How can mainland stocks bid farewell to the pattern of rarely gaining after US shares rise?

Note: He Fei, senior research fellow with the Bank of Communications, wrote an article How can mainland stocks bid farewell to the pattern of rarely gaining after US shares rise?, sharing his views on this issues.

The full text of the article is as follows:

The performance of Chinese mainland and US stocks in past year showed a pattern: it's more likely that mainland bourses will fall in the wake of a decline in US stocks than surge following a US rally.

A disappointing performance on Thursday, with the mainland market broadly falling despite the Dow Jones Industrial Average's record gain on Wednesday - in terms of points - serves as proof of this pattern. It also suggests the mainland stock market is still fragile and more vulnerable to negative externalities.

There are still substantial differences between mainland bourses and their US counterparts, such as who the major investors are. The main force of the US stock market is institutional investors, while the mainland market is dominated by retail investors, pointing to different dynamics of pushing up stock prices.

The Dow roared 4.98 percent, or 1,086 points, at the close of the market on Wednesday, making the biggest single-day gain ever. Both the NASDAQ and S&P 500 rallied strongly as well. The dramatic gains are believed to be largely related to a substantial increase in institutional holdings.

The wild upswings in US stocks on Wednesday were in striking contrast to the market plunge on Christmas Eve, which fell on Monday, meaning the market must have overreacted to some bearish news. Judging by earnings at US technology companies, a plunge in this sector is unjustified. Sound corporate fundamentals are supposed to underpin stock price rallies. Meanwhile, with the dispute between the White House and the Federal Reserve Board gradually easing, US stocks seemed to have braced for a compensatory rebound.

Mainland stocks opened higher on Thursday in the wake of the US gains, but they soon lost ground as there were no apparent reasons to be bullish about the market. Figures from the National Bureau of Statistics on Thursday showed that profits at China's major industrial companies fell 1.8 percent in November from the year before, the first decline in three years.

That bad news apparently weighed down mainland bourses, preventing them from following the US surge.

The pattern of mainland stocks falling after US equities decline, but rarely gaining after US shares rise, indicates that it's unlikely that the mainland market can derive an upturn from future US stock rallies.

Whether Chinese stocks sustain lasting gains depends on the economy's internal dynamics. That means an array of measures to stimulate economic growth, accelerate the pace of reforms, boost business earnings, toughen delisting rules and increase the ratio of institutional investors, among other steps. Only in this way can the mainland stock market make independent gains.