Why China stock market remains lackluster

Despite a string of good news, including the easing of US-China trade tensions, the inclusion of A shares into MSCI indices, monetary easing gestures from China's central bank, and robust first-quarter corporate earnings, mainland stocks remain lackluster.

The Shanghai Composite Index rose 9.41 percent in 2015, but slumped 12.31 percent in 2016. It posted a gain of 6.56 percent last year but again lost 5.98 percent year-to-date. Over the past three and half years, its cumulative loss stands at around 4 percent.

Daily turnover once hit a peak of 2 trillion yuan in 2015. But it has plunged to 400 billion yuan in recent months and even lower to 350 billion yuan in the last few days.

Investors who have sustained losses are staying away from stocks, while other investment alternatives appear to be much more rewarding.

Even compared to deposits, the stock market pales in returns.

One can get a guaranteed return of 4 percent from a three-year time deposit. That means they can obtain an accumulative risk-free return of 12.49 percent over the period.

Meanwhile, online wealth management products have taken off in recent years. The seven-day annualized return of the money market fund Yu’ebao now stands at 3.749 percent. Investors also enjoy the flexibility of being able to redeem the fund on a daily basis.

Property investment also appears a better choice. New home prices in Beijing have soared 35.1 percent since 2015, while those in Shanghai, Shenzhen and Guangzhou spiked 45.1 percent, 44.8 percent and 36.8 percent respectively, according to data from the National Statistics Bureau.

None of the 70 big cities in the country has posted a price decline from the 2015 level.

Compared to all these, the stock market is the worst-performing.

There are star performers in the stock market, like leading consumer play Kweichow Moutai (600519.CN), which has soared four times since 2015. But there are only a few of those. Besides, we all know how difficult it is to outperform the broad index.

It’s a vicious cycle, actually. Poor returns drive investors away, and this in turn leads to sluggish stock market performance.

Authorities are trying to make the market more attractive to investors. One option is the introduction of the Chinese Depositary Receipt which allows quality overseas-listed firms to list in the domestic market.

However, the scarce supply of CDRs may not change the situation much in the short run.

This article appeared in the Hong Kong Economic Journal on June 9

Translation by Julie Zhu

[Chinese version 中文版]

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