“With the real estate out of favour, bank deposit paying very low interest rates and stock valuations at very low level, the current set-up makes stocks an attractive option for domestic investors in our view.”

Wu’s elixir for reviving the ailing stock markets is a cocktail of state intervention, strict law enforcement and tougher crackdowns on offences ranging from fraudulent listings to stock-price manipulation. While some of the measures have drawn criticism, these efforts all reflect the primary message of policymakers that the stock market exists to serve the economy and is a place for the Chinese to preserve their wealth.

Despite these gains, Chinese stocks remain undervalued, reflecting in part the investor hesitancy.

Chinese stocks have become cheaper over the past decade. The CSI 300 Index, which tracks 300 of the country’s largest stocks, is valued at 11 times 2023 earnings, cheaper than the past decade’s average of 12.2 times, according to Bloomberg data. In comparison, the multiple for the S&P 500 Index in New York is 22 times and that for Japan’s Nikkei 225 is 21 times, the data showed.

This year’s rally has been driven mainly by China’s national team, a tongue-in-cheek term for state owned entities including the investment unit of the sovereign wealth fund. HSBC Qianhai Securities estimates that the team has poured about 438 billion yuan (US$60.5 billion) into exchange-traded funds (ETFs) which has helped support markets over the past eight months.

Market operators and regulators are typically responsible for ensuring the smooth operation of financial exchanges, and usually refrain from directing the market’s rise or fall. That is not the practice in China, where a dearth of investible options has turned the stock market into the biggest source of capital appreciation by default for the country’s 220 million individual investors.

Despite the potential moral hazard, Wu believes in this approach, proclaiming in his first press conference since taking the reins that state intervention was necessary and justified in times of “market dysfunction”.

Wu did not respond to requests for an interview. His focus on investor protection has impressed the market. The CSRC has issued a slew of draft rules seeking to raise the bar for company listings and tighter oversight of high frequency trading. It has also launched on-site inspections of mutual funds to strengthen the management of the industry.

The watchdog has pledged tougher new listing rules, especially for companies that have not turned profitable, as well as more on-site inspections of listing candidates’ financial records. It is also seeking to moderate the supply of new shares while encouraging share buy-backs and dividend payouts to enhance shareholder returns.

“Most investors are likely to cheer CSRC’s efforts over the past month to replicate Japanese and South Korean regulators’ recent initiatives to improve corporate governance and close deep valuation discounts,” said Steven Sun, head of research at HSBC Qianhai Securities in Shenzhen. “The CSRC’s new regulatory framework could help to achieve better liquidity supply-and-demand dynamics and drive a gradual market re-rating.”

These improvements could help lift investor sentiment while attracting foreign investment flows, although much also depends on the lingering property crisis and consumption trends in the world’s second-biggest economy.

“Delisting more companies and tightening IPO requirements is designed to increase the quality of companies on the mainland bourses to attract long-term capital and protect domestic investors,” said analysts at Everbright Securities in a report.

The note said that in the medium-term, the government is pushing for companies to issue share buy-backs and increase dividend payout ratios.

UBS Group said the trade on stocks with high dividend yields would be still a winning strategy in the second quarter after the tactic had been in play over the past year. Big-capitalisation companies would probably outperform small ones because of their high earnings visibility and potential inflows from long-term capital, it said. The Swiss bank expected earnings for the companies on the CSI 300 Index to rise 8 per cent this year, outpacing last year’s 3 per cent growth.

Everbright analysts said buy-backs and dividends will be an important policy factor, as increasing the value of equity markets can improve household wealth effects, which in turn encourages consumption as an offset to the negative wealth effects from falling property prices.

Wu’s image as a hawkish regulator stands in sharp contrast with his predecessor Yi Huiman, whose policy approach seemed to be milder. Wu, a veteran financial industry regulator, gained the sobriquet of “broker butcher” for spearheading the closure of more than 20 insolvent domestic securities firms in the aftermath of the 2008 global financial crisis. Before taking the helm at the CSRC, he spent time as chairman of the Shanghai Stock Exchange and as vice mayor of the metropolis. As vice-mayor, he worked under the current premier Li Qiang, who approved Tesla’s wholly foreign-owned Gigafactory in Shanghai when he was the city’s commissar.

With the re-rating of the market spurred by the state intervention having run its course, Wu now faces the challenge of further restoring investor confidence and sustaining the market rebound.

For that to happen, investors will need to see more long-term institutional flows from the likes of insurance companies, an increase in mutual-fund subscriptions and leveraged bets, further improvement in China’s economy and earnings forecast upgrades, according to HSBC Qianhai Securities.

More effective measures to tackle the property market’s crisis of confidence and clarity around the Community Party’s third plenum, which will lay out the nation’s long-term policy for the economic development, are some of the other prerequisites, the brokerage said.

So far, few of these have materialised. The risk appetite for stocks remains tepid, with bond funds dominating new fund issuances in the first quarter and foreign buying slowing in March.

Hong Kong listed stocks are now trading at 8.54 times forward earnings on average, the cheapest among global peers, according to Bloomberg data.

Wu Qing’s appointment and initial moves may have helped end a three-year market downturn, but the real benefits of his reforms will take longer to materialise.

“In the long run, these regulatory measures will create a healthier market by setting a higher benchmark for listed companies, delivering enhanced benefits from the stock market to the overall economy and contributing more to economic growth,” said Deloitte in a report, which forecast that overall A-share IPO market activity will “slow considerably” through 2024.

“Financial regulation must have teeth,” he said, adding that China can become a financial superpower with a system “distinct from Western models”.

“China’s biggest problem to me is a lack of confidence. External investors lack confidence in China and domestic savers lack confidence,” Bill Winters, CEO Standard Chartered bank, told CNBC.

For Elizabeth Kwik, an investment director of Asian equities at abrdn, signs of market optimism have been emerging, with part of the economy delivering incremental improvement and policy support becoming accommodative after a cut in banks’ reserve requirement ratio and a loosening of restrictions on home purchases.

But for now, it is still not time to turn fully optimistic and expect a massive turnaround.

“Investors are still cautious, waiting for a more meaningful and sustainable recovery to come through,” said Kwik. “For foreign investors to return to the Chinese market, we think this will happen once the recovery momentum builds up across all parts of the economy, including the troubled property sector.”

Additional reporting by Daniel Ren

———-