China Enhances Market Regulations to Foster Sustainable Growth

China's Regulatory Approach to Market Stability

SHANGHAI/HONG KONG, Feb 11 (Reuters) - As global capital trickles back toward China, policymakers are signalling they want growth without the froth, using tougher enforcement and cooling measures to slow the market's pace in order to strengthen its appeal in the long term.

Impact on Investors and Fund Managers

With fund managers now seeking to diversify away from dollar-heavy portfolios, Beijing's calibrated approach could help reverse years of retreat when some investors even called the country "uninvestable".

Regulatory Actions and Market Response

Analysts say these measures highlight the growing importance of the financial sector, particularly as China seeks to attract global capital amid a challenging geopolitical environment.

Long-term Economic Implications

"A rising stock market helps fund China's technology advancement, enhances people's wealth, and aids economic growth," said Meng Lei, UBS China strategist.

The China Securities Regulatory Commission (CSRC) cracked down on speculators last month after the Shanghai Composite Index hit 10-year highs on record turnover driven by leverage bets in a sign of overheating.

Over the past month, the Shanghai and Shenzhen stock exchanges handled more than 2,000 cases of irregular trading, including "pump-and-dump" schemes and spoofing, marking a monthly record in enforcement activity.

Regulators also meted out a 41-million-yuan ($5.92 million) fine to a local hedge fund for illegal fundraising and misappropriation of investors' money.

Broader cooling efforts include tightening margin financing rules, curbing high-frequency traders' access to exchange data, and curtailing stock-picking "influencers." Sovereign funds, meanwhile, have pared back equity holdings.

"The art of the slow bull is in effect," fund consultancy Z-Ben Advisors said. The market is entering a self-sustaining cycle as "dynamics suggest a growing level of confidence in market depth from regulators and investors alike."

Chinese President Xi Jinping outlined in a speech published last month his vision to build a robust financial system supported by powerful regulators and "global reserve currency status" for the yuan. 

China's benchmark Shanghai Composite Index gained 18% in 2025, its strongest performance in six years, outperforming a 16.4% rise in the S&P.

The CSRC did not reply to a Reuters request for comment.

'WARNING CALLS'

In the commodities futures market, regulatory actions have also intensified following a surge in metal prices. Measures included raising margin requirements and capping the number of new positions traders can open.

In a rare move, state-backed investors, typically seen as market rescuers, divested stocks to temper the rally.

Exchange-traded funds (ETFs), used by sovereign fund Central Huijin as a tool to steer markets, witnessed net outflows exceeding 700 billion yuan last month, according to Z-Ben Advisors.

The crackdown on speculators has not weighed on sentiment as heavily as measures implemented in the past.

"Substantial yet well-paced selling by the National Team is curbing – but not killing – the positive market momentum," Laura Wang, chief China equity strategist at Morgan Stanley, said in a note, adding that "market dynamics remain on a healthy track."

To boost financial strength, "you need a steadily rising currency and steadily appreciating asset prices," said Yuan Yuwei, Hong Kong-based fund manager at Trinity Synergy Investments.

Some market participants are taking the measures to prevent another boom-and-bust cycle seriously.

Li Feng, co-dean of a Shanghai-based investment institute which until recently taught short-trading skills, has switched to teaching value investing.

"Many traders I know got warning calls from regulators, or had their trading accounts frozen."

STEADY REGULATORY HAND

To be sure, Beijing's drive towards a more investor-friendly market started a couple of years ago, after it was jolted by a massive selloff.

Policies to limit equity fundraising and encourage share buybacks and dividend payouts, have begun to win investor trust, analysts say.

Last year, the "structural market drag" of massive equity fundraising was reversed, said Thomas Gatley, China strategist at Gavekal Dragonomics, and listed firms are now returning much more capital to shareholders than they are extracting.

In currency markets, policymakers have allowed the yuan to gradually strengthen against a weaker dollar.

"A sustainable uptrend is key to boosting the yuan's global reach," said Aleksandar Tomic, an economics professor at Boston College. "Why is China having a difficult time having yuan as the reserve currency? Because they were prone to devaluation in order to improve trade." 

Another obstacle is that China's capital markets are underdeveloped relative to the size of its economy, though that is changing, Tomic said.

Liqian Ren, Director of Modern Alpha at WisdomTree, said the key to attracting foreign inflows into Chinese stocks is for China to build a transparent, and trustworthy system, as well as sustainable outperformance.

"If you put up three years of good performance, the money will flow in," she said.

($1 = 6.9275 Chinese yuan)

(Reporting by Reuters Staff; Editing by Sumeet Chatterjee and Jacqueline Wong)