Watson: Let's talk about "new expectations for the stock market in the Year of the Dragon"

Editor's note: In March this year, China Securities Journal published an article entitled "Watson: New Expectations for the Stock Market", interviewing Watson, vice president of the China Society for Economic Reform and dean of the National Institute of Development and Policy of Southeast University, on hot issues such as stock market positioning, quantitative trading, equity investment, and independent director system. He believes that the transformation of the securities market from mainly serving financiers in the early days of its establishment to being investor-oriented is a fundamental change in the strategic direction. The significance of investor-oriented is not only limited to investor protection in the secondary market, but also closely related to the high-quality development of listed companies, the backbone of China's economy, and the functional role of the securities market.

Since late September, the A-share market has continued to rise, causing widespread concern in the society, and Watson talked about the new expectations of the stock market. He believes that the main reason for the V-shaped reversal in the securities market is that the decisive decision-making of the central government and the prospect of policy layout have greatly enhanced people's confidence, and the relevant financial support policies introduced at the same time are accurate and effective. It should be noted that after the recovery of the market, the higher rise supported by fundamentals is still waiting for the economy to recover and corporate earnings to recover significantly. The wave-like slow bull with the gradual improvement of economic fundamentals is the goal pursued by regulators.

Today, the China Securities Journal published the full text of his article on this issue for the benefit of readers.

At the beginning of the Year of the Dragon, when the new chairman of the China Securities Regulatory Commission had just taken office, I wrote a Weibo post titled "New Expectations for the Stock Market in the Year of the Dragon", which was later published on the front page of the China Securities Journal. It can now be said that the new expectations will finally come true in the Year of the Dragon.

At that time, the reason why I said that we should have new expectations was because China's stock market has not yet departed from the policy market at this stage, and the change of leadership at a key juncture in the stock market reflects the great concern of the central government about the stock market. At the first forum chaired by the new chairman, I said that the position of chairman of the CSRC was "not easy to do". One of the main reasons is that although the China Securities Regulatory Commission is the department directly responsible for the stock market, the trend of the stock market is more constrained by economic fundamentals and all parties. Objectively speaking, the China Securities Regulatory Commission has done a lot of commendable and important basic work this year in improving the quality and investment value of listed companies. Despite this, the market remained depressed until mid-September due to the impact of the environment outside the stock market. Since September 24, as soon as the financial support measures were announced, especially after the announcement of the decisions and arrangements of the Politburo meeting, the market immediately experienced an unprecedented rebound. It can be seen that in order for the securities market to truly grow stronger and stronger, it needs the efforts and support of all quarters.

The main reason for the V-shaped reversal in the securities market is, of course, that the central government's policies have changed market expectations and greatly enhanced people's confidence. It shows the government's strong belief in the centrality of economic development, especially since the financial and securities markets are no longer as concerned and valued at the top as some have assumed. At the same time, this unconventional and ultra-limited credit support commitment is a point-point measure to promote the market to rebound accurately and effectively. With the stock market rising for the first time in five trading days, the next step for the stock market in the Year of the Dragon has naturally become the focus of attention.

It can be considered that the market will rise by another 10% to 20% at the pre-holiday point, with the effective support of relatively low policy, capital and corporate valuation. Therefore, there is no turning back when the bow is opened, and this battle cannot be defeated since it is shot. Of course, emotional outbursts and hype from market participants may push the market to higher levels.

In this way, it is necessary to be soberly aware that even the unlimited supply of funds will be inherently constrained by market forces, and cannot push up the stock price indefinitely. The clever and innovative design of Treasury and credit support lies in the fact that it is precisely aimed at the stocks of blue-chip listed companies that can be used to arbitrage interest rate differentials, rather than encouraging flooding, let alone allowing the disorderly expansion of over-the-counter high-leverage capital allocation to lead to sharp rises and falls. This is the major difference between the stock market that was launched this time and the 2015 stock market mad bull that many use as an analogy.

And when the expected dividend yields and medium- and long-term returns of these blue-chip companies approach the cost of 2.25% of Treasury bonds or credit as the rapid rise in share prices approaches the cost of 2.25% of Treasuries, the demand for loans will naturally shrink rapidly. As for the underperforming stocks that follow the hype and lack growth prospects, they will inevitably be seen swimming naked at low tide.

On the other hand, prudent capital will stop when China's stock market returns to the market highs of 2021 and the usual levels of emerging markets in a favorable environment inside and outside 2021, and China's large technology companies are rapidly catching up with the valuations of the top seven technology stocks in the United States market. A higher fundamental-backed market uptick requires an overall upturn in economic conditions and a clear rise in corporate earnings.

It should be pointed out that history has repeatedly proven that the mad bull market will eventually lead to a market crash, and retail investors tend to lose the most. When this round of stock market was launched before the holiday, it was at a time when international capital was bearish on China and the proportion of capital allocation in China's securities market was also the lowest. During the National Day holiday, foreign investors began to turn to buy only overseas Chinese concept stocks and Hong Kong stocks. Therefore, there is no so-called problem of A-shares being woolened by others. However, this does not mean that A-share investors will necessarily have a good win in this bull market. This is not only because the herd effect of greed and fear is usually easy to amplify and push the market to the extreme when market sentiment is high, but also because any capital is profit-seeking, and in order to pursue its own best interests, there will be internal and external people intentionally or unintentionally fanning the flames, exaggerating, and winning attention, causing and taking advantage of large fluctuations in the market to collect fishermen's profits. Therefore, when the market sentiment is high, we should be especially vigilant against the runaway of control of the stock market from soaring to plummeting. We must understand that the extremes of the market in any direction will only be a paradise for speculative risk-takers, especially capital speculators, and will never be in line with the interests of the vast majority of investors. Obviously, only the wave-like slow bull with the gradual improvement of economic fundamentals, rather than the big ups and downs, is the fundamental interest of the majority of investors, and it is also the goal pursued by regulators. Undoubtedly, to achieve this goal, it is not only the overall rationality of the market, but also a test of the ability of relevant government departments and regulators to control it.

It should also be recognized that whether the market can continue to develop healthily and achieve a sustainable trend reversal after the first wave of strong stimulus rebound depends on the choice and strength of fiscal and other relevant policies. Now that the central authorities' major policies have been clearly defined, the key lies in the introduction and implementation of specific policies in various fields and departments. Because unlike the stock market, which can produce immediate results and achieve results at one point, the economy needs greater strength, a more coordinated rhythm and a more scientific and accurate leverage. In order to achieve the best policy results, the right direction of efforts is even more important than intensity and scale.

In my view, because we are currently facing the triple pressure of economic cycle, structural adjustment and institutional transformation, the measures and methods currently discussed are not enough to reverse the trend of economic fundamentals, especially those that propose to further invest heavily in investments and projects that may have enumerable social benefits but do not have a tangible return on economic benefits (this is the crux and root cause of the current heavy debt burden, especially the problem of local government debt). Focusing on a strong pull with short-term effects will only further increase our debt burden and reduce the room for policy manoeuvre.

In my opinion, there are not many effective measures to solve any problem, but a few measures that are really in place can be effective. Therefore, at present, in addition to the immediate and effective first-aid medicine for the stock market, the key to the complex economic policy choice is to identify the breakthrough point of the comprehensive macroeconomic policy and structural transformation that is stronger, more focused, more sustainable, and affects the whole body, highly cherishes the precious "reserve bullet" of the central finance, plans and then acts, and adopts precise and powerful measures that hit the point of the arrow.

As mentioned earlier, the stock market needs the support and cooperation of all quarters to do well, but this does not mean that there is no room and room for further substantial improvement in the work of the securities authorities. Since the beginning of this year, the regulatory authorities have achieved great results in promoting qualified listed companies to increase dividends and return investors. This is also an indispensable and important measure for the A-share market to better integrate with international standards. However, it should be noted that compared with mature markets, an important reason for the short bulls and bears and long bears and big ups and downs in the A-share market is that compared with retail investors, the proportion of institutional investors and market trading volume are very low. For some time, the regulatory authorities have vigorously promoted the development and growth of institutional investors. In the past few years, the overall performance of public funds has been relatively good, investors have actively subscribed, and the scale has developed rapidly. However, in the past few years, many public funds have suffered relatively large losses and drawdowns, and their performance not only cannot catch up with the index, but is even inferior to many retail investors. This has led to heavy losses, loss of confidence, and a large number of redemptions among the people, so that the scale of funds that can be invested in the stock market in our public funds today is extremely limited, accounting for a small proportion of the market. We must realize that a stock market that only pins its hopes on the national team to maneuver in it is not only weak, but also not conducive to the gradual transformation of the securities market from a policy market to a market market and its long-term healthy development.

An important reason for the difficulty in the development of institutional investors is that public equity funds can often only be issued in large quantities in the bull market, and at the same time, they are also actively subscribed by the market. And because the policy requires them to buy quickly, and the proportion of locked positions is very high, usually not less than 80%, so that public funds can help rise in the bull market. In the bear market, on the one hand, equity funds cannot be sold due to small issuances, and on the other hand, a large number of redemptions are made by the people due to losses, resulting in them being forced to cut their positions and reduce their positions to help them fall. Especially at this time, it is strictly required that the position of the public fund shall not be reduced, and even there is a "window guidance" for the time of selling. In the securities market, which is the most active and sensitive place in the market economy, excessive and frequent administrative intervention, no matter how good the intentions and intentions are, often backfires and backfires. Therefore, I suggest that the regulatory authorities loosen the restrictions on equity public funds as soon as possible, so that they can play their own capabilities and due leading functions in the market competition and tests, so as to accelerate the development and expansion of the scale and power of market-oriented institutional investors. As for how to give full play to the role of independent directors from the perspective of corporate governance structure, organically combine internal governance with external supervision, and consolidate the quality of listed companies, which is the cornerstone of the securities market, I have called for it many times before, and I will not repeat it here.

As for how to give full play to the role of fiscal and other macroeconomic policies, and use funds wisely, it can not only solve the current debt and real estate problems and other urgent needs, but also comprehensively activate the pivot of consumption and investment demand, economic structural transformation and institutional reform, although this is crucial for the stock market to achieve trend reversal and sustained healthy development, but that is something that needs to be discussed under the title of a separate article.

After a difficult bottom-finding and turbulent turning point in the medium term, I sincerely wish that the stock market in the Year of the Dragon can continue to walk out of a higher and more stable new starting point.

(Original title: "Revisiting the "New Expectations of the Stock Market in the Year of the Dragon")