Agencies
Beijing
China’s equity markets are exhibiting a peculiar and persistent trend: stocks tend to decline overnight, not due to macroeconomic shocks or corporate earnings, but because of a pervasive lack of trust among investors.
This anomaly, highlighted in a recent study by researchers at Peking University, is more than a technical quirk, it is symptomatic of deeper structural flaws in China’s regulatory and economic architecture.
At the centre of this issue is theT+1 trading rule, a policy that prohibits investors from selling shares on the same day they are purchased. While originally intended to protect retail traders from algorithmic exploitation and speculative volatility, the rule has inadvertently created a climate of fear, opacity, and inefficiency.
The T+1 rule amplifies information asymmetry, particularly in a market dominated by retail investors who lack access to institutional-grade analytics and protections. Unable to exit positions quickly, traders avoid late-day purchases, fearing they’ll be trapped overnight in a deteriorating position.
This behaviour depresses closing prices and contributes to a recurring pattern of overnight declines. The result is a market that is not driven by fundamentals, but by sentiment and suspicion, a fragile ecosystem where mistrust becomes self-reinforcing.
This phenomenon is not merely a technical failure; it reflects the broader economic philosophy of the Chinese Communist Party (CCP), which continues to prioritize control over transparency, intervention over market autonomy, and protectionism over institutional depth. The CCP’s economic policies, while often framed as pro-growth and reformist, are increasingly characterized by regulatory overreach, limited arbitrage mechanisms, and opaque governance structures. These traits are now visibly manifest in the behaviour of China’s financial markets.
Unlike liberalised markets in the West, where institutional investors and arbitrageurs help smooth out inefficiencies, China’s market lacks the depth and liquidity to absorb shocks or correct mispricing. The CCP’s reluctance to allow robust institutional participation fearing loss of control or foreign influence, has left the market vulnerable to volatility and manipulation. Retail investors, who make up the bulk of trading volume, are left to navigate a system that is structurally biased against them. The irony is stark: policies designed to protect these investors have made them more exposed to risk, not less.
Moreover, the CCP’s economic governance model continues to favour short-term stability over long-term resilience. The T+1 rule is emblematic of this approach, an attempt to suppress volatility by restricting liquidity, rather than addressing the root causes of market instability.
This mirrors other areas of China’s economic policy, such as capital controls, state-directed lending, and selective enforcement of disclosure standards. These interventions may offer temporary insulation from global shocks, but they also erode investor confidence and hinder the development of a mature financial ecosystem.
The consequences are increasingly visible. China’s markets are becoming more emotionally driven, with price movements reflecting fear rather than fundamentals. Retail traders, unable to hedge or exit positions swiftly, are reactive rather than strategic. This undermines long-term participation and discourages foreign investment, further isolating China’s financial system from global capital flows.
To restore trust and improve market efficiency, experts are calling for a recalibration of China’s regulatory framework. This includes reforms focused on transparency, real-time surveillance, and enhanced disclosure requirements.
Such measures would reduce information asymmetry, empower retail investors, and attract institutional capital. They would also align China’s markets more closely with international standards, facilitating cross-border investment and improving price discovery.
However, these reforms require a fundamental shift in the CCP’s economic philosophy, away from paternalistic control and toward genuine market empowerment.
This is a difficult pivot for a regime that views economic liberalization as a potential threat to political stability.
Yet without it, China risks entrenching a system where mistrust is the default, and where markets function not as engines of growth, but as mirrors of systemic fragility.
In essence, the overnight decline in Chinese stocks is not just a market anomaly, it is a reflection of the CCP’s broader economic contradictions. The party seeks to modernize its financial system while maintaining tight control; to attract foreign capital while limiting transparency; to protect retail investors while denying them the tools of informed participation.
These tensions are now playing out in real time, and the costs are mounting.
If China is to build a resilient, globally integrated financial system, it must move beyond symbolic protections and embrace structural reform. That means dismantling outdated rules like T+1, investing in institutional depth, and committing to regulatory transparency. It also means recognizing that trust cannot be engineered, it must be earned, through consistent governance, credible oversight, and a willingness to let markets function freely. Until then, the twilight trust deficit will persist, casting a long shadow over China’s economic ambitions.
