Why China’s A-share market is on such a volatile, bumpy ride

Falling company earnings expectation, a credit crunch, geopolitical tensions and pressure from rising US bond yields are a few factors

Beijing will want to address the volatility but investors should be aware that the A-share market remains complex

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Pedestrians walk past a screen displaying the Shanghai composite index on February 18. China’s stock benchmark erased gains after briefly surpassing its 2007 closing peak, as mainland financial markets opened for the first time following the Lunar New Year break. Photo: Bloomberg

Hao Zhou

Hao Zhou currently serves as a senior economist (emerging markets) with Commerzbank.

Published: 4:30pm, 6 Apr 2021Updated: 4:30pm, 6 Apr 2021

China’s domestic A-share market has been on a bumpy ride since the Lunar New Year holiday, with many star stocks falling like stones. The big volatility has surprised many investors as the outlook on China’s economy remains stable.

In contrast, major global equity indices have been on solid footing this year with a recovery from Covid-19 expected in both the United States and the European Union. In comparison, China’s A-share market has become a clear underperformer. What are the causes of this gloom?

For a start, China’s economic growth has visibly decelerated after a promising V-shaped recovery in the second quarter of last year. The market consensus is that China’s economic growth rate is likely to have peaked in the first quarter of this year, and will gradually slow to around 5-6 per cent for the rest of the year. Corporate earnings would probably follow the softening trend over the coming quarters, suggesting that the market needs to adjust its expectations of companies’ profits accordingly.