ChiNext continues to slide amid tight liquidity

Shenzhen Stock Exchange's ChiNext board fell by 0.27 percent Wednesday, after having dropped by 4.37 percent on Tuesday.

The ChiNext board, China's NASDAQ-like board for high-tech and fast-growing companies, fell by as much as 2.65 percent in morning trading on Wednesday, but bounced back in the afternoon.

Zhu Lixu, a Shanghai-based analyst with Xiangcai Securities, told the Global Times Wednesday that even though ChiNext saw a strong rise in 2013, stocks on the index had been overvalued, so a short-term adjustment is normal and beneficial.

"The ChiNext board contains many 'concept stocks,' which are highly priced due to market rumors and unfounded beliefs," Zhu said. "But as more and more companies release their annual financial reports, which might not be so rosy, the stock prices fall," he said.

The average price-to-earnings (P/E) ratio for ChiNext-listed companies stood at 61.83 when trading closed Wednesday, much higher than the average P/E ratio of 22 on ChiNext's US counterpart NASDAQ on Tuesday.

On October 28, 2013, when the ChiNext P/E ratio stood at 52.9, Li Da-xiao, director of research at Shenzhen-based Yingda Securities, told the Global Times the "unreasonably high" ratio indicated that ChiNext stocks were overvalued and that a bubble might exist.

Another reason for the drop in the index was the central bank's recent forward repurchase (repo) operations, which have siphoned 208 billion yuan ($33.95 billion) from the market since February 18, Zhu said. "Liquidity on the ChiNext board was squeezed by the central bank's repos," he said.

Also, rumors have started to circulate in recent weeks that a new batch of companies will go public in March. That could dampen investors' interest in putting money into existing ChiNext stocks, Wu Xiaoqiu, a professor of finance at Renmin University of China, was quoted as saying by the Beijing News on Wednesday.

ChiNext will continue to face downward pressure as the cash squeeze will remain in 2014 due to the problem of local government debt, Zhu said, but it will recover in future because high-tech and modern services companies will become increasingly important as China changes its economic structure.