There is an unusual, even schizophrenic, quality about the Chinese stock market. Investors are displaying a phobia for IPOs, household savings are phenomenally up and liquidity remains a white-hot issue.

As the half-year mark approaches, the Chinese bourse is behaving in a manner most erratic.

Shares closed lower mid-week as reports of possible IPO resumption came in.

Chinese retail investors have become strangely averse to launch of new public issues and a signal to end the unofficial moratorium on IPOs was met with dismay. Investors are angry about the large number of stocks, listed over the past few years, trading below their issue prices.

Routine disclosures that some companies had packaged their IPO prospectus with false or misleading information has generated a sense of mass betrayal.

Sceptical investors suspect that the practice of deception is more widespread than is widely acknowledged. The credibility crisis over the IPO issue is now impacting wider market sentiment.

An unreasonable demand by investors for a continued ban on new issues is hurting the essential function of the stock market and denying companies in the private sector a vital source of capital to help fund industrial restructuring. More than 660 companies are awaiting approval by the China Securities Regulatory Commission.

SLUMP OVERDONE

The mainland stock market is also overshadowed by tremendous misconceptions about liquidity and possible flight of capital.

The US Federal Reserve Board is likely to gradually scale down and finally phase out the quantitative easing programme as the American economy picks up.

This means there will be much less “hot money” circulating in the Chinese market. During last week’s Dragon Boat holiday, most major stock markets in the Asia-Pacific region slumped, as did China’s A-share market.

The trouble with the Chinese market, however, as one retail investor quipped, is that the Index “falls a lot, but rises only minimally”. Analysts have long warned that the slump of the broad market is overdone, despite all the negative factors.

Foreign bank analysts in Shanghai in fact have a better feel of the situation and rue the stark contradiction of Chinese stock indexes being the world’s worst performers, even as its economy and listed companies perform pretty robustly.

MSCI announced last week that it is reviewing China’s A-shares for a potential inclusion in its emerging markets index and according to some conservative estimates this may lead to $180 billion (Dh661 billion) of inflow to the Chinese equity market.

The current A-share market has priced in too much pessimistic sentiment and does not reflect China’s relatively better future growth and improving corporate profitability. It remains to be seen whether an inclusion into a global benchmark can help improve sentiments.

MANAGING FLUIDITY

In fact, the biggest problem facing China’s economy is not a shortage in its monetary supplies, but insufficient effective investment demand. A large volume of money issued by China’s central bank over the past years has caused huge fluidity.

Also, data shows that the country’s household deposits rose to a whopping 41 trillion yuan (Dh24.5 trillion) at the end of 2012 from 14 trillion yuan in 2007.

Such colossal household deposits, along with huge volumes of financial products issued by domestic financial agencies and a drastic rise in local government debt, will remain sources of excessive fluidity if not properly handled.

For decision makers, maintaining a stable monetary supply and avoiding the use of short-term policies to stimulate faster economic growth are quintessential to maintaining fiscal stability.

Last week, the central bank pumped in $15 billion into the banking system through its regular open market operations. It was the fourth consecutive week that the bank injected liquidity into the economy and this is seen as the bank’s willingness to boost market liquidity amid a tightening monetary environment caused by a slowdown in foreign capital inflows.

However, without a rise in effective investment demand, increased monetary supplies alone will not promote sound development of the “real” economy.

So obsessive is China about the health of the real economy that the China Banking Regulatory Commission issued a warning this week that banks should cater to the real demands of manufacturers and service providers.

Paranoid policy-makers have reprimanded lenders against self-circulation of capital and have told them to ensure that credit funds flow into the real economy.