China must unleash capital market's power to fuel growth

The Recommendations of the Central Committee of the Communist Party of China for Formulating the 15th Five-Year Plan (2026-30) for National Economic and Social Development places the capital market at a level of importance never seen before. The 2023 Central Financial Work Conference defined the capital markets as the hub of a modern economic and financial system, a precise and forward-looking statement that marked a major shift in how China understands and positions finance and the capital market in particular.

For decades, China's capital market was seen mainly as a channel for raising funds. Today, it is increasingly recognized as a driving force for technological innovation, institutional reform and sustainable growth.

The logic behind this change is both simple and profound. Finance is not an end in itself, but a means of channeling resources toward innovation and productivity. The vitality of any modern economy depends on how effectively its institutions reward creativity and allocate risk. In that sense, the capital market serves not only as a reflection of economic strength, but also as a powerful engine of transformation and modernization.

The 2025 Nobel Prize in Economics, awarded to three scholars who explored innovation-driven growth, offers valuable insights for China. Their research asks why the world economy experienced an unprecedented acceleration during and after the first industrial revolution. The answer, they argued, lies in two conditions: a culture open to diverse ideas, and an institutional system that rewards innovation. When societies embrace intellectual diversity and ensure that inventors share in the wealth they create, knowledge flourishes and technological revolutions follow.

For China, these insights are especially relevant. Cultural openness nurtures creativity, while institutional incentives sustain it. A society that praises innovation without providing real rewards cannot maintain momentum. The capital market, therefore, should be understood not merely as a financing venue, but as a mechanism that compensates innovators for taking risks.

Every major leap in human history has involved a cycle of creative destruction, and the capital market is the arena where such renewal occurs. When innovators gain a premium for success, their earnings are reinvested into new ventures, fueling a virtuous cycle of growth and innovation.

China already ranks as one of the most influential economies in the world. In 2024, China's share of global manufacturing reached 31.6 percent, nearly one-third of the total. In 2010, the figure was 18.9 percent, surpassing the United States for the first time. This achievement reflects decades of openness, diligence and technological learning. Yet sustaining that leadership over the long term requires a transition from imitation and adaptation to original breakthroughs.

Imitation is an inevitable stage for latecomer economies. But once a country reaches the global frontier, it can no longer rely on borrowed knowledge; it must create its own. This demands a system that encourages experimentation, tolerates failure, and rewards genuine innovation. The capital market is the institutional foundation capable of enabling this transformation.

To fulfill this role, the market's ecosystem must be comprehensively reshaped. The task is to move beyond a narrow focus on financing and build a system that integrates innovation incentives with long-term wealth management. This process rests on reforming three interconnected areas: the structure of assets, the flow of funds and the regulatory framework that ensures fairness and transparency.

On the asset side, the key challenge is to establish returns that correspond to risk. In policy discussions, "improving the quality of listed companies" is a frequent phrase, yet its meaning is often blurred. In capital market logic, profitability is not the sole measure of quality. Innovative and high-growth firms may appear unprofitable today, but carry enormous potential for tomorrow. Investors seek certainty amid uncertainty, and it is precisely these companies that sustain a dynamic market.

At present, China's risk-free rate stands near 1 to 1.5 percent, compared with about 4 percent in the United States. To make investment more attractive, reforms should aim to generate a risk premium of roughly 5 percent, resulting in total returns of about 7 percent. Achieving this requires clear institutional pathways that enable technology-oriented enterprises to become genuine market leaders.

On the funding side, a persistent problem is the over-generalization of risk. Some institutional funds — such as university endowments — have been kept out of the equity market in the name of prudence. Yet a market cannot thrive if long-term capital is sidelined. With bond yields declining, dividend-paying equities with stable annual returns of 4 to 5 percent now match the risk appetite of many institutional investors. Allowing these funds to enter the market under transparent rules would enhance liquidity and depth.

At the same time, communication between the capital market and the central bank should be strengthened. China's financial system is evolving into a "five-sided framework", in which monetary authorities play a more coordinated and supportive role.

Regulatory reform is the third and perhaps most critical pillar. The essence of fairness lies in transparency: without it, openness and impartiality become empty slogans. Listed companies must provide accurate and timely disclosures, and all participants must operate on an informational playing field.

Equally important is ensuring that the cost of violations outweighs their benefits. In the past, misconduct in the capital market often brought high profits but minimal penalties, fostering repeated fraud. Such behavior cannot be dismissed as minor administrative misconduct; it is a form of financial crime that undermines trust and efficiency. Therefore, the regulatory system must shift from administrative penalties toward a dual framework of criminal sanctions and civil compensation. Only when the cost of wrongdoing far exceeds potential gains can the market develop a clean, credible, and self-correcting ecosystem.

Looking ahead, some observers predict that China's capital market will reach a total capitalization of 200 trillion yuan ($28.16 trillion) during the 15th Five-Year Plan period, or even 400 trillion by 2030. Yet these figures, while striking, should not be viewed as policy goals. Market value will naturally rise as reforms deepen and institutions mature.

The real priority is openness. At present, China's market remains partly closed, with foreign access limited to specific channels. Over the next decade, a decisive step toward comprehensive openness is essential.

When renminbi assets become widely traded and globally trusted, China will have the institutional foundation of a true financial power. The 15th Five-Year Plan period thus represents more than a stage of growth — it is an opportunity to redefine the capital market's role in national modernization. By consolidating its position as the hub of the financial system, promoting transparency, and embracing openness, China's capital market will not only underpin high-quality domestic growth, but also contribute to a more balanced and resilient global economy.

The writer is former vice-president of Renmin University of China and dean of the university's National Academy of Financial Research.

The views do not necessarily reflect those of China Daily.