Questions over the ruling Communist Party’s policies have taken on renewed urgency this week as leaders huddle for the National People’s Congress, an annual parliamentary session where lawmakers will sign off on China’s five-year economic plan. Nine months after the stock-market rout began, the aftershocks are still a focus of NPC delegates gathered in Beijing.

The market rout is “destroying the middle class,” Fan Yun, a businesswoman from Shanghai, said during a meeting of her municipality’s NPC delegation on Sunday, an unusually outspoken assessment of government policies. "The 10 years of stock-market development since 2007 is a decade of tears.”

Investing Masses

The second half of 2015 was especially painful. The average Chinese investor who entered the stock market in May -- when new account openings surged to record highs -- suffered losses of 27 percent through December, according to figures compiled by Hithink RoyalFlush Information Network Co., one of the nation’s biggest providers of financial data. 

Corwin Huang, a 26-year-old financial professional in Beijing, is among those disillusioned by policy makers’ response to the selloff, particularly that of the China Securities Regulatory Commission.

“I used to appreciate the CSRC’s efforts to support the market," said Huang, who liquidated his stock holdings in late January after recording a 50 percent loss. "Eventually, I decided I was wrong. I overvalued the government’s capabilities."

It’s easy to see why protecting China’s small investors was such a priority for Xi, who has also spearheaded a crackdown on official corruption and pledged to lift 50 million people from poverty by the end of the decade.

For one, stock investors are a huge constituency: About 90 million individuals had registered as investors by the height of the boom in June, more than the 88 million-strong Communist Party. Keeping the wealth of China’s middle class intact also furthered an official goal of creating a consumer-led economy, while the government’s credibility was on the line after senior officials joined state-run media in promoting equities before prices collapsed.

David Fuller's view

China’s biggest mistake in dealing with its stock market was in allowing too much leverage.  It then compounded market problems with a series of ill-considered, off the cuff regulatory policies which further undermined confidence. 

Too many politicians spend too much of their time scheming and therefore have to learn or relearn regulatory lessons for themselves, as if these problems had never occurred before.  Nevertheless, common sense policies of investing, such as buy-low-sell-high, apply in most financial markets.

China’s equities are comparatively cheap today.  In terms of investor participation, China’s market is more oversold in the medium term than overbought in the short term.  Xi Jinping’s government needs to regain the confidence of the 90 million individuals who had previously registered as investors, since they are among the constituents of a consumer led economy.

There are far worse investment backgrounds than what we see in China today and arguably it is competitive.  Moreover, these Chinese Indices appear to be back in recovery mode, albeit short-term overbought following the initial rallies from last month’s lows: Shanghai Composite Index (P/E and Yield charts), Hang Seng Index (P/E and Yield charts), HSCEI Index (P/E and Yield charts).