The recent deep adjustments in the A-share market, the result of weak investor sentiment, may indicate room for a market turnaround, as China's improving economic fundamentals and its dedication to advancing the high-quality development of the capital market have remained unchanged, experts said.

 

The benchmark Shanghai Composite Index shed 2.68 percent on Monday, while the Shenzhen Component Index slumped 3.5 percent to 8,479.55 points — the lowest since March 2019.

 

The technology-focused ChiNext in Shenzhen closed 2.83 percent lower to touch the lowest point since December 2019. Banks and insurance companies fared better, reporting the narrowest daily slide of 1.33 percent and 1.46 percent, respectively, on average.

 

Less-than-optimistic market expectations have led to the A-share market's prolonged correction and aggravated fluctuations in recent times, analysts at HuaAn Securities said. Although China achieved its growth target in 2023, the weaker-than-expected marginal improvement in property investments and retail numbers in December have affected the outlook of investors.

 

The fact that interest rates and the reserve requirement ratio have remained unchanged so far is reflected in the weak credit demand in the real economy, they said, adding that investors' expectations of a relaxed credit environment have not been realized yet.

 

The renminbi has also been under pressure of late, as the dollar has performed strongly amid market expectations of the US Federal Reserve postponing rate cuts. All such factors together have resulted in capital outflow from the A-share market, dragging down indexes, the analysts at HuaAn Securities added.

 

However, experts from Huatai Securities said that market expectations usually change after the implementation of key policies. Institutional reform and innovations will usher in additional capital, they said. These will lead to buoyant market performance, which has been proved true by experiences since 2005.

 

During a news conference on Friday, China Securities Regulatory Commission, the country's top securities watchdog, said the registration-based initial public offering mechanism will be further optimized, while the grip on the quality of listed companies will not be relaxed.

 

The CSRC said financing and investment will be balanced. Delisting regulations will be strictly implemented to rule out disqualified companies, while exit channels will also be diversified.

 

CSRC officials stressed that there is no conflict between the crackdown on violations and the capital market's development. On the contrary, inspection and law enforcement can best protect investors and build long-term confidence to stabilize and further invigorate the market, they said.

 

Ever since the top leadership emphasized in July that continued efforts should be made to boost market confidence and invigorate the capital market, a number of supportive measures have been taken, including further regulating major shareholders' reduction in holdings and lowering the solvency requirements for insurance products with long debt duration, said Meng Lei, China equity strategist at UBS Securities.

 

Central Huijin Investment, an arm of China's sovereign wealth fund, announced in October that it would increase its holdings in four major State-owned commercial banks and exchange-traded funds, which will also help inject more vitality into the market, he said.

 

Despite Monday's slide, the northbound capital, the value at which overseas investors buy into the A-share market via the stock connect program linking the Shanghai, Shenzhen and Hong Kong exchanges, reported a net daily purchase of nearly 1.05 billion yuan ($150 million), ending the net capital outflow of six consecutive days.

 

Zhu Liang, chief investment officer at asset manager AllianceBernstein in China, said the value of one of the company's products that allows foreign investors to buy A shares is at a historic high at present. The bulk of the investors in this product are sovereign funds and long-term capital, indicating that foreign investors' confidence in Chinese equities remains unchanged, he said.

 

On top of that, the A-share market's correction phase is very likely to end soon, said Zhu. The decline, which started in 2023, is mainly due to the lower-than-expected profitability of listed companies, which has largely impaired the appetite of investors.

 

According to Zhu, a V-shaped recovery in profitability is likely in the next 12 months, and A-share companies' average earnings per share are projected to grow by 17 percent year-on-year in 2024. This means that the A-share market may bottom out soon, given the fact that China's economic fundamentals are gradually improving, he added.

 

It should be noted that the A-share market's overall sentiment is relatively low at present. The central bank or the government should come up with relaxed and stimulative policies to inject more liquidity, which, to the delight of investors, has been happening regularly, he said.