Solving inherent problems can help mainland stocks find fair value

By Xiao Xin Source:Global Times Published: 2018/2/7 22:48:40

The weak performance of stocks on the Chinese mainland in the past two days could be a wake-up call that the domestic equities market is vulnerable to a short-term correction.

Rather than focus on identifying the external factors that have dragged down mainland stocks, market watchers and regulators are advised to instead look at the domestic factors that have an impact on mainland equities.

The benchmark Shanghai Composite Index shed 1.82 percent to end at 3,309.26 points on Wednesday, adding to a 3.35 percent fall on Tuesday. The dismal performance dashed hopes of a rebound, even after the three major US stock indices bounced back on Tuesday after two days of spectacular losses.

US stocks have been on a wild ride recently, with the Dow Jones Industrial Average ending Monday down 1,175 points, the index's worst one-day fall in point terms. The US stock market rout triggered a global selloff, and mainland stocks were caught up in the global panic.

Adding to the gloomy mood, China's four major securities newspapers, considered a proxy for mainstream market opinion, ran front-page stories on Wednesday that attributed Tuesday's decline mainly to the panic overseas.

Nonetheless, the fact that the Shanghai index failed to rebound on Wednesday even as global stock markets mostly bounced back ought to prompt China's market watchers and regulators to reflect on the inherent problems with the domestic equity market and the economy at large. In technical terms, the mainland's blue chips were overbought, resulting in Wednesday's fall that overshadowed a pick-up in the ChiNext Index, which tracks China's NASDAQ-style board of growth enterprises.

Out of more than 3,000 stocks traded on the mainland markets, just a few hundred blue-chips, the "Nifty 50" in particular, are considered to have propped up the market over the past year amid a broadly weak performance. A bloodbath in smaller-cap mainland shares that has seen many stocks plunging by 20 percent to 30 percent in recent trading days unleashed concerns over deeper problems with the domestic stock market. The sell-off in the blue-chips only added to the worries.

There are rumors that some maturing asset management and trust products can't be rolled over owing to China's deleveraging measures. Observers have speculated that this problem led to dumping of shares in companies with such products among their major shareholders.

Regulators need to address investors' concerns and deal with problems inherent in the market; for instance the potential negative effects of policy efforts that are designed to reduce risks in the financial system.

Reasonable valuations for mainland stocks that are intended to serve as a barometer of the Chinese economy's health and outlook can only be achieved when all parties involved face up to the market's inherent problems.

The author is a reporter with the Global Times.


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