The Mixed Ownership Reform Will Transform China’s Stock Market
Ofvarious reforms, the reform of ownership is the most fundamental one. Any reform that may influence the ownership system will have profound impact on the economy and the society in the future. The mixed ownership reform will also bring great opportunity to China's stock market.
Government policy, one of the most important long-standing factors in China's stock market, played significant roles in China's major bull markets and bear markets in the past. To a great extent, the full circulation reform starting from 2005 not only contributed to the bull market from 2005 to 2007, but also triggered the long bear market lasting from 2007 to 2014. The bull market in 2014 is attributable to the period of monetary easing whose beginning in the same year was heralded by an interest rate cut. However, the instrument of leverage, which was created together with the monetary easing policy, also partly led to the stock market crash in 2015.
The full- circulation reform itself didn’t perform well, even taking the compensation into account. However, the reform was launched at a special time. Before China’s access to the WTO in 2003, the common concern was whether the products made in China were good enough to compete against their foreign counterparts. In 2005 it turned out that products made in China began to be prevalent around the world, leading to the prediction of RMB appreciation and inflow of hot money, which caused the increasing RMB circulation. Besides, China’s stock prices are substantially undervalued after years of bear market. The combination of various factors fueled a round
of booming bull market, pushing the stock market index from 1000 points to over 6000 points.
But in fact the full circulation may be subject to greater potential risk, since it completely changed the structure of tradable shares in China's stock market and its valuation. In addition, the full circulation raised the market capitalization during the initial stage for the purpose of selling shares at a high price later. As a result, even with no major setback occurring during the period from 2007 to 2014, China’s stock market index plummeted from 6000 points to 2000 points. In a word, the full circulation both gave birth to the bull markets and took 7 years to restore the stock price to normal levels after the great bull market ended.
Fundamentally, the mixed ownership reform is beneficial to the stock market. Unluckily, it happened during an RMB devaluation period, coupled with economic adjustment, deteriorating external environment, as well as the psychological shadow of the after effect of a stock market crash with huge destructive power. Given the fact that the current external environment will suppress the performance of the stock market, it will take a long time for the suppressing factors to weaken before embracing a new round of long-term bull market.
If there will be major adjustment this year, even bigger opportunities are expected to emerge in a more violent manner after the adjustment. Of course, maybe the bullish aspect of mixed ownership reform will offset the bearish aspect of the deteriorating economy and external environment. If there is no major adjustment this year, then the stock market will exchange space for time, replacing the overall uptrend with local active hotspots.
In addition to the benefits of the mixed ownership reform, the potential negative factor is the registration system. Recently, new shares were issued so rapidly that the stock market has been suppressed. It is self-evident that the registration system will deal a blow to shell resources and junk stock valuation.
In fact, the mixed ownership reform is beneficial to most state-owned enterprises, many of which are blue chip companies, while the registration system is mostly unfavorable for junk stocks in mid- and small-capitalization stock markets. With the mixed ownership completed, new impetus will be injected into the development of the state-owned enterprises. However, the theme stocks and shell resources will take a long time to embrace the value regression. Therefore, we can’t rule out the possibility that new polarization is likely to happen in the stock market index in the future.