Will There Be A Turnaround For Chinese Stock Market?

Caifu Magazine |
Posted: January 6, 2017 | Updated: March 21, 2017 at 1:56 pm
By David Ren, Chairman of CAIFU Magazine

Though lacking optimism in our expectations for a rebound of Chinese stock market in the spring of 2016, most investors still do not anticipate a drastic slump as another round of downward adjustments.  Investors have become even more panicked since the Growth Enterprise Market (GEM) index plummeted, which caused the stock market to fall all together.  A rebound in the real estate market and a decrease in Requirement Reserve Ratio (RRR) can be interpreted as some positive factors, signaling for some potential opportunities.

In the stock analysis section of CAIFU magazine, it has been mentioned several times that with the implementation of the registration system in the near future, the value of the Chinese stock market will decline in general, especially when the value of GEM and the Concepts Stocks are faced with tremendous downward pressure.  The spring of every year has usually been the time when funds are eased, and the Concepts Stocks are always the centre of attention during the National People’s Congress (NPC) and Chinese People’s Political Consultative Conference (CPPCC) in Beijing.  However, since the beginning of this year, investors have been conservative about their investment due to the pressure of RMB’s depreciation along with the not so optimistic economic data.  A great amount of funds are trapped in the Conceptual Stocks and small-cap stocks while nobody is willing to purchase them, thus resulting in the plummet of the market.

In contrast to those highly valued GEM and Conceptual Stocks, the values of those blue-chip stocks are rather low.  If those blue-chip stocks can serve to stabilize the market, perhaps the index may not appear to be as embarrassing.  However, the blue-chip stocks will only follow the trend of the market, instead of being the pillar to support the market.

During the past month, investors had not been willing to invest more capitals in the market not only because of the uncertainty of the foreign economic environment, but also due to the unpredictable future of the Chinese economic situation.  Although a rebound in the real estate market may be beneficial in the short term, however, allowing the real estate bubble to grow larger will bring much more negative impacts in the long run.  The first wave of devaluation of RMB has already come to end, and it is highly probable to have a second wave coming, therefore it would be very difficult to manage the out flow of fund due to the devaluation of RMB if the real estate market starts to fall.

Despite various concerns, some positive factors have emerged recently.  Although long-term effects of the recovery of the real estate market still remains ambiguous, it has significantly eased China’s downward economic pressure and debt risks in the short-term.  Since the Central Bank has reduced RRR, a new round of monetary easing policies is being implemented, and the capital environment has been greatly improved compared to the beginning of this year.  If the monetary easing policies would last for a while, chances are there might be a turnaround in the Chinese stock market.  However, it is highly unlikely for the Federal Reserve to increase interest rates continuously, and investing on commodities are note worthy.