The contrasting performances of the Chinese and American stock markets often spark conversations among investorsAt first glance, the picture seems clear: the Chinese stock market experiences short bullish phases and extended bearish periods, while the American market enjoys prolonged bullish cycles interspersed with brief downturnsFollowing the onset of economic recovery strategies initiated by the U.Sgovernment in 2009, the American stock market has soared, witnessing a significant ten-year bull runThe COVID-19 pandemic briefly disrupted this upward trajectory, yet within months, stock indices reclaimed their pre-pandemic heightsIn stark contrast, after a brief bullish spell in 2014-2015, the Chinese stock market has been stagnant, oscillating around the 3000-point mark without significant advancements.

So why do these two seemingly similar markets exhibit such disparities?

Upon closer inspection, it becomes apparent that while the U.S

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stock market has indeed been soaring, the degree of its success may not be as remarkable as it appearsConversely, the Chinese market, although it appears stagnant, has responded to growth dynamics differentlyA fitting analogy might consider the American market as akin to a tall athlete, sprinting upward, while the Chinese market resembles a chubby figure, expanding horizontally rather than vertically.

In 2009, the market capitalization of the U.Sstock market was roughly 10 trillion USD, while China's A-share market was valued at approximately 24 trillion yuanBy 2020, these figures soared to 35 trillion USD for the U.Sand 70 trillion yuan for ChinaWhen compared, the U.Smarket expanded by a staggering 2.5 times, while the Chinese market grew by 1.9 timesThis disparity indicates that the Chinese market is not stagnant but is instead growing at a slower pace relative to the U.Smarket's expansion.

Examining the indices reveals a comparable story: the Dow Jones Industrial Average climbed from 9,000 to nearly 28,000 points, mirroring the market capitalization growth effectively

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In contrast, China's Shanghai Composite Index has hardly changed, lingering obstinately around the 3000-point markThis discrepancy stems from differing regulatory frameworks governing these marketsThe U.Soperates under a relatively lax registration system, allowing companies to list and delist with ease, thus limiting the increase in stock volumeConsequently, market capitalization growth correlates predominantly with rising stock prices, thereby fostering a long-term bull marketOn the other hand, the A-share market, under a stringent review system, experiences rare delistings, leading to a notable increase in stock quantity over the last decadeThis expansion has mostly resulted in more companies, rather than significant changes in average share prices.

The stark contrast in the developmental trajectories of these two markets stems from their respective economic structuresChina's remarkable growth has not translated into similar stock market performance, primarily due to structural and systemic differences between the two economies.

The world’s largest hedge fund, Bridgewater Associates, has provided a straightforward model demonstrating economic growth: consider central banks as tanks of fuel and the real economy as an engine

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When central banks expand credit (money supply), they boost the economy, propelling it forwardConversely, when inflation looms, central banks contract credit, triggering economic slowdown.

For the past decade, both China and the United States have navigated this intricate dance of monetary policy expansion and contractionHowever, while their tanks may be similar, their engines differ drastically.

In the U.S., the technology sector dominates the industrial landscape, with the top five publicly traded companies all within this realmThe growth of technology feeds into the capital markets as primary financing instrumentsFollowing the Federal Reserve's initiatives to inject liquidity into the economy, the stock market becomes a primary reservoir for capital, fueling a proliferation of high-tech, biotechnology, and internet companiesFor instance, Amazon thrived on the stock market despite running at a loss for two decades, continuously raising funds to fuel its expansion

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Consequently, corporate giants like Apple, after accruing profitability, invest back into stock buybacks, thus inflating market value and sustaining a thriving stock market in an ever-positive feedback loop.

Conversely, China’s economic engine relies heavily on real estate rather than an advanced stock marketReal estate companies, characterized by substantial assets and investments, rely predominantly on bank credit for their endurance and growth, whereas technology firms often depend on future projections to bolster their market standing.

The urbanization rate in China surged from 45% a decade ago to 60% today, spurring vigorous infrastructure projects and real estate developmentProperty has become the undeniable engine of economic growth, paralleled by the central bank's liquidity provision, creating a stark contrast to capital flows in the stock marketA staggering 50% of newly generated credit flows into the real estate sector before trickling down into other industries.

In terms of wealth distribution, real estate constitutes the largest asset category for Chinese families, comprising about 60% of their portfolios

Stock market investments, on the other hand, account for less than 10%. Even during bull markets, family investments in the stock market hover below 15%. As a result, over the last decade, asset bubbles have inflated more significantly in real estateWhile the U.Smarkets had been buoyed by stock valuations, Chinese asset inflation predominantly emerged within real estate, which ballooned from 100 trillion to 500 trillion yuan in the past decade—five times GDP and seven times the stock market’s value.

Moreover, inflation presents differing challenges in these marketsOver the past decade, inflation levels in both the U.Sand China have remained relatively subduedInstances of price hikes, such as pork spikes in China, are quickly mitigated by state intervention, as both stock and housing markets absorb excess liquidity, forestalling immediate consumer price inflationHowever, while the U.S

revels in wealth accumulated through stock market bubbles, China contends with significant repercussions from a booming housing market.

As property prices reach unsustainable levels, traditional businesses with limited margins struggle to cope—some entrepreneurs shut down factories to invest their capital into property, seeking financial security, while unwillingly contributing to an unsustainable economic structureThe real estate boom has stifled the hands of many small businesses, from restaurants to consultants, painting a shared struggle across various sectors.

Recognizing this issue, the government has implemented a series of restrictions aiming to curb property bubblesRecent policies, often dubbed the “three red lines,” highlight initiatives to rein in rising housing pricesHowever, these measures indirectly affect the stock market as a liquidity drawdown in the housing sector exacerbates cash crunches in the economy

The current environment, as many suggest, invites capital to migrate to equities; however, an unexpected question arises: how many individuals unable to purchase property are actually allocating those funds into the stock market?

The intertwining fate of the real estate sector and the stock market demonstrates the complexity of Chinese economic policyOften, limitations on residential investment precipitate a cycle where businesses struggle to secure financing, government finances dwindle, and broader economic activity stagnatesWhen demand for housing declines, the consequence reverberates throughout the economy, curtailing potential investments.

As we pivot towards the future, some investors lament the persistence of bearish trends in the Chinese stock marketYet many find solace in the tangible wealth gains from real estate, offsetting losses in equitiesFor those who have remained entirely focused on stock investments without real estate diversification, one may attribute their predicament to mere misfortune rather than systemic issues in the markets.

However, this state of affairs is not permanent

As the Chinese real estate market matures, analysts anticipate a shift towards technological advancement and innovationThe government is already demonstrating a commitment to supporting burgeoning tech sectors, often nodding towards the significance of the Science and Technology Innovation Board—a step towards fostering a conducive environment for technological growth.

Looking ten years ahead, it's plausible that robust tech firms listed on Chinese exchanges could embody the next cornerstone of wealth creationCurrent technology sectors, which are experiencing heightened global competition, call for domestic replacements within China, particularly in regards to critical technologies like semiconductorsHence, transitioning to a tech-centric industry will necessitate sustained financing from the stock market.

Interestingly, while the U.Sstock market has appreciated more than twofold over a decade, excluding the major tech giants unveils that the average growth rate of remaining companies is significantly lower than those indices