Date
23 January 2017
Chinese stocks slumped on Monday following reports of a police raid on a Shanghai-based investment firm and the detention of one its top executives. Photo: CNSA
Chinese stocks slumped on Monday following reports of a police raid on a Shanghai-based investment firm and the detention of one its top executives. Photo: CNSA

Why A-share investors must now focus on fundamentals

I wrote in my previous column that the A-share market was headed for a fresh correction. Well, that was exactly what happened on Monday, when the Shanghai benchmark index shed 1.7 percent.

About 1,800 stocks posted losses in the A-share market on the day, with nearly 50 counters suffering limit-down falls of ten percent.

The central government has strengthened regulation on stock market practices recently.

Shanghai-based Zexi Investment, known in China for the high return of its privately-offered securities funds, or “sunshine” fund products, has come under the scrutiny of authorities.

The Ministry of Public Security announced late Sunday that Zexi’s general manager Xu Xiang and several others are suspected to have obtained some company information via illegal methods and then engaged in insider trading and stock price manipulation.

Xu has been placed under detention.

The news has come as a shock to many in the market, and people rushed to sell stocks that Zexi was heavily involved in.

The list includes Deluxe Family Co. (600503.CN) and Wenfeng Great World Chain Development (601010.CN), among others.

Companies, meanwhile, have been busy issuing clarification statements to de-associate themselves from Zexi.

The investigation gave investors an excuse to sell amid the expected market correction.

As speculative activities ebb, the focus should now again shift to fundamentals.

A study by GF Securities has revealed that, excluding the financial sector, the overall profit of A-share firms fell 36.8 percent in the third quarter from the previous three months.

On a year-on-year basis, the profit growth rate fell to negative 14 percent in the third quarter, after a negative 4.6 percent showing in the three months to June.

Mainland investors have been fixated by policy hopes, instead of paying heed to company fundamentals.

It is worth watching if they will at least now, following the latest correction, pay more attention to the fundamental data and sell the stocks of firms that had poor earnings.

Among the emerging industries that were chased in the market recently, new-energy vehicle makers and environmental protection-related firms have posted good financial results. However, wind power and maritime engineering firms have been disappointing.

A plan unveiled by the State Council Monday to deepen reforms in villages may bring some speculation topics to a tepid market.

Related stocks like First Tractor Co. (601038.SH) may benefit from the theme and outperform.

This article appeared in the Hong Kong Economic Journal on Nov. 3.

Translation by Myssie You

[Chinese version中文版]

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MY/DY/RC

a columnist at the Hong Kong Economic Journal

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