23 October 2016
As China's regulators change policies from time to time, making long-term plans can be difficult for fund managers. Photo: CNSA
As China's regulators change policies from time to time, making long-term plans can be difficult for fund managers. Photo: CNSA

Why China’s A-share market is a tough ride

China’s equity market appears to have long detached from the nation’s economic fundamentals.

Right now, the market is influenced by factors such as potential A-share inclusion into the MSCI, the Shenzhen-Hong Kong Stock Connect and currency volatility in emerging markets.

Non-economic factors have increased the complexity in determining equity valuations in the country.

While top leaders are usually very ambitious and push forward reforms in the first three years of their rule, many issues however often surface in the subsequent years.

The government then tends to step up control, regulation and management, or get prepared for upcoming tough times.

Amid this situation, innovation and reforms could be put on hold.

Long-term investors hope to reap profits after deep research into industries as well as specific companies. However, political uncertainties and systemic risks makes the task relatively difficult.

Some fund managers have to deal with investment losses or company liquidations on a daily basis. In this situation, how can they make any real long-term plans?

Mainland regulators have been changing policies from time to time in recent years. Sometimes the policy direction runs counter to the interests of the market in terms of its development.

The government makes mistakes, as seen in the fiasco early in the year over a market-wide circuit breaker system.

Despite the missteps, regulators don’t hesitate to unveil new policies or remove old measures. This has made policy analysis a big headache for fund managers.

Meanwhile, frequent changes in industrial policy have made it very difficult for companies to map out plans for 5 or 10 years going forward.

Reform has unleashed huge momentum but it also brought some chaos to the existing system.

This has caused discontent among some vested interest groups, prompting them to strongly oppose new measures and try to force policymakers to take a U-turn.

In China, many industries have long faced this dilemma: policy liberalization could lead to chaos while tighter control would stifle growth.

The mainland’s equity market has gone through various policy changes in the recent past.

China is in the middle of an economic restructuring exercise. That has prompted investors to seek out companies that can benefit from the initiative.

Enterprises that fail to ride the restructuring would lose favor in the equity market, forcing the firms to return to traditional bank lending if they want new funds.

As China’s economy moves toward services-led growth, equity financing will be the best model for services companies to raise funds.

But the equity market needs to measure up in terms of fulfilling the financing needs and value discovery.

As capital will chase returns, money could be hard to come by for some industrial or old economy sectors. 

This article appeared in the Hong Kong Economic Journal on June 13.

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Senior investment banker

EJI Weekly Newsletter