Correction in the Chinese market: profit-takers strike

By Gigi Chan, Far East & Asian Equity Fund Manager, Threadneedle Investments
“We regard the 9 per cent falls in the Shanghai Composite Index as a healthy correction after a very strong run of performance. The market has soared by around 50 per cent since November and it appears that investors have taken rumours of the authorities’ liquidity reduction measures as an excuse to take profits. It could be argued that the sell-off was a delayed reaction to the raising of the banks’ reserve ratio requirement. There had also been concerns as to whether the next head of the securities commission will be as pro-market.

“A degree of education will be required to make investors aware that stock markets go down as well as up.

“The short term may see further volatility from Chinese stocks. From a longer-term perspective, however, the case for the market remains strong. We believe that corporate earnings growth is likely to remain buoyant enough to justify valuations. Structurally, the quality of the market is improving all the time. There is greater transparency and corporate governance is now much stronger.

“In addition, the liquidity backdrop remains favourable with an abundance of both domestic and foreign capital looking to invest in Chinese equities longer term.

“The Chinese equities market is still immature, with many thousands of domestic investors entering the market for the first time.”