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China's solid economic fundamentals, increased appeal to foreign investors and strengthened market regulation will ensure a healthy capital market in the long term despite short-term fluctuations.

As of May 16, China's benchmark Shanghai Composite Index had plunged 8.96 percent from its peak level this year.

Meanwhile, net capital outflow under the northbound trading of the "Stock Connect" programs between the Shanghai and Hong Kong exchanges and the Shenzhen and Hong Kong exchanges totaled 30.71 billion yuan ($4.46 billion) and 18.08 billion yuan respectively since April, under the influence of a fluctuating exchange rate of the Chinese yuan and external uncertainty.

The short-term fluctuations of the stock market partly mirrored investors' concerns over the future, but China's capital market has a solid foundation to continue its sound and upward development.

Increased appeal

The MSCI announced Tuesday that it will raise the inclusion factor of all large-cap China A-shares in the MSCI indexes from the current 5 percent to 10 percent.

The move followed its decision in March that it will increase the inclusion factor of A-shares to 20 percent in a three-step process in May, August and November, each time upping the representation of Chinese large-cap stocks by 5 percentage points.

Upon the completion of the plan, about $68 billion of capital is expected to flow into the Chinese market, said Sheng Hao, a senior researcher at Huatai-PineBridge Investments.

With considerable foreign capital inflow and domestic institutional investors' improved capability of asset allocation in the stock market, Chinese A-shares are increasing their appeal to foreign investors, Sheng said.

Those flows of foreign capital would in turn further lift valuations for A-shares, according to Kinger Lau, chief China Strategist at Goldman Sachs, in a note to investors.

"For foreign investors, China's financial markets offer an opportunity to benefit from China's ongoing strong growth, as well as to invest in a large and diversified economy," said Zhang Tao, deputy managing director of the International Monetary Fund.

Strengthened regulation

The advanced reforms of the capital market and strengthened market oversight have also added strong impetus to the sound development of the Chinese stock market.

Supervision of listed companies will be strengthened as their quality serves as the cornerstone of capital markets' sustainable development, Yi Huiman, head of the China Securities Regulatory Commission, said last week.

According to Yi, listed companies with consistent standards of operation will benefit from more convenient financing and mergers to boost the internal growth momentum, while companies with more problems and risks will be placed under strict supervision.

Continuous and precise supervision will also be carried out to promote the quality of listed companies' information disclosure, Yi added.

As of the end of April, China had 3,627 domestic listed firms with a combined market value totaling about 60 trillion yuan.

Apart from the toughened market supervision, a number of other regulatory reforms underway have also been "broadening the scope of what foreign investors can invest in," said Christina Ma, head of Greater China Equities of Goldman Sachs Securities.

Resilient economy

The sound economic fundamentals of the Chinese economy have provided a solid base for the stock market to remain bullish in the long run.

Data released this week by the National Bureau of Statistics (NBS) have shown that China's economic performance has continued within a reasonable range and maintained stable momentum while persistently optimizing the economic structure.

"Investment has maintained steady growth, with that in high-tech industries continuing to post relatively fast growth," the NBS said.

Investment in high-tech manufacturing and services surged 11.4 percent and 15.5 percent year on year, respectively.

NBS data also showed that 4.59 million new jobs were created in cities nationwide in the first four months, accomplishing 42 percent of the task for the whole year.

Meanwhile, foreign investors showed improving confidence in the Chinese capital market.

Foreign direct investment into the Chinese mainland expanded 6.4 percent year on year to reach 305.24 billion yuan in the January-April period, the Ministry of Commerce announced Thursday.


Newspaper headline: Healthy outlook for capital market