China's stock market had its worst day in more than six months on Tuesday due to concerns about economic weakening, but the correction could be short-lived as the country's reform agenda could bring new opportunities for investors.
The benchmark Shanghai Composite Index slumped by more than 1.8 per cent to 2,297 points, with analysts claiming that it’s the start of a major correction cycle to be seen over coming months.
Tuesday’s correction is apparently the result of weak macroeconomic data in August. A slew of statistics ranging from money supply to foreign direct investment indicate economic growth is trending down, something that could continue in the coming months if policymakers fail to take countermeasures.
Investors have anticipated a weakening since early this year but weak macroeconomic data in August has become the last straw.
The big drop is a normal technical correction since the Shanghai index has risen by 15 percent since June without any major corrections.
As pessimism spreads in the market, however, it may not necessary for investors to become too worried. The weakening of the Chinese economy has been reflected in the lackluster stock performance in previous months and become a drag on the stock indices. Otherwise, the recent round of gains could have started much earlier.
As economic weakening become certain, it is advisable for investors to look at China’s unfolding reform agenda, which may not make an instant contribution to GDP growth, but is set to unleash growth potential in the middle term, which will become a solid support for the stock market.
As Ting Lu, chief China economist at Bank of America Merrill Lunch, pointed out, investors may have underappreciated the positive bearing brought by China’s ongoing reforms on the stock market. “It's time for investors to shift focus from short-term economic cycles to the new leaders’ initiative on reforms … which so far has been under-appreciated by markets”.
After Tuesday’s slump, it is reasonable for investors to become more cautious in the short term, but it’s not time for an exit yet.
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