. . . China’s economic growth is so driven by capacity expansion or fixed-asset investment, that investments now account for more than 50% of the gross domestic product, more than any other country at any time in the history of economic development. The relentless capacity expansion has led to economy-wide overcapacity and overcompetition, to such an extent that profit margins of the firms are constantly squeezed. Data show that the prices of Chinese exports to the U.S.. have fallen by more than a quarter since 197 whereas the price index for China’s raw materials has risen by about 20%. If growth only translates into ever declining profitability for Chinese firms and decreasing return to their shareholders, is there any wonder why their stock prices also fall?

Moreover, the Chinese stock market has never been a fair game. To be permitted to go public has long been considered a policy favor often reserved for weak firms requiring government support. . .The practice of meting out policy favors as a way to select listing candidates has created a mix of some good quality firms and a lot of bad ones on China’s stock exchanges. In addition, the parent company of many poor quality firms are also know to have helped themselves with the money raised by their listed subsidiaries in the public market, further weakening them.

The equity markets, therefore, are reflecting both declining profitability and poor governance practices. It’s virtually impossible for equity prices to do anything but fall given the headwinds of these two considerably important conditions.