21 September 2019
Optimists believe the factors underpinning the recent bull market remain intact. Photo: HKEJ
Optimists believe the factors underpinning the recent bull market remain intact. Photo: HKEJ

Is next correction coming soon in A-share markets?

It’s no longer easy for speculators to make huge gains in the mainland A-share market.

Major shareholders of five mainland-listed companies are under investigation, and 138 are not allowed to leave the country, according to data from China Securities Regulatory Commission (CSRC).

The nation’s top securities watchdog handled as many as 369 cases in the first half of this year.

Mainland regulators are cracking down on insider trading, illegal financing and violations on selling shares.

Insider trading has evolved into a very sophisticated scheme involving mutual funds, brokerages, trustees, etc.

Mainland brokers have been found to be engaged in illegal off-market financing activities, which could lead to tremendous risks in the future.

Malicious short-selling is another key area targeted by the authorities. Deputy Public Security Minister Meng Qingfeng visited the regulator’s offices in Beijing early this month to investigate malicious short-selling of stocks and indexes.

It has been reported that about a dozen organizations and individuals have been investigated for illegal short-selling activities.

How will A shares fare after the crackdown? The market is divided over whether stocks would rebound further or trend downward.

The optimists believe that the factors underpinning the recent bull market remain intact, adding that A shares may post a V-shape uptick.

The monetary easing and lower interest rate are still in place, and company earnings are improving as a result of reform on state-owned enterprises and corporate governance.

However, stocks that lack fundamental support will struggle to move up further, while those with good earnings growth and enjoy a bright industry outlook will continue to outperform.

A leverage-driven bull market usually falls drastically as investors are forced to liquidate their positions at any cost.

Meanwhile, the market rebound would also be dramatic. These optimistic investors are favoring high-growth industries, leading companies, and stocks with reasonable valuations.

However, conservative investors believe the rebound will be short-lived, and the correction will deepen further.

Foreign investors are fleeing the market in light of Beijing’s intervention measures, although the Shanghai Composite Index has recovered to 4,100 points.

They’ve pulled as much as US$2.9 billion from A shares within one week for fear of ambiguous rules. As a result, A shares will continue to be a market dominated by domestic investors.

Foreign investors have withdrawn funds from A shares for six straight weeks.

The capital outflow from China equities reached US$2.9 billion in the week ended July 22, compared with a fund outflow of US$5.6 billion in previous week, according to data from a fund flow tracking organization.

Interestingly, foreign investors have become the biggest buyers of China bonds in the same period, reflecting robust safe-haven demand.

Also, global investors are avoiding A shares as a large number of listed companies have suspended trading during the market meltdown.

Therefore, the market rebound may struggle to sustain for lack of global investors.

This article appeared in the Hong Kong Economic Journal on July 27.

Translation by Julie Zhu

[Chinese version中文版]

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Senior investment banker