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Correction in Chinese shares highlights irrational exuberance

  Author: Schroders ( Schroders )
 July, 2015
  Price: FREE

Abstract:

The recent sharp declines in Chinese stock prices have been met with a spate of government counter-measures aimed at supporting the market.

Back in May, we discussed our thoughts on the liquidity-driven rally in China’s A-shares and how valuations of Chinese companies were not justified by the underlying fundamentals. We also expressed our concerns that A-shares were already at vulnerable levels in light of their frothy valuations, increasing IPO issuance, rising margin financing and deteriorating corporate fundamentals.

What market watchers did not know was when the meteoric prices would come crashing back to reality. Recent market falls suggests that moment has now arrived and investors realise that the current government measures aren’t going to help ignite a rebound rally.
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