Defl ating ChiNext bubbles only way to reveal true state of corporate fi nancial health

The price earnings ratio of the ChiNext, China’s NASDAQstyle board tailored for innovative and high- tech companies, is reportedly about to fall below that of the NASDAQ Composite Index for the fi rst time ever. As China’s securities regulators are expected to strengthen oversight and reduce fi nancial risk under new guidelines issued after a policy meeting that is only held every fi ve years, squeezing the bubbles out of the ChiNext may still take some time.

As of the close of trading on Friday, the price- to- earnings ratio – a major valuation indica- tor – of the ChiNext index was 36.2, compared with 34.3 for the NASDAQ Composite Index. It was the narrowest gap between the two, according to a Bloomberg report on Monday.

Since the beginning of this year, the NASDAQ index has risen by more than 17 percent, while the ChiNext index had declined by 14.05 percent as of Monday.

The pace of declines on the ChiNext picked up in July, with a loss of 7.24 percent recorded so far this month.

In July, heavyweight companies traded on the ChiNext mostly reported or warned of disappointing fi rst- half fi nancial results, letting some of the air out of their stock bubbles and dealing a blow to investor sentiment. For instance, Guangdong Wens Foodstuff s Group said that its fi rst- half profi t may have decreased by nearly 78 percent year- on- year to 1.6 billion yuan ($ 237.07 million). The statement drove its stock down by more than 17 percent to a low of 19.40 yuan on July 18. Meanwhile, Leshi Internet Information and Technology, the listed arm of the debt- rid- den LeEco group, warned of a potential loss of up to 642 million yuan for the fi rst half. Trading in Leshi has been suspended since April, and the resumption of trading is seen as one of the biggest risks facing the entire board, raising concerns over a potential market stampede.

All these developments clearly point to the high risk of bubbles on the ChiNext, which was originally intended to allow investors to discover highgrowth technology companies.

The National Financial Work Conference, which ended on July 15, put a lot of emphasis on curbing fi nancial risks and enhancing fi nancial regulation, which is exactly what ChiNext needs if regulators hope for a genuine revival of the board.

Without the foundation of a sound business performance, it is inevitable for ChiNext companies’ shares to drop, and without the prevention of fi nancial risks, the true valuations on ChiNext will be obscured by bubbles.