China’s A-share market is down about 35 percent from its recent peak, despite a 5.76 percent gain on Thursday.
The rebound yesterday came amid weaker turnover. Investors who suffered heavy losses are staying away, and the market is unlikely to return to the bull track in the short term.
Authorities have announced several measures to prop up the market, including encouraging listed firms to repurchase their stocks.
The central government has also ordered state pension funds to buy equities, after previous efforts failed to stem the market slide.
As several hundred listed firms announced share buyback plans, the market finally found some strength. Among 1,339 stocks that resumes trading in Shanghai and Shenzhen, 96 percent posted gains of over 9 percent on Thursday. Only two stocks continued to fall.
To ensure market stability, it’s necessary to restore investor confidence. Company earnings and macro economic performance both have a bearing on the sentiment.
It remains unclear whether the market meltdown in the past month has damaged the real economy, but the recent inflation data — both retail and wholesale — was disappointing.
Beijing has been concentrating on bailing out the equity market in the last few weeks. It’s time now to focus on the real economy.
Some academics have noted that the equities crash may undermine consumption. During the market run-up, many people put off spending on other things and used the money for equity investments. Now that they have suffered huge losses, they are likely to cut back again.
Given this situation, the People’s Bank of China could ease the monetary policy further to stimulate economic growth. HSBC analysts predict that the central bank may cut key interest rates by 25 basis points and reduce the reserve requirement ratio by 100 basis points in the third quarter.
Over the past several months, monetary easing measures always added fuel to the equity market. Now, authorities should send a message to market participants that they must not engage in excessive speculation.
Beijing had intended to bolster the real economy by leveraging on the stock market. However, things have turned out in such a way that the economy may suffer from the market meltdown. It’s a wake-up call for the central government to rethink its strategy.
This article appeared in the Hong Kong Economic Journal on July 10.
Translation by Julie Zhu
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