Fluctuations show investors’ immaturity
Chinese mainland stocks rebounded on Monday following an extremely volatile week.
But even as markets appear to be calming down, sobering questions as to what went wrong and who is to blame lingers among Chinese investors, analysts and officials.
While the rocky week, which saw the Shanghai Composite Index plunge nearly 10 percent and the smaller Shenzhen Component Index tumble around 8 percent, may have been triggered by a global rout that started in the US, domestic factors such as the rising bubble in equity prices and a massive base of individual investors who tend to engage in short-term speculative trading played a major role, some analysts noted.
On Monday, the Shanghai Composite posted a 0.78 percent gain, while the Shenzhen Component edged up 2.91 percent. The blue-chip CSI 300 index also gained 1.29 percent
“Though further volatility might occur, the stock market will soon stabilize,” Dong Dengxin, director of the Financial Securities Institute at the Wuhan University of Science and Technology, told the Global Times on Monday.
As for last week’s sharp losses, Dong cited “internal” factors for the widespread sell-off and said the US stocks rout was just a “coincidence.”
“Even without the US stocks rout, the A-Share market would have been headed for a correction,” Dong said.
He added that steady gains in the past six to seven months have pushed the A-Share market to a point where a correction is due, with prices of some blue-chip shares such as Kweichow Moutai going “crazy,” and major earnings shortfalls reported by several companies also shattered investors’ confidence.
A total of 79 listed companies reported earnings losses of more than 10 million yuan ($1.58 million) for 2017, while 10 of them reported losses of over 1 billion yuan, including Leshi Internet Information and Technology Corporation, which reported a striking loss of more than 11 billion yuan, the Securities Times newspaper reported last week.
However, domestic fundamentals remained strong, though some speculation does exist, and it was the US stocks rout that led to the downfall in the Chinese markets, argues Li Daxiao, chief economist at Yingda Securities.
“I think the US factor played a larger role in the Chinese stock market rout,” he told the Global Times on Monday, pointing to relatively lower price-earnings ratios in the Chinese indexes.
The price-earnings ratio of the CSI300 is at 14 times, substantially lower than the NASDAQ’s 60 times and the Dow Jones’ 21.7 times, according to Li. A high price-earnings ratio indicates a bubble in valuation.
Either way, a crucial issue behind both internal and external factors is the huge base of individual investors, who are immature and highly speculative, the two analysts said.
“Chinese investors are immature. They focus on short-term, speculative trading,” Dong said, adding this could be “a big issue because the group is massive.” He noted that individual investors account for up to 90 percent of total transactions during certain periods such as the market crash in 2015.
Li also pointed out that investors’ behavior following heavy losses also reflects their grave misunderstanding of the market and risks.
After the recent market turmoil, which came just a week before the Chinese lunar new year, some investors have reportedly slammed the US for starting the stocks rout, and Chinese officials for their inaction, and have blamed the US and the Chinese government for ruining their new year.
“This is just so irrational and immature,” Li said. “They should understand that this is all part of the risk they take when investing in the stock market.”
Dong said he is “glad” that the [China Securities Regulatory Commission] did not intervene as they were called on to do “because that’s not their job. Their job is to provide a fair market, and not to drive the market up or down.”