The capital market is not only a vital platform for resource allocation and innovation-driven development, but also a key hub supporting China's long-term economic competitiveness and the enhancement of national strategic capacity.

The draft outline of the 15th Five-Year Plan (2026-30) for national economic and social development clearly states that China must uphold a combination of an effective market and a proactive government, giving full play to the decisive role of the market in resource allocation. As an integral component of the modern financial system, the capital market is playing an increasingly fundamental role in optimizing resource allocation, supporting technological innovation and upgrading industrial structure.

Amid profound adjustments in both the domestic and international economic landscape and deep changes in the global financial order, the central government has placed higher demands on the capital market's functional positioning, institutional framework and governance system — elevating it as a crucial pillar for promoting high-quality development and fostering a new development paradigm.

During the 15th Five-Year Plan period, capital market reform should center on serving the real economy and advancing technological innovation. The main focus should be on improving foundational institutions, strengthening information disclosure and investor protection, and deepening the implementation of the registration-based IPO system. At the same time, China should steadily expand capital market opening, enhance marketization, rule-of-law governance and internationalization, and improve regulatory efficiency.

Against the backdrop of reshaping China's capital market ecosystem, efforts to enhance the quality of listed companies, cultivate long-term capital inflows and improve the overall market ecosystem should be accelerated — thereby strengthening inclusiveness, resilience and global competitiveness.

The Central Financial Work Conference in 2023 elevated capital market development to new strategic heights, explicitly defining it as a hub of modern economic and financial systems. This means fully leveraging the capital market's pivotal role in economic operations and financial development. As China advances toward becoming an innovation-driven society, finance — particularly the capital market — plays an especially important role in driving innovation.

Since the 14th Five-Year Plan period (2021-25), China has needed to gradually build the intellectual and scientific foundations for its future economic growth. China has already become a globally influential nation. Taking "Made in China" as an example, its global share reached 31.6 percent in 2024 and is expected to have approached one-third in 2025.

Over time, there will be fewer countries for China to emulate. Instead, other countries may begin to learn from China. China must address the intellectual and scientific foundations of economic growth — considering what kinds of scientific theories and institutional designs other countries may one day look to China to provide.

China's contribution to human society should not be limited to technology and economic growth, but also encompass inclusive culture and institutional advancements in human civilization. How a late-developing country evolves into a developed nation may be a subject for which China can offer a model for study. Within this broader macro framework, the capital market forms an essential component.

Therefore, the foremost task in developing the capital market is to transform perceptions — shifting it from being viewed solely as a financing platform to becoming a market that also embodies incentive mechanisms and wealth management functions.

With such a fundamental shift in understanding, how should China reshape the capital market ecosystem? The existing ecosystem was formed under the old perception and is no longer capable of fulfilling the responsibilities required under its new positioning, nor can it bear the mission of serving as a vehicle for building a financial powerhouse.

The realization of a financial powerhouse rests on two major pillars: first, the internationalization of the renminbi, enabling it to become a freely tradeable international currency; and second, the development of a strong capital market — one that serves as a major global financial center for renminbi-denominated assets, which should gradually evolve into a new class of global assets comparable to those denominated in US dollars.

How, then, should this ecosystem be reconstructed?

First, the asset side must be restructured. In the past, the asset base struggled to attract foreign investors and failed to deliver risk-adjusted returns commensurate with a risk market.

China's risk premium performance has been historically weak, limiting market development. Once the risk premium gradually increases, the market will expand accordingly. The risk premium could reach 5-5.5 percent. Combined with the risk-free rate, overall returns could approach around 7 percent. To achieve such returns, asset-side reform is necessary — allowing high-tech companies with significant uncertainty but strong future growth potential to gradually become the mainstay.

China has long recognized the importance of improving listed enterprise quality, but the key challenge lies in how to do so effectively. What is truly needed is to design a clear pathway toward this objective. Moreover, the definition of "quality" must be clarified. In capital market terms, a company that is not yet profitable does not necessarily lack quality. Therefore, supply-side reform is critical, with the core objective of enhancing the risk-adjusted returns of listed assets.

Second, the funding side must be restructured. In the past, market risks were excessively generalized and even demonized, deterring many investors and creating the perception that investing in the market could be a violation of regulations. As a result, participation became dominated by individual investors. While individuals are permitted to invest their own money in stocks or mutual funds, such capital flows are limited. Substantial institutional capital has struggled to enter the market.

In reality, the capital market balances risks and returns. The overgeneralization of risk perception has led to severe capital shortages. Therefore, we must reform our understanding of market risks and drive sustained expansion of the demand side, particularly by enabling and encouraging large-scale capital inflows. The priority is to remove or ease constraints preventing major institutional funds from entering the market.

The writer is former vice-president of Renmin University of China and dean of the university's Central Financial Work Conference. This article is an excerpt from the English translation of the original text published in the January 2026 issue of New Finance, a monthly journal specializing in economics and finance.

The views do not necessarily reflect those of China Daily.