While Global Stock Markets Are Crashing, Can A-Shares Be Spared?

While the market for A-shares was closed during Chinese New Year, the European, the American, and the Japanese stock markets all plummeted.* This past Monday, Germany’s DAX fell by 3.3 percent, France’s CAC40 by 3.2 percent, the U.K.’s FTSE 100 by 2.7 percent, the U.S.’ Dow Jones by 1.1 percent, the S&P 500 by 1.4 percent, and the NASDAQ by 1.8 percent, while on Tuesday, Japan’s Nikkei 225 plunged by 5.4 percent. After Chinese New Year, the A-share market trend after it opened could not help but make people break out in a cold sweat.

Against the backdrop of a global stock market crash, it is necessary to maintain appropriate caution on the A-share market. Global economic integration has led to extremely intricate economic ties between countries and regions. These countries and regions continue to invest massively in each other, to trade massively through importation and exportation, creating an interconnected economic structure. If the economy of a certain country experiences problems, or even a financial crisis, then it is difficult for other countries to escape the same fate, and the market trend can replicate and spread. In other words, with global economic integration, the world’s stock markets rise and fall as one. As an effect of the global economy and stock market linkage, perhaps the A-share market will also follow this trend of sharp fluctuations from the global markets after the A-share market opens, and produce the appropriate volatile response.

However, many experts believe that even if the global markets, especially the U.S. stock markets, appear bearish, they resemble the bear markets in 1987 or in 1998, rather than the crash when the dot-com bubble burst in 2000 or during the financial crisis in 2008. The key reason for this thinking is that the chances of the U.S. entering a recession are very low. For bear markets like those in 1987 or in 1998, the duration is shorter, their decline less drastic, and they come and go quickly, and therefore do relatively limited damage to investors.

The most important factor in determining the stock price of a corporation is its profitability. As long as the company’s profitability is stabilized or even increases, this provides the most solid foundation or motivation to stabilize or maintain the rise of the stock markets. In the next few years, China will enter a period of economic adjustment. China will shift from relying on an investment- and exportation-driven economy to one that is more consumer-driven. While revenues from the top two industries are in decline, those from the third industry can potentially usher in greater growth, especially with Chinese people being hard-working, intelligent, and willing to endure hardships, and a market of 1.3 billion people upgrading a consumption structure that presents tremendous potential for economic growth. These are all favorable conditions for promoting the restructuring and development of the Chinese economy. The restructuring and development of corporations may also produce more success stories.

In short, it is not easy for the A-share market to endure against the backdrop of weakening global markets. However, those of us from various industries must do our best to contribute to economic restructuring and development. The relevant government departments can propose formulated measures to effectively respond to drastic changes from foreign economies or markets, while strongly promoting the reform of institutional mechanisms and a sound stock market system for the A-share market. Against the backdrop of a steadily developing Chinese economy, along with an environment of a gradually improving stock market system, the A-share market can likely lead in reversing the trend toward decline.

*Editor’s Note: A-Shares in China are shares of the renminbi currency that are purchased and traded on the Shanghai and Shenzhen stock exchanges.