China's stock markets last year were the worst performing among major exchanges. Deleveraging, tightening credit conditions within the private sector, a trade war that wasn't supposed to happen, and a slowing economy showing weakness across most industry metrics all took their toll.
The year, though, ended on a positive note: the government's high-level Financial Stability and Development Committee pledged in late December to curtail official intervention in the stock market, weeks after a similar declaration from the China Securities Regulatory Commission.
Will the authorities hold to their word? Control is too central to the Chinese leadership, now more than ever, to think that market forces will be given free rein. But the declaration of intent should not be downplayed. Until four years ago, interference was less frequent and less blunt; there is reason to think the authorities have learned from their clumsy meddling and will at least go back to the sidelines.
They jumped into the fray amid the bursting of the stock market bubble in mid-2015. Under instruction from the nation's political leadership, Chinese regulators began to intensely interfere with trading activity on a micro level in a quest to control financial risk and squelch volatility.
Retail and institutional, domestic and foreign, investors of all types were called, pestered, threatened and bullied by exchanges to stop selling shares or refrain from trading all together. Some investors were effectively told to hold their positions for days on end during sensitive political events. This kind of intervention was unprecedented and unwelcome.
Since mid-2018, such calls and warnings to investors and brokers have become less frequent. The Financial Stability and Development Committee's announcement has now made the change of direction explicit.
Effectively, the highest economic policymaking body has admitted that the micro-intervention approach was unsuccessful. It failed to boost market prices and to stop the selling the stocks. It certainly did nothing to boost investor confidence. It showed that political will alone cannot contain markets.
The reversal of this approach is a small win for the reformers within the system and comes as China edges toward center stage for foreign investors. The inclusion of domestic shares in MSCI indexes and those of other providers has brought a burst of hard currency into the exchanges in Shanghai and Shenzhen but distrust of the marketplace and regulators has remained.
Other recent announcements should help. Limits on index futures are to be loosened. Real improvements have been made to rein in and shorten trading suspensions declared by company management.
The Shanghai Stock Exchange is to set up a separate technology board with substantially lower listing requirements to capture the initial public offerings of Chinese unicorns and unprofitable high-tech darlings. This past Monday, the regulators said they would double the cap on investment into the market through the once-popular Qualified Foreign Institutional Investor program to $300 billion.
Market intervention is evolving and support measures are becoming more focused. Provincial and city governments, for example, have been left to support troubled local companies on their own amid the surge of concern about the forced selling of stakes pledged by major shareholders as loan collateral.
State buying of stocks has not ended but there has been a realization by the authorities that investors need to take losses. The China Securities Regulatory Commission has for too long been seen as trying to defend market index levels and talk up stocks -- to little avail although investors have assumed that the state would somehow step in and drive prices back up if they fell too far or too fast.
Part of the leadership's mindset change is due to the internationalization of China's markets. The Qualified Foreign Institutional Investor program and Stock Connect links between Hong Kong's exchanges and the mainland's have brought around $100 billion each into domestic shares and another $100 billion or so into the bond market.
Not huge amounts in the global context but noteworthy within China. Of even more importance is the increasing interaction between global institutions and the Chinese authorities. The move away from micro-interference partly reflects foreign investor feedback and frustration.
Financial reform in China is often a dollar short and a day late -- never really the right thing at the right time. As a result, the impact is always muted. While that remains the case, some of the recent measures are definitely the right medicine.
China easily constructs market architecture but fails in intangibles such as building trust. Investors question companies' underlying assets and the regulators' ability to fairly oversee the market. Practical clearing and settlement work efficiently but a lack of long-term confidence means short-term speculation is the default trading approach.
Domestic shares have had a bumpy start so far in 2019, as have global markets. The Financial Stability and Development Committee's announcement changes nothing immediately and 2019 will be a very difficult year for China and the world economy in any case. Chinese stocks will continue to face volatile trade but at least there can be some hope that market forces will be the decisive factor.
Global investors should take comfort from all the work done in China in 2018. It is far from complete or perfect, but a better marketplace is slowly taking shape. The post-bubble hangover was needlessly aggravated and prolonged by government interference, but that chapter is closing. Prices may still fall but the true nature of stock markets may yet emerge in China -- that sometimes they go up and sometimes they go down.
Fraser Howie is co-author of "Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise." He has worked in China's capital markets since 1992.