In the world of finance and economics, there often exists a chasm between reality and perceptionKnowledge, or rather the monopoly over knowledge, can significantly tilt the balance in favor of a select group of elites, often obfuscating simple truths while complicating them with jargon and technicalitiesThis phenomenon is not new; throughout history, those who wielded knowledge have also wielded power, leading to the famous quote by Francis Bacon: "Knowledge is power." But the question looms: Does this saying still hold weight in our contemporary society, particularly in relation to the financial markets?
To dissect this notion, let’s begin with the strengths of the U.S. stock market, which has shown a remarkable upward trajectory over decadesMany may argue that this is attributable to American values such as contractual spirit and the superiority of its financial systemsHowever, the reality is far more complex and, in part, counterintuitiveThe core reason for the sustained growth of U.S. equities can be traced back to a critical observation: a staggering 50-60% of American households' wealth is tied up in the stock marketFurthermore, over half of corporate financing in America is raised through equities, with another significant portion coming from bonds—essentially, all roads lead back to the stock market that serves as the life source for the economy.
This interconnectedness highlights an essential point: the health of the U.S. economy is now inextricably linked to the stock market's performanceWhen stock prices plummet, the ramifications extend far beyond Wall Street—companies struggle to secure financing, production falters, and consumer confidence plummetsThe result is a swift descent into economic turmoilSuch has been the mandate of the Federal Reserve; in times of crisis, the urge to intervene and revitalize the market overrides other major considerations like employment rates and inflationThe stakes are simply too high—the potential collapse of the stock market could lay waste to the American economy.
Conversely, when the stock market flourishes, corporations can seamlessly access capital for innovation and growth, households see their wealth increase, and consumers become more inclined to spend, thus creating a positive feedback loop that propels economic expansion
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In this sense, the stock market and the U.S. economy function symbiotically, illustrating a principle of mutual gain and lossAs long as the empire maintains its foundation, drastic downturns in the stock market remain unlikely.
Now, why has the stock market taken center stage as a primary avenue for corporate financing and individual savings? The answer lies in its historyEstablished in 1811, long before many of today’s commercial banks came into existence, the U.S. stock market had ample opportunity to craft sound institutional frameworksIt also had earlier access to competing over deposits and corporate capital, both of which have been instrumental in shaping its landscape.
Shifting our lens to the domestic stock market in China, we see a starkly different backdropOne might wonder why the A-share market exhibits such volatility, declining during prosperous economic times and plummeting further during downturnsThe answer is straightforward: the A-share market has never established itself as a primary financing channel for domestic enterprises or as a reservoir for household wealth.
Upon its inception in 1990, the A-share market faced stiff competition from a robust banking system that had already permeated even rural areasThe ambition for the stock market to wrest control over corporate funding and individual savings was a tall orderMoreover, the early intentions of the A-share market were not aimed at fostering sustainable investment, but rather at providing incentives for entrepreneurs and state-owned enterprises to address fiscal deficits—essentially, it emerged from a framework steeped in compromise and expedience.
Fast forward to today, and the A-share market still struggles to engage meaningfully with the national economy, representing less than 10% of corporate financing as of 2023. The banking system continues to dominate, with approximately 80% of businesses relying on loans, while individual household wealth predominantly resides in tangible assets like real estate and cash deposits
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