Where is the great chance for A Share in the future?

(1) The stock market disaster arises from China’s approval-based IPO system and hypercorrect relief

At first, let’s talk about A Share market crash this time. The most damaging is market “run”, that is, to change the chips into cash. This process is costly and most destructive. If we let it be, it will be similar to common financial crisis, i.e., the financial institution suffers from damage first, and then the bank will be increasingly reluctant to lend, real enterprises come to a standstill, and economic cycle is jammed.

However, if the crisis is caused by “run”, it is easy to rescue the market, that is, to prevent “run”: firstly, to defend with money, and then to restore confidence. But the really horrible thing is that there is no risk of run, such as collapse of real estate bubble, which may crack down a country’s economy for a decade or two. For example, Japan fails to recover after two decades. The result is that its social structure is changed after twenty years and there appear tens of millions of young Neets and temporary workers, etc.

Therefore, compare with other financial crisis, the stock market crash of this time is not serious and is recoverable.

Them, what on earth is the root for stock market crash?Let’s take a round-about way to see what listing is.

Listed company will earn three sums of money to complete listing of A Share: firstly, to raise fund from IPO; secondly, to subscribe interest from fund freezing; thirdly, to get the profits from other company’s backdoor listings through its shell company. Among these three, the shell company is the most profitable.

Each market has shell companies and the related profits. But why does the price of China’s shell company so high?

The answer lies in China’s approval-based IPO system.

The approval based IPO system can systematically reduce the aggregate supply of stock. Once the pattern of more money than stock forms, it will overly last. When there is a stock market crash, the approval-based system will force the government to save the market. Such overly rescue behavior usually further broadens the expectation and room for upward speculation.

The government rescuing is always centered on how to realize the pattern of more money than stock, and it will sharply cut down stock supply at the supply end, for example, suspending IPO, requiring listed companies to repurchase the stock; while at the fund end, the government will substantially increase external fund supply. The problem is that sustaining this pattern will go beyond the limit. This is because the government rescuing is always about politics, not about economics, and this overdoing will cause crazy speculation in next round of stock market, so we have to solve the problem from the source.

Therefore, the general trend will be a shift from approval-based IPO system to registration-based system.

(2) Market divergence and de-retailing under registration-based IPO system

So, what changes will happen if changed into registration-based system?

We will see the polarization of 80–20 rule:

• There will be 20% stocks becoming very strong, and big fund will concentrate towards these stocks.

• A tremendous number of small stocks will collapse to the degree that the decimal point will be move forward one digit or even two digits based on the present price, just like the Hong Kong stock market where a large number of penny stocks appear and the liquidity is so stagnant that there is no transaction for several days or even a few months.

Certainly, in today’s bailout, the release of registration system maybe will be postponed. Subsequent to the registration system, the cheating stock (trash stock) will be rampant for a period of time just like Hong Kong. However, generally, there will appear polarization. The quality stock is promising.

In one word, the root for stock market crash is approval-based system, and all other factors are immediate causes. When release the registration system, fund will gradually play a leading role, and retail investors will play the supporting role.

The relationship between stock market and economy is indirect and non-mirroring. The long tendency is long-term deflation and generally tending to be zero interest rate, wherein asset appreciation is the major trend.

(3) A great opportunity for RMB internationalization

Seeing from a larger background, this might be an inevitable thing during RMB internationalization. The whole bull market is not the leading role but supporting role. The leading role is RMB internationalization, and all supporting roles including stock market have to comply with RMB internationalization. If the RMB is to be internationalized, it is necessary to strengthen the banks and other state-owned enterprises, especially the central enterprises. It might be deducted that the bull market is far from end and the bonus share is concentrated in central enterprises.

RMB internationalization is the biggest politics and stock market here is only supporting role.

Let’s fancy: will China Bank purchase Citibank, will CITICS purchase Morgan Stanley, and will China Life Insurance purchase Metropolis? Although these are fancies, maybe one day they will come true.

If companies listed on Shanghai Stock Exchange 50 index had finished allotment of shares, they can not only cleared bad debts, but also enriched strength and laid a solid material foundation for accomplishment of overseas acquisition. Everyone might be worried: how to complete such a great number of re-allotment of shares? There is no problem, for many measures can be taken. For example “the reform of introducing mixed ownership to SOEs” is a good idea.