The Chinese stock market experienced a dramatic plunge, leaving one to ponder the reasons behind such a precipitous decline.

The global stock markets are currently experiencing a buoyant trend, with notable gains observed in major indices such as those of the United States, Japan, Germany, France, Italy, and India reaching unprecedented levels. Even in economically challenged nations like Argentina, stock markets are on an upward trajectory but Hong Kong stock markets have been witnessing a sustained decline for three consecutive years. This phenomenon can no longer be solely attributed to economic factors. Despite ongoing debates surrounding the actual growth rate of the Chinese economy, it is evident that the stock market has deviated from its fundamental connection to the underlying economic conditions and fails to accurately reflect the true situation. In essence, the prolonged downturn experienced by the Chinese stock market over these past three years—particularly exacerbated since this year's onset—is more plausibly attributable to a crisis of confidence triggered by political factors rather than purely economic ones. A comparative analysis between the Chinese and Hong Kong stock markets will further elucidate this point.

The continuous decline of China and Hong Kong's stock markets is significantly influenced by the withdrawal of foreign investment. The tense relationship between China, the United States, and Western countries has prompted a gradual retreat of foreign investment, particularly from the US, due to security concerns. Liquidity plays a vital role in the stock market as it resembles the blood transfusion function in our bodies; once liquidity dries up, it leads to slow deterioration. During the first two decades of remarkable development in the Chinese stock market, there existed a period of harmonious coexistence between China and Western nations. Substantial amounts of Western capital flooded into this market. However, with the outbreak of the US-China trade war, only did America impose restrictions on high-tech sectors and investments in China but also issued an executive order last year under Biden's administration prohibiting various US funds and pensions from investing in China's secondary market as well. Consequently, existing US funds will withdraw at an accelerated pace from Chinese markets while other Western countries are likely to follow suit.

The withdrawal of foreign capital, primarily from Western sources, from the Chinese stock market lies beyond the purview of authorities. As long as the competitive dynamics between China and the United States remain unaltered, an unfavorable geopolitical climate towards China will persist. Capital is highly sensitive, particularly in high-risk markets where prompt withdrawals are crucial. The outflow of Western capital from China also has a contagion effect on domestic capital flows. However, the causes behind Chinese capital outflows are more intricate; yet politically speaking, they can all be perceived as manifestations of diminished trust in governmental institutions.

The 15.13% decline in the Shanghai A-share market in 2022 can be attributed to various factors, notably China implemented a dynamic zeroing strategy during the outbreak of COVID-19, particularly the implementation of a lockdown in Shanghai and the convening of the 20th National Congress. While most countries worldwide had reopened by 2022, China remained closed off, impacting not only tourism and trade exchanges but also fostering disillusionment among its populace towards the current regime. These measures and political landscape undoubtedly instilled a sense of uncertainty and prompted capital flight from the market. It is worth noting that during the period encompassing both the Shanghai lockdown and several months surrounding the 20th National Congress, we witnessed one of the most significant declines in stock market performance for that year - an occurrence that cannot be dismissed as mere coincidence.

The significant decline observed since the beginning of this year can be directly attributed to the special seminar on high-quality financial development held at the Central Party School on January 16th. The key approach for advancing Chinese characteristic finance lies in adhering to the centralized and unified leadership of the Party Central Committee over financial affairs, while ensuring that risk prevention and control remain a perpetual priority within financial operations. Savvy investors are aware of the policy implications associated with the Party's centralized and unified leadership over financial matters, prompting them to swiftly withdraw their investments from China's secondary market. Recent reports from Bloomberg indicate that foreign investors have withdrawn billions of dollars from China, further exemplifying Morgan Stanley's reduced allocation of positions in the Chinese market, which has now reached its lowest level at 24%.

The authorities cannot be said to not take the decline of the stock market seriously. Since last year, regulatory authorities have consistently emphasized the importance of maintaining confidence in the stock market and have implemented numerous measures to address vulnerabilities and enhance trust. However, on one hand, the China Securities Regulatory Commission's jurisdiction is limited, rendering it somewhat ineffective in addressing issues beyond market dynamics. Market confidence is a complex matter that cannot be solely resolved by regulatory authorities; On the other hand, investors perceive the measures introduced by regulatory authorities, including those by the China Securities Regulatory Commission, as superficial and lacking substance. When it comes to significant market aspects such as IPOs, refinancing, reduction of holdings by listed companies, and information disclosure requirements, they either fail to meet market demands or only scratch the surface – disappointing investors who believe that these authorities do not genuinely value the stock market. The so-called "market rescue" appears more like a facade rather than a genuine effort to revive it. Consequently, this sluggish response from regulatory authorities may even accelerate further declines in the stock market.

The market's interpretation of signals from the authorities was not entirely inaccurate. In the case of the Chinese stock market, an excessive burden of responsibilities has been placed upon it by the authorities, some of which should have been delegated elsewhere. This multitude of conflicting functions has resulted in neglect or excessive exploitation of its fundamental roles. For instance, while financing is a fundamental function of the stock market, China's IPO numbers surpass those in established markets like the United States, leading to a proliferation of low-quality companies going public. A market inundated with such subpar stocks hampers investors' ability to achieve returns on their investments. During periods of decline, such as the current one, these junk stocks retain inflated valuations and leave significant room for further downturns in the stock market. Consequently, this presents a dilemma for authorities: failure to intervene invites public discontentment and disappointment; intervention risks safeguarding these underperforming securities.

In fact, Chinese regulatory authorities and market scholars have long held the peculiar belief that rising stocks represent an accumulation of risk, while falling stocks signify a release of risk. This perspective is closely intertwined with the prevalence of junk stocks in the stock market. Moreover, adhering to this viewpoint, during periods of sharp market decline, they perceive it as favorable and even tolerate it for a certain duration, sometimes deeming the decline insufficient. Consequently, this explains why authorities have been slow to intervene in rescuing the market.

The sharp fluctuations in the stock market naturally hinder its healthy development, but it is difficult to justify government intervention solely in suppressing rises without addressing falls. In the case of the Chinese market, sharp movements are often not driven by economic factors, particularly when there is a long-term downward trend or significant short-term decline; thus, governmental inaction would be inappropriate. Historically, the Chinese government has intervened multiple times to stabilize the market. This current round of stock market decline has persisted for two years and intensified this year. However, over these past two years, society has largely become desensitized to such declines as they have become commonplace for investors. Nevertheless, the recent steep drop has reached a point where it becomes unbearable for most individuals since only a few out of millions can withstand such losses. If this continues unchecked, nearly everyone's investments will be reduced to zero value. Behind these millions of investors lie millions of families who were already enduring hardships due to an economic recession and now witness their wealth dwindling day by day in the stock market. Unfortunately, despite slogans from authorities regarding support measures during this crisis period, practical actions have been lacking—leading to an inevitable eruption of public frustration. Consequently, following last Friday's stock market crash with no warning or indication thereof—the topic suddenly became widely discussed among the public who openly ridiculed authorities and even expressed their dissatisfaction on Weibo sections related to the US Embassy in China—an act that reflects immense disappointment.

The authorities must promptly take action to rescue the market before the Lunar New Year, given their observation of this alarming reversal in public sentiment. If the stock market continues its decline, it is highly probable that unforeseen events may transpire during the Lunar New Year, posing challenges for the authorities in creating a joyous and peaceful holiday season. Presently, apart from real estate, there exists an additional source of risk in the stock market.