When will the "3000-point curse" end?

When will the "3000-point spell" end?

2024-08-07

On July 29, the real-time quotes of the Shanghai Composite Total Return Index were launched.

As a derivative index of the Shanghai Composite Index, the constituent stocks and weights of the Shanghai Composite Total Return Index have not changed. The main difference is that cash dividend income is further taken into consideration, thus being able to reflect investors' actual holding experience.

Therefore, before the official release, many investors had high hopes for the Shanghai Stock Exchange Total Return Index. After all, in a structured market, OTC investors don’t care how steadily the dividend sector has risen in the first half of the year, or how hot the recent hype about driverless cars has been. They only know that the Shanghai Stock Exchange Index has not been able to stand firmly above 3,000 points. An index with a good trend can obviously attract more OTC funds to enter the stock market.

However, after it was officially launched, the market response was lukewarm. Whether it was media reports or investor discussions, everyone's attention was still focused on the Shanghai Composite Index.

Therefore, the best strategy to break the "3000-point curse" is not to launch a new index in a wishful attempt to replace the Shanghai Composite Index in the hearts of stock investors. The first step to solve the problem may be to understand where the concept of "Shanghai Composite 3000 points" came from?

The origin of 3000 points

The concept of integer barriers in the stock market has a long history. Livermore once introduced the key point trading method of stocks in his memoirs: "When the transaction price of a certain stock is at 50, 100, 200 or even 300 US dollars, once the market passes through such a point, a rapid linear movement will almost inevitably occur afterwards."。

Later, American scholars also studied the daily closing level of the Dow Jones Industrial Average and found that the stock index levels that are integer multiples of 100 act as psychological barriers. Around the psychological barriers, the stock index stays for a shorter time, and the rise and fall and amplitude of the stock index also vary greatly around the psychological barriers.

Essentially, this is the result of the interaction between anchoring psychology and the round number effect, which belongs to the category of behavioral finance. When people make predictions, they are often filled with fear and anxiety about the uncertainty of things. A specific number can significantly reduce this anxiety and strengthen their beliefs. The round number price that they subconsciously believe to have special significance naturally becomes an important reference.

In any market, integer multiples of 1000 are important thresholds, but the Shanghai Composite Index is special. As the first stock index in the A-share market, it quickly became the most important market indicator in the minds of investors after its release in 1991, with the highest recognition and influence. However, in the past decade or so, it has always fluctuated around 3000 points, making itself a meme that broke the circle. Even people who don’t trade stocks have heard of the heroic "3000-point defense battle."

The visible hand played an important role in the formation of this psychological anchor.

The first battle to defend the 3,000-point mark was probably in 2008. At that time, affected by the global financial crisis, the Shanghai Composite Index fell from its highest point of 6,124 in about half a year, and was officially cut in half in late April 2008.

Since the end of March, when the index fell below 3,500 and aimed at 3,000 points, the management began to "play cards" frequently. Officials at all levels, from the China Banking Regulatory Commission to the central bank, have spoken to the market to send positive signals, and finally played a trump card on the evening of April 23 - reducing stamp duty, lowering the stamp duty rate on securities transactions from 0.3% to 0.1%.

However, since the A-share market is already very large, it has a strong trend effect. From the perspective of market performance, the previous three stamp duty adjustments only caused short-term market fluctuations, but did not change the original trend. This time is no exception. After a brief rebound, the Shanghai Composite Index turned around and fell below 3,000 points again.

However, this set of rescue measures still constituted the initial impression of A-share investors in the "3,000-point defense battle", and the visible hand also participated in several key battles later. Taking the typical IPO policy adjustment as an example, there have been four changes in IPO policy since 2008, three of which have some intersection with 3,000 points.

Among them, the first suspension of IPOs was at the end of 2008. At that time, although the Shanghai Composite Index had adjusted back to around 2,000 points, it then started a sharp counterattack under the efforts of a series of strong stimulus policies. By mid-2009, the increase had exceeded 40% and aimed at 3,000 points, and IPOs were also restarted. After that, the bull market continued for more than a month, and the Shanghai Composite Index once approached 3,500 points, but the upward momentum was exhausted. The market turned around and began a two-year battle around 3,000 points.

As for the third time, it happened a year ago at the shocking "Heroic Monument to Stockholders". After the epidemic prevention and control was relaxed, the Shanghai Composite Index experienced a six-month recovery, but then it fell to 3,000 again because the economic recovery progress was slower than expected. Tightening the IPO rhythm as one of the "four arrows" was once again taken out of the toolbox.

Although the target of the "visible hand" may not be a specific point, 3000 points still closely united many policies around it by chance. Of course, the reason why this pass is so popular is actually inseparable from the exaggeration of the media and big Vs, among which the most widely circulated one may be Li Daxiao's "baby bottom".

Li Daxiao, who just retired at the end of last month, is one of the earliest stock investors in China and has the Shenzhen No. 1 shareholder code. Starting from a "grassroots" and becoming a "chief economist" until retirement, Li Daxiao has also witnessed the ups and downs of A-shares for more than 30 years since their inception.

After 2009, with the rise of social media, Li Daxiao, who had been promoted to chief economist of Yingda Securities, opened an accountWeibo, began to frequently express his views on market trends on the Internet. Most of the time, he spared no effort to sing bullish, such as the "diamond f bottom" he frequently called out in the second half of 2012, and occasionally called out the top in the opposite direction, such as the "earth top" he proposed during the market frenzy in 2015, and he earnestly called out the Shanghai Composite Index from 3687 points to 5178 points.

The battle that made him famous was the "baby bottom" he proposed after the market crash in 2015. On August 27, 2015,Shanghai Stock IndexThe decline from 5178 points was nearly halved, falling to a low of 2850 points. Daxiao declared a "baby bottom". The market subsequently rebounded miraculously, making Li Daxiao famous among retail investors. He became the only person who holds the title of chief economist but serves retail investors[1].

Li Daxiao and the baby bottom, picture from the Internet

After entering 2016 with the momentum of "precisely predicting the bottom", Li Daxiao officially competed with 3000 points. On January 7, 2016, the day when the market was circuit-breaker again, Li Daxiao stubbornly shouted "3000 points will be the horizon of A-shares", and the concept of "horizon" was repeatedly mentioned in his Weibo. Because his blog posts are distinctive and good at using various "vivid" metaphors, they always bring their own topics and are widely circulated, especially the welding video he published with the text "3000 points were welded to death by me", and he was once called "Welding Emperor".

In the process, the concept of 3,000 points has become more and more popular. Today, the baby that Li Daxiao held in his arms has grown up, but the A-share market still remembers its original intention and jumps left and right on the so-called "horizon".

Textbooks always tell us that "the stock market is a barometer of the macro economy", but the Shanghai Composite Index cannot fully reflect our economic development achievements over the past decade. In 2023, our GDP exceeded 12.6 trillion yuan, which is nearly 4 times the growth in 2008 when the first "3,000-point defense battle" took place, but now the Shanghai Composite Index is still hovering around 3,000 points.

In contrast, the US GDP has less than doubled since 2008, but the three major US stock indices have all increased by more than 4 times, especially the Nasdaq index, which has increased by more than 10 times.

Indeed, as Jiang Cheng said in a live broadcast, if we look at the long term, the bottom of the Shanghai Composite Index is constantly rising, and the overall trend is actually upward[2]. However, the performance gap with the US stock market is so large that it makes people think deeply. What is the problem?

where is the problem?

The reasons are undoubtedly very complicated. Among them, the reason why the contrast with the U.S. stock market is so sharp is mainly due to the way the index is compiled.

As a comprehensive index, the Shanghai Composite Index is compiled using the total market capitalization weighting method. The constituent stocks initially included all stocks listed on the Shanghai Stock Exchange, and the most recent revision simply eliminated risk warning stocks. Therefore, large state-owned enterprises such as banks, oil and other industries account for too high a proportion of the index.

This compilation method has been controversial.NetEaseEconomists' annual meetingZhongtai SecuritiesChief Economist Li Xunlei said bluntly, "It is rare internationally to have an index that brings all stocks together."。

In contrast, among the three major U.S. stock indices, both the Dow Jones Index and the S&P 500 select a certain number of U.S. listed companies to form a basket of stocks, which are then compiled into indices, and the constituent stocks are dynamically adjusted based on market capitalization, industry representativeness and other factors to achieve the survival of the fittest and the emergence of the old. Taking the Dow Jones Index as an example, none of the original 30 constituent stocks are now in the index, so it is not surprising that it can achieve long-term growth.

Although the Nasdaq's constituent stocks include all stocks listed on the Nasdaq, because the exchange was initially positioned to serve start-up and growth companies, over the years, the Nasdaq has naturally become a technology industry index.

Therefore, due to the different index compilation methods, there are fundamental differences between the Shanghai Composite Index and the US stock index, and the representativeness of the market situation is also very different. It is understandable that it cannot outperform the US stock market. What is more outrageous is that the Shanghai Composite Index cannot outperform the GDP growth rate.

In this regard, the entire market is constantly looking for reasons. In June 2021, Gao Shanwen, chief economist of Essence Securities, gave a speech that went viral, attributing the 3,000-point curse to "unreasonably high interest rates." In his view, China's interest rates are still getting higher and higher under the condition of diminishing marginal returns, resulting in an accelerated decline in corporate ROE and a suppression of the market valuation center.

At that time, Gao Shanwen predicted that "the abnormal interest rate rise in the next 5-10 years will end" and "the situation in the next ten years will show a more obvious improvement." In fact, market interest rates have indeed been declining in recent years, and the yield on 30-year government bonds has fallen below 2.4%, but the Shanghai Composite Index has not yet broken away from 3,000 points.

Considering many factors, the bigger problem may lie in the issuance of new shares.

Among them, the blood-sucking effect of IPO on the market is self-evident. Another side of the impact of new stock listings on the index is the negative contribution to the index's rise after inclusion in the index. Before full registration, A-shares have always had the habit of speculating on new stocks. Because the number of circulating shares is small at the beginning of listing, coupled with information asymmetry, it often triggers market competition. Most new stocks will be overvalued in the early stage of listing, and the subsequent valuation regression accompanied by the ebb of sentiment often occurs after the stock is included in the index, so it is easy to drag down the index.

Historically, the Shanghai Composite Index compilation method has been adjusted four times, all of which were related to the time when new stocks were included in the index, which shows its importance.

Among them, the one with the greatest impact was theChina PetroleumIn 2007, PetroChina was listed at a high price. Although its share price had fallen by more than 20% from the opening price on the first day of listing when it was included in the index on the eleventh trading day, its weight in the Shanghai Composite Index was still close to 25%. In the following year, PetroChina continued to fall, falling by as much as 80%, and is still far from its high point that year. Therefore, PetroChina's "contribution" to the "Shanghai Composite Index 3,000-point curse" cannot be underestimated.

According toGuosen SecuritiesAccording to statistics, the average excess return of new stocks compared to the Shanghai Composite Index from the 11th day to one year after listing is -8.48%. Although the adjustment in July 2020 postponed the inclusion of new stocks to three months or one year later, it can be inferred from the statistical results of Guosen Securities that the impact of the new regulations will only be weakened, but it is still unavoidable[3].

In addition, Wu Xiaoqiao, dean of the National Institute of Finance at Renmin University of China, further directed the criticism at the IPO mechanism and the quality of listed companies.

In his view, China's capital market has long had a phenomenon that is not seen anywhere else in the world - queuing. This mechanism has led to huge rent-seeking space and also induced the actual controllers of the company to believe that as long as they queue up, they can get huge wealth, which is much easier than running a business, so they will do whatever it takes to successfully go public. The final result is that most companies, especially private companies, will reduce their holdings once the lock-up period is over.

After the full registration system was implemented, the phenomenon of queuing has been alleviated, but it has also caused new problems, as it is easy to confuse high-tech enterprises with high-tech research institutions. Therefore, Wu Xiaoqiu believes that the registration system should not be generalized. High-tech research institutions can raise funds from angel investors, VCs, and PEs, but should not conduct IPOs. At the same time, he emphasized that the registration system must strengthen the transparency of information disclosure and impose restrictions on shareholders' share reductions[4].

end

In the biographical sports film "Dreaming", adapted from a true story, it tells the story of a young man Rudy with mediocre grades, who entered the football team of Notre Dame University of his dreams with unremitting efforts and tenacious fighting spirit and was selected as a substitute. Although he did not get a chance to play for a long time, Rudy never gave up until he came off the bench in a crucial game and helped the team win, winning the respect and applause of the whole audience.

Looking back over the past year or so, regulators have been equally sincere towards the market and have been very caring towards investors.

Not to mention that market interest rates have already dropped, we have responded to issues such as shareholder share reduction and information disclosure transparency raised by some professionals, and are now also exploring ways to compile indexes.

The repo mechanism, which ordinary investors have complained about the most, has been suspended, and quantitative trading has been put under layers of constraints. Recently, there have even been reports that the special suspension system for unusual transactions has been cancelled.

Admittedly, these measures have not been able to save the market from its downturn so far, but judging from historical situations, policies can rarely directly restore investor confidence or reverse market trends, not to mention that the "3,000 points" is originally a historical issue.

But it is undeniable that these measures will accumulate momentum for the next market rise, so the regulators have tried everything they can and there is no need to be too harsh.

Let the policy fly for a while!

References:

[1] On the occasion of the 10th anniversary:We analyzed Daxiao's 27,000 Weibo posts to restore the real Li Daxiao for you.

[2] Jiang Cheng:We will not always defend 3000 points. We need to look at the long term confidence. If time is long enough, A shares can reach 1 million points. Investment Homework Book Pro

[3] Entering a new era - the Shanghai Composite Index broke through 3,000 points for the 29th time, Guosen Securities

[4] Wu Xiaoqiu:How to climb to 3000 points, Renmin University Chongyang

EditEditor: Shen Hui

Visual design: Shu Rui

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When will the "3000-point spell" end?

The origin of 3000 points

where is the problem?

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