A-shares Drop Below 3000 Points!

On June 21, the Chinese stock market experienced a day of turbulence, with all three major indices reflecting a mild downturnThe Shanghai Composite Index suffered a disappointing fall, dipping below the critical 3,000-point threshold by the end of tradingThis marks a significant psychological and technical level that many investors closely monitorThe Shanghai index closed down by 0.24%, while the Shenzhen Component Index saw a decrease of 0.04%, and the ChiNext went down by 0.39%.

Overall, the trading day concluded with a majority of stocks experiencing declines, with over 2,600 individual stocks falling across the boardThe trading volume across the Shanghai and Shenzhen exchanges reported a total turnover of 619.6 billion yuan, a drop of 104.8 billion yuan from the previous trading day, marking this as the second lowest trading volume recorded in the year

Such reductions in trading volumes typically suggest diminished investor confidence and increased caution in market activities.

Market analysts have pointed out that the battle to defend the 3,000-point mark for the Shanghai index has been a recurring theme this yearThe expectation is that further macroeconomic stimulus measures will be introduced in response to declining market sentiments, aimed at stabilizing and uplifting investor confidence in the Chinese economy.

The Index Decline

The tug-of-war around the 3,000-point milestone continued on this dayDespite the hopes of market participants, the Shanghai Composite Index ultimately fell beneath this crucial levelThis breach signals concern amongst traders and analysts about the immediate future trajectory of the market amidst challenging economic indicators.

Examining the landscape through the lens of primary industry indices recognized by Shenwan, out of the 31 primary industry indices, only 11 sectors managed to close positively while 20 sectors recorded losses

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Notable gainers included sectors such as building materials, construction decoration, automobiles, environmental protection, telecommunications, and pharmaceuticals, indicating a divergence of performance across different segments of the industry.

In particular, the building materials sector showcased strength, achieving a gain of 1.53% to lead the day’s indices higherWithin this sector, 53 stocks rose while only 19 declined, demonstrating a robust performanceAmong the top performers were Tibet Tianlu, Hanjian Hankong, and Sanhe Pile with significant surges at their peak rates.

The construction decoration sector also saw a notable increase, climbing by 1.16%, closely following the building materials sectorA remarkable rally was evident, with 129 stocks within this sector rising while only 27 experienced declinesKey contributors included New City and Hualan Group, both hitting their daily limit-up, alongside several others recording substantial gains.

On the biopharmaceutical front, the sector also experienced an uptick, closing with a modest gain of 0.38%. A total of 297 stocks rose, while 159 fell, highlighting some resilience within the health industry even amidst broader declines

Noteworthy performances came from Frontline Bioscience and Jinkai Biotech, among others.

Conversely, the food and beverage as well as comprehensive sectors faced declines exceeding 1%. Sectors like coal, social services, non-ferrous metals, electrical equipment, and retail followed suit in the downward trendMoreover, concept stocks tightly associated with newly listed firms on the Sci-Tech Innovation Board, education technology, lithography equipment, and automation equipment also saw significant declines, showcasing market volatility and investor nervousness.

Reasons for the Decline

Since May 20, spanning 24 trading days, the Shanghai Composite Index has dropped by 4.94%, sliding from over 3,150 points down below the key 3,000-point levelThe question lingering in the market is, what has fueled this downturn?

According to investment expert Chen Jiande, following a period of recovery from February to May, the market had accumulated a degree of growth that necessitated some correction

Besides this adjustment requirement, companies exhibiting financial distress and malfeasance have experienced significant falls, which have affected overall market sentiment.

Other factors include the recent strength of the U.Sdollar, which has influenced the yuan's depreciation against it, subsequently constraining foreign capital inflows into the Chinese marketFurthermore, recent macroeconomic data released has shown results that are slightly underwhelming compared to expectations, exerting downward pressure on market performance.

Yu Xiaobin, Director of Global Investments, pointed out that multiple pressures weigh on upward momentum in the market, but fundamentally, the economic climate and funding flows remain the key determinantsFrom a trading perspective, there has been insufficient sustainable interest, and as such, the market continues to search for robust support amid these challenges.

The Chief Strategy Officer of Heiqi Capital, Chen Xingwen, noted that the most glaring challenge lies within the market’s existing capital pool, which lacks new investment flows

This is predominantly attributed to several intertwining factors:

Internationally, increasing geopolitical risks have introduced uncertainties for the global economy, influencing market risk appetitesIn light of these challenges, despite various central banks around the world implementing monetary easing policies, their effectiveness has been muted amid a broader global economic slowdownAdditionally, foreign capital, despite the generally low valuations of Chinese A-share companies, has remained tentative towards investment.

Domestically, even with strong macroeconomic stimulus policies, unexpected declines in narrow money (M1) have indicated that market liquidity is not effectively converting into real economy energization, leading to overall sluggish performanceFurthermore, under stringent financial regulations, newly introduced policies require time to be digested and properly implemented.

Looking Forward

As for market forecasts, Chen Xingwen expressed that the prolonged defense of the 3,000-point level has persisted

There is an optimistic belief that further macroeconomic stimulus measures will emerge to bolster market expectations. 

"Despite the numerous challenges currently facing the A-share market, opportunities and optimization strategies still exist," added Chen XingwenHe suggested that investors strategically pivot towards "high-tech" sectors to capitalize on growth dividends while also striving to build a stable portfolio comprising blue-chip stocks with reliable dividends, positioning against the backdrop of fluctuating geopolitical circumstancesMaintaining patience and confidence in his view will be pivotal, along with diligent research and careful decision-making processes to identify promising investment opportunities amidst the turbulence.

Analyzing the situation, Chen Jiande remarked that the stability at the 3,000-point mark is substantial, indicating that significant breaches below this may not unfold imminently

Those companies that have shown weak performance may see further capital flight, thus investors should be cautious about exposure to such stocks.

In conclusion, Yu Xiaobin conveyed that the targeted approach of policies and the regulatory bodies’ stance on the market serve to instill a measure of confidence among investorsHowever, prior to the arrival of a revitalizing trend, patience remains crucialRisks ahead should stem from liquidity constraints and external disruptions, but these factors are expected to improve in the latter half of the year allowing new opportunities to surface amidst the prevailing market oscillations.

Xia Fengguang, a fund manager, expressed optimism about the overall valuation of the A-shares being low, particularly when benchmarked against major economiesGiven that the Chinese economic cycle appears to be at a low point, this presents a favorable risk-reward ratio