but the weight in the global MSCI index is equal), there is a serious underestimation.

So the next step is not to blame investors for irrationality, but to use reserve policy tools to slow down the market's rise, achieve a smooth landing after the stock market's rapid rise, evolve from a fast bull to a slow bull, and become a breakthrough for China's economic recovery.

Therefore, what we are currently experiencing should be the beginning of a revaluation of Chinese assets.