Exclusive Interview with Liu Qiao: The Chinese stock market has the foundation for a slow bull run, but retail investors may not necessarily make money

Reporter Du Tao

Liu Qiao, who is the dean of Peking University Guanghua School of Management and has long focused on macroeconomic and financial research, has participated in the Boao Forum for Asia on multiple occasions.

On March 25, Liu Qiao attended this year’s Boao Forum as a guest for the breakout session titled “Shaping the Future of Enterprises in Transition.” He said, why do some companies feel that “things are really hard” right now? The reason is that, currently, certain industries have entered a structural cycle of “low prices, low profits, and low incomes.” Product prices are too low, companies have no profits, and this in turn leads to employees’ incomes not being high. In the end, companies may have large production capacity, but their profitability is low, homogeneous competition is fierce, efficiency is poor, and the problem of excess capacity is prominent.

After the forum concluded, Liu Qiao accepted an interview with the Economic Observer to discuss topics including the capital market, AI (artificial intelligence), monetary policy, and “anti-volatility” (反内卷).

When talking about the capital market, Liu Qiao believes that China’s stock market has the foundation for a “slow bull market.” There are two core supports: first, China’s long-term growth potential provides fundamental support for the stock market; second, the quality of listed companies has been continuously improving.

Liu Qiao judges that in the second half of this year, or at the latest next year, China’s price index will enter a period of positive growth. The downtrend in prices over the past nearly three years is expected to be reversed, which will provide strong support for the capital market.

Regarding the difficulty for retail investors to make money in the stock market, Liu Qiao said that there is a common misconception in the market today—that the more active the trading, the more vitality the market has. In fact, in China’s A-share market, there is an inverse relationship between trading volume and pricing efficiency: the larger the trading volume, the lower the pricing efficiency. The core reason is the current investor structure, in which retail investors dominate. Currently, 60% of trading volume in China’s A-share market comes from individual investors, but these trades generally lack “information content.”

Liu Qiao said that, in academic terms, retail investors’ trading is “noise trading.” To improve pricing efficiency in China’s A-share market and increase the information content of stock prices, changing the investor structure is key.

How can fiscal and monetary policy drive toward a price objective?

**Economic Observer: The Central Economic Work Conference proposed monetary policy that is “appropriately loose,” and continues to include the goal of prices returning to a reasonable level as an indicator in this year’s monetary policy considerations. Will “prices returning to a reasonable level” become the most important objective for monetary policy formulation? **

Liu Qiao: A reasonable rebound in prices is indeed the core consideration of current monetary policy. To understand this direction, we must first recognize the fundamentals of China’s economy.

Starting from the second quarter of 2023, China’s PPI (Producer Price Index) has remained in a negative growth range, and the downtrend in prices has had a clear suppressive effect on the economy. Although China still achieves 5% real GDP growth, negative price growth results in a lower nominal growth rate. Companies’ actual operating conditions are far less optimistic than what macroeconomic data suggests, and this is the core reason for the pronounced “gap” between macro data and the perceptions of micro market participants.

Sustained price declines have pushed China’s economy into a structural cycle of “low product prices—low corporate profits—low workers’ incomes.” Since residents’ incomes cannot rise, the sense of real gain brought by low prices is limited. Instead, people will pursue value for money even more, further intensifying price competition and making consumption unable to take off.

Therefore, breaking the downward trend in prices and pushing prices back into a positive growth range is the core starting point of current monetary policy.

However, the room for monetary policy operations is actually quite limited at present. It does not have the conditions for broad-based interest rate cuts across the board. Currently, China’s bank deposit-lending spread is already below 1.5%, and the nonperforming loan ratio in the financial system is around 1.5%. The deposit-lending spread needs to be able to cover the nonperforming loan ratio, so there is not much space for a comprehensive rate cut.

Economic Observer: Within limited room for operation, how do you think current monetary policy should be deployed to effectively push up prices and activate the economy?

Liu Qiao: I would more strongly recommend implementing structural interest rate cuts and promoting coordination between fiscal and monetary policy—using fiscal funds to subsidize interest rates, thereby lowering the actual cost of financing and ensuring that the interest rate cut effects truly transmit to the real economy. Structural interest rate cuts can prioritize two major groups.

First, cut interest rates for residents holding housing mortgages. By the end of last year, the scale of China’s housing mortgages was about 37 trillion yuan. If, based on that, interest rates were cut by 0.5 percentage points over the course of one year, residents’ households could reduce their interest burden by 180 billion yuan annually. This portion of funds would directly turn into disposable income for residents, flowing into consumption or fields of reinvestment. An 180 billion yuan policy scale should not be underestimated. Compared with this year’s “trade-in for renewal” policy of 250 billion yuan and the birth subsidies of around 100 billion yuan, this scale is already in the same order of magnitude, and the effect is more direct. Estimated using a three-times multiplier effect, the 180 billion yuan in interest relief could drive about 540 billion yuan in consumption. That corresponds to the 2025 social retail total of 50 trillion yuan, equivalent to driving consumption growth by 1 percentage point. Last year, consumption contributed 52% of GDP growth, implying it could drive at least 0.5 percentage points of GDP growth. More importantly, growth driven from the consumption side, and the way it stabilizes employment and the labor market, is far superior to policy efforts on the production side or investment side.

Second, cut interest rates for financing for small, medium-sized, and micro enterprises (SMMEs). SMES are the “capillaries” of the economy. They have the closest link to terminal consumption and are also the main force absorbing employment. Even if the scale of bank loans SMES receive is limited at present, implementing structural interest rate cuts for them can directly enhance business vitality.

**Economic Observer: This year, fiscal-financial coordination has become one of the important directions of policy. How can we prevent a situation where, after fiscal interest subsidies, the effect does not transmit to the price side? **

Liu Qiao: Fundamentally, this is a technical detail in fiscal transfer payment policy. The core issue is that there is an intermediate link in policy transmission. There is a game between enterprises and policy makers, which may result in the dividend of fiscal subsidies not truly reaching consumers.

The core to solve this problem is to give fiscal transfer payments directly to individual consumers, reducing losses in intermediate links through consumption vouchers, direct subsidies, and similar methods.

With the same amount of money, individuals will value it most and use it most efficiently among the government, enterprises, and individuals. Meanwhile, enterprises face principal-agent problems: after individuals receive subsidies, they tend to treat them as their own income and use them cautiously. Each yuan of subsidy can leverage more subsequent consumption spending, making the economic pull effect more direct. For example, the “trade-in for renewal” policy of 250 billion yuan. Fundamentally, it is still subsidizing enterprises. If that funding were instead directly converted into residents’ disposable income, the consumption-driving effect would be better than the current model.

Economic Observer: Last year, “anti-volatility” became a hotly discussed topic. Raw material prices and other items also saw some rebound. Do you think the effective transmission of prices currently can be smooth? If price transmission is not smooth, what problems will arise?

Liu Qiao: Behind poor price transmission is reflected China’s biggest structural problem at present: “low product prices, low enterprise profits, and low workers’ incomes.” This is also the core issue I have emphasized for a long time. Enterprises face low prices mainly because there is excess capacity, and much of that excess capacity can be traced back to inefficient and repeated investments by local governments. At the same time, most of China’s products are concentrated in the mid- to low-end segments of value chains, lacking quality premiums and brand premiums, which further pushes prices down.

With low corporate profits, companies find it hard to invest in R&D and carry out long-term investments, and they also cannot raise employees’ incomes—leading to a low share of workers’ incomes. And when workers’ incomes cannot rise, it is hard to support higher product prices, and the share of service consumption is also difficult to increase. Last year, China’s service consumption share was only 46%, far below the United States’ 66% to 67%. This situation will in turn suppress product prices and form an unfavorable structural cycle. If price transmission remains poor, this cycle will continuously reinforce itself. Enterprise business vitality will stay sluggish, residents’ consumption capacity will be hard to improve, and the impetus for economic recovery will be continuously weakened.

Economic Observer: To address the above structural problems, what do you think is the key lever?

Liu Qiao: The core to address the above structural problems is to promote a reasonable rebound in prices, so that enterprises can obtain a reasonable space for profits, and then form a virtuous cycle of “reasonable prices—enterprises’ reasonable profitability—an increase in workers’ incomes.” To achieve this, besides macro policies, on the one hand we need to promote the upgrading and high-end transformation of manufacturing, enhancing quality premiums and brand premiums so that enterprises can escape low-price competition. On the other hand, we need to solidly optimize capacity and resolve excess capacity, improving the price formation mechanism from the supply side.

How to keep a “slow bull market” stable?

**Economic Observer: In the current capital market, people still have expectations for a “slow bull market,” but there are also voices saying “the stock market has topped out.” How do you judge the future trend of A-shares? **

Liu Qiao: I believe China’s stock market has the foundation for a “slow bull market,” with two core supports.

First, China’s long-term growth potential provides fundamental support for the stock market. Although the economy currently faces challenges, during the “14th Five-Year Plan” period China achieved 5.4% annual average growth, and the “15th Five-Year Plan” also laid out clear plans for cultivating strategic industries and future industries, as well as AI-enabled empowerment for traditional industries, digital transformation, and green transformation. Future economic growth is promising.

More importantly, I judge that later this year or at the latest next year, China’s price index will enter a range of positive growth. The downtrend in prices over the past nearly three years is expected to change, which will provide a direct positive boost to the stock market. Today, China’s stock market is also increasingly becoming an “economic barometer.” Improvements in the real economy will be directly reflected in the stock market’s performance.

Second, the quality of listed companies continues to improve. In recent years, regulators have continuously strengthened oversight of listed companies, and the dividend level and quality of financial disclosures of listed companies have improved steadily. Although listed companies still face pressure under the influence of the macro economy and structural shocks, overall quality is in a process of improvement. While the dividends from this improvement may not be fully released in the short term and the market may still have ups and downs, in the long run it will inevitably push the stock market toward a benign direction.

Economic Observer: How should we understand the problem that retail investors find it hard to make money in the stock market?

Liu Qiao: The core of this issue is that the investor structure dominated by retail investors in China’s A-share market leads to low market pricing efficiency. There is a common misconception in the market today that the more active the trading, the more vitality the market has, and that retail investors find it easier to make money. In fact, there is an inverse relationship between trading volume and pricing efficiency in China’s A-share market—when trading volume is higher, pricing efficiency is actually lower. The underlying reason is the investor structure where retail investors dominate. At present, 60% of trading volume in China’s A-share market comes from individual investors, but these trades generally lack information content. In academic terms, these trades are “noise trading.” To improve pricing efficiency in China’s A-share market—that is, to increase the “information content” of stock prices—changing the investor structure is the key.

Economic Observer: What characteristics do retail investors’ trading behaviors show in the current market?

Liu Qiao: Retail investors’ trading behavior shows a distinct feature of high-frequency turnover. Research shows that the small retail group with account sizes of 0 to 500k yuan has an average daily holding turnover rate as high as 8.8%, meaning that in 12 trading days they will essentially turn over all their holdings once.

Against this backdrop, suggestions such as “T+0” and extending trading hours may increase trading volume. But this would not stimulate market vitality; instead, it would further reduce pricing efficiency and expose retail investors to higher risk of losses. Unless trading is driven by institutions that have information collection and analysis capabilities, the larger the trading volume, the more severe the deviation of market prices from fundamentals will be—and ultimately the ones harmed are retail investors.

The fundamental problem in China’s stock market lies in the investor structure. The core path to solving it is to accelerate the process of institutionalization, so that institutions become the dominant force in market pricing.

In the United States, from the 1950s to the 1970s, it took about two or three decades to reduce retail investors’ share of trading volume from 60%—80% to around 10%, forming an institution-led investor structure. This is also a key reason why the U.S. capital market has relatively high pricing efficiency and can more effectively play the role of price signals in guiding resource allocation.

We may not need two or three decades, but we must have the determination to promote institutionalization. This is a long-term effort that cannot be achieved overnight. In fact, in recent years we have been promoting the rule-of-law building for institutional investors. Currently, the share of retail investors’ trading volume in China’s A-share market has already fallen from 80%—90% before the pandemic to 60%. There is still significant room for further decline in the future.

**Economic Observer: In the current market, there is also a call to “cancel quantitative trading,” with the view that quantitative trading is “cutting retail investors’ grass.” What is your take on this? **

Liu Qiao: This view is worth scrutinizing. Quantitative trading itself does not create information, but it does create market liquidity. In an institutionalized market, the competition and game between institutions—including between quantitative institutions and traditional institutions—can effectively improve market pricing efficiency. Canceling quantitative trading could bring about two consequences: first, the diversification of institutions would decrease, trading between institutions would reduce, and capital market liquidity would be affected; second, capital market opening to the outside and increasing liquidity in A-shares would face some constraints, because quantitative trading is a strategy commonly used by overseas institutional investors.

Real market vitality comes from diverse competition and gaming between institutions. Increasing the diversity of institutions is the key. And the core function of a capital market is to improve pricing efficiency—to guide resource allocation with market prices that contain rich information content—so that capital flows toward industries and companies with high investment returns and growth potential, achieving optimal allocation of social resources.

The prerequisite for efficient pricing is that trading among professional institutional investors becomes the market’s dominant driver. Retail investors can, in fact, channel their money to professional investors by buying ETFs, funds, and the like, rather than directly participating in market games themselves.

Economic Observer: Many people believe that China’s A-share market is a “zero-sum game market.” How do you view this statement? How can we help the capital market get rid of this label?

Liu Qiao: A capital market itself should not be a zero-sum game. If the market has high pricing efficiency and stock prices can accurately reflect companies’ fundamentals and growth potential, capital will naturally flow to high-quality companies, promoting their development. And the development of companies will also bring stock price increases, creating a win-win situation between market participants and companies. This is a process of “making the pie bigger.”

The reason why China’s A-share market is regarded as a zero-sum game market mainly comes down to low pricing efficiency and the lack of an effective delisting mechanism. Bad companies cannot be pushed out, while the value of good companies gets buried. Capital allocation becomes random. Added to this are issues like news speculation and insider trading in the market, which turns the capital market into a game of pure gambling. To get rid of this label, the core is still to significantly improve pricing efficiency, which in turn depends on optimizing the investor structure. When institutions become the dominant force in the market, they will research and analyze to discover the value of high-quality companies, and guide capital to high-quality tracks and companies. At the same time, they will eliminate low-quality companies, forming a virtuous cycle in the market.

Economic Observer: This year, AI has become a hot topic. How do you view the real contribution of AI technology to China’s economic growth? Where is the breakthrough point for future AI development?

Liu Qiao: There is a great deal of uncertainty about the rollout and application of AI right now. In the short term, its actual contribution to economic growth is still relatively limited. Economic growth is ultimately driven by growth in total factor productivity. Improvements in total factor productivity rely on technological progress and optimization of resource allocation efficiency. AI, as a revolutionary technology, is undoubtedly part of this. But if the technology is not integrated with specific application scenarios, it will be difficult to generate aggregate effects.

Research shows that currently, AI’s contribution to total factor productivity growth is only about 0.06% per year. China’s current total factor productivity growth rate is around 1.5%—1.6%, while the United States is at 0.8%. In the short term, AI’s contribution can only make this number rise slightly. Of course, in the long run, with continued investment to discover and develop AI application scenarios, its contribution to economic growth is worth expecting.

People today have strong expectations for economic growth, yet they find it difficult to identify clear sources of growth. As a result, the investment potential of AI and the prospects for industrial applications are being overhyped. Naturally, in a context of insufficient investment, the AI narrative brings capital investment enthusiasm. From a Keynesian perspective, to a certain extent this demand-expansion approach can help repair the growth rate of the economy.