2025: A Pivotal Year for the Stock Market
Over the past six years, China's economic structure has undergone a significant transformation, making notable strides despite a trend toward declining growth rates. While some observers might correlate this decline with the costs of transitioning economies, it’s essential to understand that this is primarily a function of cyclic pressures rather than an inevitable consequence of structural reform.
As we look forward, the year 2025 could mark a critical turning point. The aberrations seen in data from 2023 and 2024 suggest a shift from volatility to a period of sustained moderate growth. The imbalances introduced by speculative bubbles seem to be corrected, and the government has taken a more proactive stance to implement stronger policies, which collectively create a more predictable macroeconomic environment for the stock market.
The ongoing transformation of the economy has demonstrated positive developments, with cyclical pressures outweighing the temporary challenges posed by growing pains.
According to Gao Shanwen, an influential economist, the Chinese economic growth model has gradually transitioned since around 2018 from one reliant on debt, infrastructure, and real estate to one that prioritizes technological advancement and industrial upgrading. This evolution has inevitably led to the emergence of some industries and the decline of others. However, viewed from a broader perspective, the slow-down in growth rates primarily results from cyclical pressures—a reflection of the normal teething difficulties of growth rather than a detrimental byproduct of necessary economic transformation.
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When analyzing the entire spectrum of listed companies, which includes both A-shares and U.S.-listed Chinese stocks, Gao categorizes these entities into three distinct categories. The first group, which exceeds 2,500 firms, is encouraged and supported by government initiatives aiming to steer economic transformation positively. The second group consists of approximately 500 companies that find themselves subject to regulation and control, indicative of sectors in decline—such as real estate and media—which are simply characterized as restricted industries. Finally, the third category, encompassing over 2,600 companies, is neutral, where the government neither actively supports nor restricts expansion and growth.
Notably, when consolidating data from all listed firms, these companies contribute more than 50% of total operating revenue to the GDP projected for 2024, thus holding significant representation in the economic transformation narrative. Gao's analysis dives deeper into these classifications across various metrics.
From the perspective of total operating revenue, neutral industries account for approximately 65% of the total revenue generated by all listed firms, while supporting sectors contribute around 20%, with restrictive industries representing an even smaller share. In terms of total market capitalization, neutral sectors also hold a slightly higher percentage—over 50%, while the ratio for restrictive and supporting industries remains around 20% each. Since 2016, the share of neutral industries has shown stability from both an operating revenue standpoint and total market cap approach. A significant decline in the share of operating revenue from restricted sectors was observed between 2018 and 2020, while supporting sectors expanded markedly in representation. This trend holds true in market capitalization assessments as well.
This data underscores a definitive economic transformation. Regardless of fluctuations in growth rates, the stable proportion of neutral industries is telling. These sectors are largely unaffected by either supportive or restrictive policies, highlighting their resilience against potential disruptions.
It is easy to conflate overarching economic issues with structural transition challenges, often discounting others as root causes. However, analyzing the neutral sector’s performance reveals consistent proportionate stability in total market capitalization and revenue streams. Thus, the experiences of these neutral industries relate more significantly to cyclical forces rather than the anticipated burdens of growth and transformation, a conclusion also supported by employment data trends.
In recent years, China’s economic transition has achieved remarkable results. However, alongside this advancement, growth rates have also experienced a decline—not a direct correlation to the transitions themselves but predominantly a reflection of cyclical economic forces at play.
Looking ahead, 2025 could be significant. General interventions, such as large-scale interest rate cuts and stabilizing financial institution balance sheets, along with government asset and liability sheet expansions, are essential steps towards this recovery. The timeliness, scale, and force of these government actions are critical; there is considerable work remaining in the interest rate space, including regulation of shadow financial institutions, suggesting that further governmental stimuli are necessary. Based on international experience, the economy is expected to transition through periods of moderate growth, which will be required before the economy can normalize. Thus, 2025 emerges as a potential inflection point, where, guided by data anomalies from 2023 and 2024, the economy may pivot towards stable moderate growth. The adjustments made will likely stabilize emergent financial conditions, reinforcing a conducive macroeconomic environment for stock markets.
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