Global Markets Boom, But A Shares Stuck at 3000 Points
In recent times, the global stock markets have witnessed a remarkable surge, with Germany's stock index achieving historic highs and Japan's market reaching levels not seen in over three decades. Meanwhile, the United States has been basking in the glow of a prolonged bull market that has spanned decades. Even neighboring India, with an economy that lags significantly behind China's, has managed to witness a meteoric rise in its stock market. In stark contrast, the Chinese stock market, often referred to as A-shares, has found itself steadfastly anchored around the 3000-point mark, akin to a long-term relationship that remains unshakable despite external pressures.
This persistent stagnation at 3000 points raises a rather pertinent question: why is it that this particular point has become a formidable barrier for Chinese stocks? To understand this dilemma, one must delve into the intricacies of the A-share market. Over the years, the number of listed companies has skyrocketed. The first thousand listings were achieved over a decade, while the next thousand took another decade. The pace quickened significantly, with the journey from 2000 to 3000 listings taking only six years, from 3000 to 4000 a mere four years, and the leap to 5000 listed companies achieved within just two years. This rapid expansion, however, has led to a rather unexpected consequence: the A-share market has become increasingly 'overweight', a phenomenon described metaphorically as a form of 'market obesity'. This excessive growth has hampered the market's ability to realize significant gains, causing it to stagnate.
Advertisement
The expansion of the market mirrors a bowl filled with water, where new capital inflow represents water, and the participation of investors is akin to a small bag of flour. As more water is added at an accelerated pace, the flour, representing investment interest, struggles to keep up; thus, the mixture becomes thinner and less effective, ultimately failing to coalesce into a cohesive form, much like ineffective stock prices which falter due to lack of solid backing.
At its core, the function of the A-share market is to facilitate financing for enterprises. In the prevailing discourse, one often hears calls to increase the proportion of direct financing further. However, this drive towards capital accumulation does not directly translate into market vitality. The market is continuously being drained through various channels: initial public offerings (IPOs) siphon off capital, existing shareholders dilute their stakes, and significant stockholders offload shares for cash. Such practices raise doubts about how a sustained bullish trend could manifest under these circumstances.
The recent implementation of a comprehensive registration system is indicative of a broader trend toward market expansion. Despite the introduction of measures allowing for more frequent delistings to ensure market health, the number of new listings far outpaces them. Projections suggest that in just a few years, the A-share market might expand to include over ten thousand companies, indicating a pivotal shift: a definitive bull market across the A-share landscape seems unlikely. The current investment landscape suggests a looming necessity for structural bull markets instead of broad-based ones; investors must come to terms with this reality.
In comparison to more mature global stock markets, the A-share market remains relatively young. It is plagued by systemic issues, with numerous cases of financial misrepresentation and companies known for not distributing dividends, colloquially termed 'iron roosters'. This leads to a scarcity of genuinely valuable investment opportunities. Coupling this with a high ratio of retail investors compared to institutional players, many of whom lack robust investment philosophies, one can observe a pronounced speculative behavior permeating the market. This results in significant volatility, with market indexes swinging dramatically from highs to lows.
The frequent market fluctuations serve as a harsh lesson in risk management, amplifying the volatility. Investors who resist the urge to sell during soaring stock prices often find themselves on a rollercoaster ride, ultimately resulting in mass exits when a bull market concludes. This pattern culminates in market crashes, reminiscent of a funeral pyre, where clueless retail investors or slow-moving institutions remain stuck at the peak, standing vigil for the next bull market to 'rescue' their investments. The cycle perpetuates itself, leaving many in the middle-class demographic stranded in positions where they await the elusive next rise to free up their capital, knowing full well that next bull market might also evade them.
For many investors who find their capital immobilized at high prices, past painful losses breed mistrust towards long-term value investing, which circles back to reinforce a short-term mentality, fostering speculation. Each bear market inflicts damage not only on individual investors but also adversely affects broader economic growth. When vast amounts of capital become trapped at inflated valuations, they transition from active to dormant assets, leading to reduced consumer spending and stifling entrepreneurship. A robust and lasting bull market is essential for bolstering wealth creation for the populace, rather than merely emphasizing perpetual funding.
Summing up the reasons that have led to the prolonged presence of A-shares around the 3000-point threshold boils down to five key aspects. First, the rapid expansion of listings resembles a leap rather than a gradual climb. Second, an inclination toward raising capital overshadows returns on investment, which remains a pivotal concern. Third, there exists a glaring dearth of high-quality investment options. Fourth, systemic shortcomings continue to plague the landscape. Fifth, the prevailing maturity of investment philosophies, leaning heavily toward speculation over stable investing principles.
In essence, the A-share market is still in its formative years, requiring time for mature growth. Changes in structure and approach are steadily in progress, and as the Chinese economy evolves, more firms will emerge as worthy investment prospects. The long-standing relationship between A-shares and the 3000-point mark is poised for change in the uncharted future.
As we conclude this analysis, it is worth noting that the current A-share landscape presents relatively friendly conditions for ordinary investors. By adopting a balanced mindset and lowering expectations, there exists ample opportunity for profit if approached strategically. Engaging with foreign markets such as the U.S. or Hong Kong often proves disadvantageous for retail investors, while the latter applies a T+0 trading regime without limits on price fluctuations—a scenario where adverse news can drastically halve a stock's value. The U.S. market exemplifies a challenging environment to navigate, predominantly favoring institutional investors, thereby limiting the opportunities for retail participants.
As the A-share market continues to integrate more closely with global standards, retail investors will face increasing challenges. A fundamental understanding of trading principles, techniques, and risk management will become crucial. Past tendencies of simply waiting at the high-water mark for recovery are no longer viable; perseverance must yield to a proactive approach. Instruments like index or sector ETFs, which are less prone to delisting and maintain better liquidity, present better investment avenues for the general public.
Leave a comment