China's stock market finds itself in better condition than many analysts believed, after recent corrections squeezed out speculative bubbles and attracted rational investors.
"This correction is definitely a sharp one and lasted longer than before, and we don't rule out the possibility of a future dive," said Cheng Weiqing, an analyst with CITIC Securities' Beijing office.
But another dive is generally deemed unlikely for the moment. Most analysts agree that 3,500 points for the Shanghai bourse is a "support level", meaning most investors still prefer to buy than sell, according to Lorraine Tan, vice-president of Standard & Poor's equity research in Asia.
"I would say most investors would feel stock prices are quite low if the Shanghai stock index falls below 3,500," said Xi Feng, another CITIC analyst.
Most analysts agree the market will not stop its bull run despite the correction. "The market is much healthier after the correction and I still believe China's stock market will move up, but on a more gradual road," Tan said.
China's economy maintains double-digit growth and corporate fundamentals remain strong, while merger and acquisition activity continues.
The market's future is closely tied to the mid-term financial reports of listed companies, which will be released from the end of June until August.
The annul profit of companies listed on the CSI 300 Index is estimated to jump 40 percent, after jumping 70 percent in the first quarter. This is "actually a good indication of a future run of the market", Xi said.
The stamp duty that triggered the five-day plunge actually "released the aggregated risks of the past quarter, such as overestimated valuation, faster-than-expected rise of stock indexes as well as too many speculative bubbles," said Cheng.
After the correction, the market will "get back on the rational track by releasing those risks", said Zuo Xiaolei, chief economist of China Galaxy Securities Company Limited. "We definitely have bubbles in the market, but those bubbles are not big enough to destroy the capital market," said Zuo.
Analysts believe the sharp correction would push nervous retail investors into either blue-chip stocks or the fund market.
"Blue chips will remain glamorous after the correction since they are not the target of government cooling efforts, while funds are obviously safer than stocks," said Cheng of CITIC.
(China Daily June 6, 2007)