Shanghai Composite Index drops below 3000. Now what?

The government and large state-owned companies have been rescuing the market. Recovery will take time but most believe the market has or is close to bottoming out.

Photo by Kuang Da

Photo by Kuang Da

By CHEN Jing, SUN Yizhen


The Shanghai Composite Index (SSEC), the most important indicator of China’s stock market performance, dropped below 3000 on October 20, for the first time since the 2008 financial crisis. It continued to fall before popping back up above 3000 again on October 27. The index closed at 3023.08 on November 1.

Wealth of differing opinions

The stock market has been weak this year due to the slow economic recovery, systemic risk posed by the real-estate sector and high US interest rates. Historically, the Chinese stock market has been highly correlated with the US ten-year treasury bond. This time no exception.

Some analysts believe the market has or is close to bottoming out, but many hold no such view.

Tech stock valuations are near all-time lows (but these stocks are often quite new, so historical lows do not represent very much history). P/E ratios – an indicator of whether stocks are under or overvalued – of mid- and large-cap companies are below their 15-year averages. Both could suggest a forthcoming recovery.

Shareholders of state-owned companies have pledged between 100 million and 1 billion yuan each to increase their holdings and support the market. Ten other companies have announced stock buybacks since mid-October. Typically such programs are carried out when companies believe their shares are undervalued and will soon rally, acting in the same way as any other investors. Over 1,000 companies have bought back their shares worth a total of 62 billion yuan this year.

Lessons of history?

Businesses are hopeful that this round of stock buybacks will send positive signals and boost confidence, mainly on the basis that this has worked before. In January 2019, triggered a wave of buybacks worth 20 billion yuan, the market rallied two months after a crash.

A state fund has been buying exchange-traded funds (ETFs) and will continue to increase ETF holdings. It also raised its stakes in the four biggest banks this week. Bank stocks as well as major indexes rose in response.

The central bank has conducted over a trillion yuan of seven-day reverse repos over the past week to inject liquidity into the system.  A national financial work conference this week decided to set up a mechanism to resolve and manage local government debt. The government has halved the stock trading tax and plans to issue 1 trillion yuan of sovereign bonds in Q4.

Complicated prospects for Q4

Even if the stock market bounces back, it will take time for confidence to be restored. It is only possible to know if a market has really topped off or bottomed out months after the event.

Prospects arecomplicated by global conflicts and persistently high US interest rates. The speed of recovery depends on the efficts of the domestic stimulus as well as sentiment overseas. There is substantial uncertainty ahead in Q4.