Market volatility and expectations of an economic slowdown are spurring a record amount of capital outflow from China. To turn things around, Beijing must turn to long-term institutional investors to boost its stock market, Nasdaq President Adena Friedman told CNBC on Wednesday.
Friedman said institutional investors, such as banks, insurance companies, and pension funds might hold the key to lifting the gloom and doom surrounding China's markets. Their participation could bring much-needed balance and liquidity during times of volatility.
Confidence in the Chinese markets plummeted after a massive sell-off earlier this year. A series of contradictory policy steps aimed to shore up sentiment only added to the confusion.
As a result, China's capital account deficit for the first half of 2015 was $125.6 billion, with nearly $40 billion capital flowing out between May and June, Reuters reported.
The situation worsened after the Chinese central bank unexpectedly devalued the yuan in August. China instructed brokerages to buy shares to prop up the market but the impact of such intervention is likely to be limited.
"The more that they can bring institutional order flow, and long-term investors, into the markets, the better off they're going to be in not having to intervene when they see market volatility," she said.
Chinese stock markets are dominated by individual retail investors who trade small volumes of stock in the short term.
Reports suggest they are often inexperienced, invest with borrowed money and a faith in the government to intervene when times are tough. They were some of the hardest hit stakeholders during the stock market rout.