What Happened Today?

According to reports from the Securities Times, on October 9th, the two A-share markets showed a weak downward trend, accelerating into a sharp plunge at the close. The Shanghai Composite Index fell nearly 7%, losing the 3300-point threshold, while the ChiNext Index dropped by over 10%. The total trading volume for both markets exceeded 2.9 trillion RMB, and more than 5,000 individual stocks declined.

Reasons for the Surge

Regarding the previous market surge, I have already provided an analysis in an earlier article. Interested readers can view the article 《On the Historic Surge Day of A-Shares: False Prosperity or Steady Ascent?》 for further details.

The Essence of This Plunge

To understand the underlying reasons for this plunge, we must first review several key assumptions:

  1. The Goal of Policymakers: To prevent the economy from falling into an asset-liability recession similar to the Great Depression, decision-makers chose to rescue the economy through monetary policy.
  2. The Stock Market as a Policy Tool: The central bank drives the stock market upward by purchasing stocks on a massive scale, creating an asset bubble, and helping enterprises obtain liquid funds.
  3. Inflation and Capital Flow: Policymakers hope that through inflation, bank depositors will be forced to withdraw their deposits from the banks and invest them in other economic sectors, thereby pushing the economy out of deflation.

Since the implementation of these policy tools, the market has experienced significant short-term gains. However, today’s plunge signals that the policy effects are being tested by market reality.

Today’s Market Reality

Today, A-shares plunged sharply by 6% after opening, but looking at the overall situation, investors’ losses are not yet evident. This is because the stock market has already risen by about 20% over the past two weeks, partially mitigating the impact of the short-term decline.

More notably, many veteran investors who experienced the 2016 stock crash have still not entered the market. The veteran investors in a certain automotive sector that I have been closely monitoring remain cautious, showing high vigilance toward the stock market. This phenomenon indicates that despite the market experiencing a rapid short-term rise and sudden drop, the psychological trauma caused by the historic crash has not dissipated, and investor confidence has not yet recovered.

The cautious attitude of these veteran investors suggests that short-term market volatility is insufficient to overcome their concerns about market fundamentals. Speculative sentiment is rampant in the market, with many adopting a “make a quick profit and leave” mindset, as everyone generally believes that the economic fundamentals have not fundamentally improved.

Analysis of the Plunge’s Causes

Today’s plunge was primarily driven by two factors:

  1. Realization of Prior Gains: After the market rose significantly, some investors chose to take profits at this time.
  2. Policy Below Expectations: The new policy announced yesterday was far below market expectations, leading to a shift in market sentiment toward pessimism and exacerbating today’s decline.

Future Outlook

I do not believe that this round of market volatility signifies the end of the upward trend. On the contrary, it may just be the beginning of a new cycle of fluctuations. Under the guidance of policy and capital, the market is likely to continue rising amidst volatility. This is the strategy adopted by decision-makers to achieve their economic goals.

Although the Central Bank’s policies are not infallible in the long run, in the medium to short term, the Central Bank’s policies and capital support have a decisive influence on market direction. Therefore, we may see more similar fluctuations and reversals in the future.