Despite China's recent stock market plunges, analysts remain upbeat about the market's health due to sound economic fundamentals.
Since last November, Chinese investors have enjoyed a strong bullish cycle, which saw the Shanghai Composite Index surge from 2,425 in early November to as high as 5,178 on June 12.
However, the index plummeted more than 21 percent in the 10 trading days afterwards, ending on Monday, strongly eroding market confidence and bringing some signs of panic selling.
Even rare simultaneous cuts to the requirement reserve ratio (RRR) and key interest rates by the central bank on Saturday seemed to have failed to pep the market, with the Shanghai Composite Index shedding 3.34 percent on Monday.
Bucking the trend, a dramatic surge of 5.53 percent on Tuesday dispersed mounting fears and helped establish a clearer picture of the market's fundamentals.
POSITIVE CHANGES FOR ECONOMY
In the long term, the stock market has to be anchored by a strong economic condition, similar to how a man walks his dog. The man walks slowly, while the dog runs back and forth.
Although China's economy is still facing huge downward pressures, recent data has pointed to some relief.
China's industrial output growth accelerated by 0.2 percentage points month on month in May and fixed asset investment sped up by 0.3 percentage points, data from the National Bureau of Statistics (NBS) showed.
The total area and sales volume of commercial housing both saw faster growth month on month in May. The surveyed unemployment rate in 31 big cities dropped slightly from a month earlier to 5.1 percent.
The HSBC flash manufacturing purchasing managers' index (PMI) recovered to 49.6 in June from May's final reading of 49.2, beating market forecasts and showing new signs of stabilization.
The NBS is scheduled to release the manufacturing PMI for June on Wednesday.
Zhu Jianfang, chief economist at CITIC Securities in Beijing, said positive changes in major economic indicators showed that China's economy is still within a reasonable range and the general economic situation improved from earlier this year.
The positive hints have a close bearing on China's new reform policies that target the country's natural momentum, including the Belt and Road Initiative, Beijing-Tianjin-Hebei regional integration in the north and Yangtze River economic belt in the south.
The government also rolled out policies to support innovation and entrepreneurship, promote the development of Internet Plus and Made-in-China products.
Li Xunlei, chief economist with Haitong Securities, said there is still room for future reforms, including the liberalization of interest rates, the opening up of capital account, as well as fiscal and taxation reforms, land reform and reform of state-owned companies.
"These reforms will be highly beneficial for raising the whole market's efficiency in allocating resources," Li said.
As the economic situation improves, some companies will also witness better profitability, providing a more solid foundation for the health of the capital market, Zhu said.
ABUNDANT LIQUIDITY
Many investors worried the country's monetary policy would be tightened as the economic situation eases before the central bank announced cuts in RRR and interest rates.
Lu Lei, head of the central bank's research bureau, said the country is still facing huge pressure to stabilize growth, so it is necessary to continue implementing relatively loose monetary policies to sustain growth.
"The cuts fully consider macroeconomic situations and financial stability and lower rates will support the further drop of financing costs and stabilize the expectation of corporate investment and residential consumption," Lu said.
The move will not only provide the necessary liquidity for keeping economic growth in the reasonable range in the latter half of this year, but also be strong liquidity support for capital market, analysts say.
"The general logic sustaining the capital market has not changed," said Wei Fengchun, analyst with Shenzhen-based Bosera Asset Management.
The previous bullish cycle is grounded on expectations about the country's reform effects, relatively loose monetary policy and rapid growth of new sectors under government policy support.
"None of them have changed," Wei said.
