On the morning of October 12, 2024, the State Council Information Office held a press conference, where the Minister of Finance, Lan Fo'an, introduced a package of incremental fiscal policies. For the securities market, this was another heavyweight press conference following the "one bank, one bureau, one meeting" on September 24 and the National Development and Reform Commission on October 8, attracting high attention from investors.

After watching the press conference on his computer, stock investor Zhang Li expressed to the reporter that since October 8, the stock index has been retreating step by step, and the information from the Ministry of Finance's press conference seemed to fall short of market expectations. He was worried that the "9.24 market trend" would stop there and become a short-lived rebound.

Market Chaos

Zhang Li was once a senior veteran stock investor, but after experiencing the circuit breaker trend of thousands of stocks falling in 2015, he resolutely "exited the market." It was not until the release of the central bank's major policy on September 24, 2024, that he saw the hope for a new round of bull market trends and "returned" to the A-share market on September 26.

He told the reporter that in the past two weeks, what impressed him the most was the "chaos" in the entire A-share market, such as the crazy speculation of new stocks and shareholders' rush to reduce holdings. These are not phenomena that a healthy market trend or a mature market should have, and these chaos will ultimately hurt small and medium investors like them.

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According to the reporter's statistics, since September 26, a total of 6 new stocks have been listed on the A-share market, all of which showed signs of crazy speculation in the first 5 trading days after listing (according to relevant rules, there is no price fluctuation limit during this period). For example, on October 11, Qiangbang New Materials (001279.SZ) was listed with an issue price of 9.68 yuan per share, reaching a high of 245.00 yuan per share on the same day (an increase of 2430.99%), and closed at 178.01 yuan per share, with a turnover rate as high as 86.72%.

Behind the crazy speculation of new stocks, the shadow of institutional heavy participation flashed. For example, Dan Bin, the chairman of Shenzhen Dongfang Gangwan Investment Management Co., Ltd., a private equity institution, revealed in his Weibo on September 30 that some of the company's fund products obtained astonishing returns due to heavy participation in new stocks, accompanied by a K-line chart with the stock code removed.

After verification by the reporter, the stock was actually Hehe Information (688615.SH) listed on September 26. Data shows that Hehe Information's issue price was 55.18 yuan per share, which was speculated to 507.00 yuan per share on the fourth day after listing, and fell to 174.55 yuan per share on the fifth day. The stock price fluctuated greatly in a short period, and if small and medium investors participated, they would suffer heavy losses.

In addition, the market has also launched a fierce discussion on the recent behavior of listed company shareholders' rush to reduce holdings. Dan Bin holds a positive attitude towards this, emphasizing in his Weibo on September 29 that the capital market is for buying and selling. Since it is a product of the market economy, why can't shareholders buy and sell according to their own wishes?

"We should objectively distinguish and treat these reduction behaviors. Although the reduction that complies with regulations is not timely, it is excusable; for those who reduce holdings illegally, we must prevent their occurrence." On October 12, Song Ding, a researcher at the National High-end Think Tank Comprehensive Development Research Institute (China·Shenzhen), told the reporter that objectively speaking, since Wu Qing took office as the chairman of the China Securities Regulatory Commission, the system construction of the entire securities market has been quite good, but there are still some loopholes that need to be filled."The recent significant fluctuations in the market are largely due to these illegal share reductions that are 'siphoning'. While you are 'watering' and 'releasing water', they are 'siphoning' on the other side. How can that work? These loopholes must be taken seriously," said Song Ding.

Of course, the regulatory authorities have also noticed the above market chaos and have started to take action. On October 11th, the Shenzhen Stock Exchange emphasized in the weekly regulatory update released after the market closed, "Focus on monitoring the trading of newly listed stocks in the early stage"; on October 12th, the Shenzhen Securities Regulatory Bureau stated on its official website: "The securities regulatory department will continue to strengthen the supervision of shareholders' reduction behavior, strictly punish all kinds of illegal reduction behavior according to laws and regulations, protect the rights and interests of small and medium investors, and maintain market stability and fairness."

Valuation Debate

After re-entering the market on September 26th, Zhang Li's profits were quite considerable due to the significant rise in the market. However, as the index turned from rising to falling on October 8th, his account profits were almost completely erased in just a few days.

"Such ups and downs in the short term, this kind of market, let alone new investors, even old investors find it hard to bear," Zhang Li said after experiencing a week of continuous decline. He began to question whether this round of the market is still a bull market.

In fact, since September 24th, there has been a discussion on whether this round of the market is a rebound or a reversal, and as the stock index showed a huge long shadow pattern in the first week after the National Day, the bearish voice spread rapidly, and one of the representatives is Dan Bin.

Dan Bin is bearish on this round of the market from a valuation perspective. He pointed out on Weibo that as of October 6, 2024, among the 5,354 companies in the A-share market, the TTM P/E ratio (indicating dynamic P/E ratio) of the 500 companies with the largest market value is about 21 times, and the P/E ratio of smaller market value stocks is about 53 times; if it is a big bull market, it will double, and the P/E ratio of these 500 largest companies will be about 42 times, and the P/E ratio of smaller market value stocks will become 106 times. So, if it really goes to ten thousand points as some people advocate, what will the market valuation be?

"This is why I only see a rebound and not a bull market," Dan Bin emphasized.

With the sharp turn of the market on October 8th, Dan Bin's above Weibo was widely forwarded, and the voice of "A-share valuation is too high" further spread.

So, does the valuation of A-shares really not deserve a bull market because it is too high?"No one stipulates that one cannot be bearish on the Chinese stock market, but your arguments need to be objective and comprehensive, not taken out of context," Huang Sui, a senior researcher at Shenzhen Zhaoyao Investment Management Co., Ltd., told the reporter. To judge whether the valuation of A-shares is too high, one must compare it both vertically (with the history of A-shares) and horizontally (with overseas markets) to draw a more objective conclusion.

Statistical data shows that as of October 11, 2024, the price-to-earnings (P/E) ratio of the S&P 500 index in the United States was 28.44 times, the P/E ratio of the NASDAQ Composite Index was 44.03 times, the P/E ratio of the BSE Sensex 30 index in India was 23.59 times, the P/E ratio of China's A-share CSI 300 was 12.89 times, and the P/E ratio of the Shanghai Composite Index was 14.21 times.

"Rebound or reversal? This view can be agreed to differ. But from a valuation perspective alone, China's A-shares are clearly undervalued compared to major overseas markets, which is an ironclad fact," Huang Sui said, noting that no one stipulates that a bull market can only rise and not fall, and no one stipulates that a bull market must reach ten thousand points in the short term. Using this as a precondition to deny the prospects of A-shares is a concept switch.

Huang Sui further stated that historically, in May 2011, the P/E ratio of the US S&P 500 index and China's Shanghai Composite Index were both at the same level of 16 times, with the former's position around 1300 points and the latter around 2900 points. Subsequently, the S&P 500 index, driven by global capital (including domestic funds heavily invested in US stocks), took 13 years to rise to its current level of around 5800 points, with an increase of about 3.46 times, and the P/E ratio increased to 28.44 times. The Shanghai Composite Index, amidst a chorus of bearish voices, fell into the "3000 point defense war" quagmire, with the P/E ratio falling to 14.21 times.

Chart 1: Comparison of P/E ratios of A-shares and US stocks

"If A-shares had followed the same 13-year slow bull market as US stocks since May 2011, and if the P/E ratio was the same as the S&P 500 index now, then the corresponding position of the Shanghai Composite Index should be around 6000 points," Huang Sui said. If viewed solely from a valuation perspective, the "9.24 market" is fully capable of reversing into a bull market. "Of course, having the conditions to start a bull market and whether a bull market really comes is another issue."

Wang Xiaogang, an investment consultant at GF Securities, also told the reporter that looking at the vertical comparison, the current valuation level of A-shares is returning from a relatively low level to a reasonable level. Specifically, as of the close on October 10, the TTM P/E ratio of the A-share CSI 300 index was 13.2 times, slightly higher than the average level of the past ten years (12.8 times), with a percentile of 66.27%; the price-to-book (P/B) ratio of the CSI 300 was 1.41 times, still lower than the average level of the past ten years (1.52 times), with a percentile of 31.96%.

"Considering both the P/E ratio and the P/B ratio, we believe that the valuation of A-shares is returning from a previously low level to a reasonable level," Wang Xiaogang said.

Chen Xianshun, the chief equity strategy analyst at Bosera Fund, also believes that from a valuation perspective, the current P/B ratio of the Wind All A index is at a low level over the past decade. Whether compared with its own history or internationally, A-shares have a high configuration cost-performance ratio.

Possible bull marketIn Wang Xiaogang's view, the main reason for the recent rapid rise in A-shares is the series of meetings since September 24th, which have released a policy signal of "strongly maintaining the capital market and reversing the cold economic pattern," bringing significant benefits to the A-share market that has been lingering at the bottom. As for the subsequent rapid decline in the market, it is mainly due to the excessive rise in the early stage and the high deviation rate, which requires technical repair on the technical level. In addition, the most important fiscal policy has not yet been introduced, and the improvement of the domestic economic pattern and the promotion of total demand ultimately depends on the efforts of fiscal policy.

It is against this background that the press conference of the Ministry of Finance on the morning of October 12th is particularly important. However, at the press conference that day, although a package of incremental fiscal policies was introduced on the spot, including supporting large state-owned commercial banks to replenish core tier-one capital, supporting local resolution of hidden debt, and supporting the promotion of the real estate market to stop falling and stabilize, etc., the stock market was not mentioned at all, which made small and medium investors including Zhang Li feel a bit disappointed.

However, Wang Xiaogang believes that compared with developed economies such as the United States and Japan, China has a huge fiscal policy space. If it can make up its mind and find the right handle, there is hope to reverse the domestic economy that is too cold and the unbalanced supply and demand situation, and then A-shares will usher in a real reversal.

He also said that at that time, China's technological advantages, industrial advantages, and military advantages will also be further reflected in economic advantages and financial advantages, helping to achieve the great rejuvenation of the Chinese nation.

Song Ding believes that from the above several press conferences, the key to the stock market trend is that the policy must continue to be firm and cannot stay at the current level. Especially for external pressures, it is necessary to re-evaluate and make new response policies, and at the same time, resolutely crack down on the counter-current of internal violations such as stock market internal reduction. Only in this way can the stock market have hope to walk out of a long bull market.

"We believe that with the effective implementation of a series of existing policies and the introduction of incremental policies, the market is expected to reverse economic expectations and further revalue Chinese assets," Chen Xianshun also said to the reporter.

He also believes that the "9.24 market" should be a market for the revaluation of Chinese assets. At present, the valuation of A-shares still has great attractiveness. With the improvement of the dividend rate and the quality of listed companies, the long-term investment value of A-shares is worth looking forward to.