In 2007, Chinese stocks were the most expensive in the world. After soaring 500 percent in two years, by autumn, the Shanghai market was trading at over 8 times its book value. Comparatively, at its zenith, Japan traded at 5 times its book value.

Secular bear markets destroy valuations. Seventeen years later, China’s Shiller price-to-earnings ratio has plummeted from 55 times to 10 times.

Why it matters: We believe Chinese equities have bottomed out. A multi-year bull market is on the horizon. 

But: What about Evergrande and the slow-motion property crash? This could be China’s Minsky moment, after all. Have you forgotten about the record debt levels and the shrinking working age population? What if there is another trade war or conflict over Taiwan? 

Our thought bubble: Overcome your fear. Remember Jeremy Grantham’s wisdom amid the depths of the global financial crisis: the market does not turn when it sees light at the end of the tunnel. It turns when all looks black, but just a subtle shade less black than the day before. 

Backdrop: China’s benchmark CSI 300 Index has plunged 42 percent over the past three years. Declining home and stock prices is creating a negative “wealth effect.” Households are less confident about their future so they are saving a greater proportion of their income.

Since the beginning of 2020, household bank balances have risen by 65 percent, equal to $7.4 trillion. That’s nearly as much as Germany and Japan’s GDP combined. It is greater than the value of China’s 2019 retail sales.

Question: Without a big-bang, debt-fueled stimulus, how can confidence be revitalized?

State of play: Since “houses are to live in, not to speculate on,” as President Xi Jinping has made abundantly clear, the Politburo has declared its aim to push stocks higher. 

“The wealth effect brought about by a rise in the stock market,” China’s top decision-making body said, “can directly increase investors’ income and boost income growth expectations, thereby translating into actual consumption.” 

Sound familiar?

Flashback: After the subprime mortgage crisis, then-Fed chief Ben Bernanke desired higher stock prices to create a “wealth effect” and dispel economic gloom. 

At a time when unemployment was high and home prices were declining he reasoned that a bull market in stocks would make people feel wealthier. A positive feedback loop would result from the boost in confidence, which would encourage spending and raise output and employment. 

By the time the US housing market bottomed out in 2011, the S&P 500 had doubled. 

Get smart: The Beijing put is in full effect.

When the Party broadcasts its intentions, history tells us how reliably they execute them. Igniting a bull run is an increasingly urgent political objective. 

Details: Central Huijin, the domestic arm of China’s sovereign wealth fund, announced a renewed round of domestic ETF purchases. 

The securities regulator (CSRC) issued a statement praising the move and encouraged other institutional investors to do the same: “We will continue to coordinate and guide various institutional investors to enter the market with greater efforts.”

The intrigue: Retail investors dominate China’s equity market, accounting for around 70 percent of trading volume. Their average holding period is approximately 16 days. 

They have been badly burned. 

An “execution ground” is how one retail investor describes the investing arena. Some believe, “There is nothing worth buying in the domestic market. Everything is tumbling.” Another summed up their disappointment by saying, “Stay away from all yuan assets.” 

Our take: Never underestimate the extreme brevity of financial memory. 

To quote John Kenneth Galbraith: “There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.”

In other words, nothing changes sentiment like price.

Why it matters: How will mom-and-pop investors feel about hoarding their large and beloved cash reserves if they miss out on a significant portion of this market recovery? 

Go deeper: From 2006 to late 2007, the CSI 300 Index surged over 500 percent, before losing more than two-thirds of those gains in the next year. The pattern repeated itself between 2014 and 2016. The benchmark rose as much as 150 percent with the crash destroying more than $5 trillion of value. 

Both times, a sort of hysteria swept the nation. Stories of quick fortunes gained popularity and drew in novice investors who eagerly joined the pursuit for riches.

What’s next: Real estate, which is likely to remain mostly stagnant, accounts for about 70 percent of Chinese household wealth—double the US rate. 

What if the 400 million-strong millennial generation leads the shift from property to stocks as a way to grow wealth as the bull market gets underway? According to CLSA, cumulative flows into financial markets from all Chinese households may exceed $18 trillion by 2030.

As for the unemployed youth and those “lying flat,” there’s a Chinese saying: those with a lot of money can speculate, but those with no money must speculate.