Why China's stock market is bearish

It would be unfair to claim that no listed companies in the domestic stock market are “quality” players. But, in recent years, we have become increasingly disappointed by news that certain listed companies were found to be cheating before listing – with their senior managers rushing to sell their shares as soon as it becomes possible after listing. As a result, the market has become unattractive to investors.

And when it becomes unattractive, it is normal for the indexes to be bearish.

Technically, the high requirements for listing applications by growth enterprises in the domestic market have also dampened the zeal of some enterprises seeking listing, such as the emerging Internet companies.

The domestic market rules require companies planning to go public to show they have net profits in the previous year at least, thus blocking some big-name players - such as weibo.com, a micro-blogging site with more than 500 million users - from getting listed domestically, because they still register losses due to their fast expansion.

Now almost all the major Internet companies, such as Tencent (listed in Hong Kong) and jd.com (listed on the Nasdaq Stock Market, in the US), have gone public in overseas markets. It means domestic investors cannot benefit from their great growth potential.

To make the domestic stock market more attractive and sustainable, policymakers must implement measures on two fronts. First, they must improve rules to punish cheating so that the cost of cheating is higher than its potential gains. This requires efforts by China’s judicial system – in addition to the China Securities Regulatory Commission.

The listing rules, meanwhile, must be updated to cater to the growth enterprises. Investors are most concerned about determining which are honest companies with great growth potential for investment, not necessarily companies that have already achieved profits.