18 September 2019
Mainland investors have been discouraged by the recent stock market slump. Photo:
Mainland investors have been discouraged by the recent stock market slump. Photo:

Why A-share bull market has ended earlier than expected

I mentioned in mid-June in an interview with Bloomberg that the rally in A shares might not be sustained for long.

However, I never expected the bull run to end so quickly.

The State Council gathered regulators of the banking, securities and insurance industries, officials of the central bank, the Ministry of Finance and the State-owned Assets Supervision and Administration Commission, and executives of major state-owned enterprises on Sunday to discuss bailout measures for the equity market.

It’s reported that the top regulators reached a consensus to stem the market’s free fall; however, they are divided over how to remedy the rout.

Should the authorities administer powerful medicine or a more gradually acting one?

At the moment, the priority is to restore market confidence.

The national pension fund, state-owned investment firm Central Huijin Investment Ltd. and SOEs have bought into the market.

Also, the central bank has pledged to provide liquidity, which could ease the market slump and avert a potential shock to the financial system.

Xiao Gang, chairman of the China Securities Regulatory Commission (CSRC), told mainland brokerages and fund managers in a meeting Saturday that the authorities have the capability, confidence and conditions to safeguard the stability of the equity market.

The senior officials believe a new fund worth 1.72 trillion yuan (US$280 billion) could support the market.

The CSRC, China Banking Regulatory Commission and China Insurance Regulatory Commission will each contribute 200 billion yuan to the fund, the central bank will set up a market stabilization fund, and 21 Chinese brokerages will invest no less than 120 billion yuan in total.

The Ministry of Finance will contribute 500 billion yuan.

How will A shares fare in the future?

I’m still positive on the market, and the root causes for the market sell-off are overly high valuations and supply and demand imbalances.

The government has done the right thing.

However, these issues need to be fixed through market forces in the end.

Over the past six months, the mainland regulators have been closely watching margin trading activity.

At first, the market thought the risk was manageable.

However, the massive sell-off occurred when everyone realized the market risk far exceeded expectations.

Is there anyone taking the opportunity to short sell A shares?

There are three main channels to short sell A shares: direct short selling, short selling stock index futures and short selling through Stock Connect.

I don’t think foreign investors have played a key role in the current market rout, given the limited volume of short selling by them.

And there is no sign that foreign investors have conducted naked short selling through the renminbi qualified foreign institutional investor program.

It’s quite obvious that deleveraging efforts have triggered the market slide.

And the active and forced liquidations of positions have accelerated the slump.

That’s the key feature of a liquidity-driven market, which can run up quickly in the short term and can also dive quickly during deep corrections.

Most retail investors initially stayed away from the market in light of the rapid run-up of A shares since the start of the year.

However, there has been wide speculation that the bull market is driven by government policy with a view to stimulating economic growth and tackling local government debt.

As a result, more and more investors jumped onto the bandwagon, in particular young investors with very limited experience.

Rampant margin financing and leveraging inflated the bubble.

That has prompted local authorities to tighten rules on margin trading, which led to a panic sell-off.

The momentum-driven part of the bull market cycle may have already come to an end, and the market participants have become more sensible.

However, the bull market is likely to continue with improving economic growth and more supportive policies.

This article appeared in the Hong Kong Economic Journal on July 6.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker