Like a weak patient recovering from a long illness, the Chinese stock market, after an encouraging spurt in the past several months, is suffering from a relapse.

Although the market's unstable condition shouldn't have surprised anyone, the relapse apparently has disheartened the team of stock analysts and the army of investors who found their earlier bullish prognosis shattered by the latest price reverse.

Indeed, the government's renewed efforts to clamp down on the property market that once again was showing signs of overheating wrecked the nerve of many investors, sending them into a stampede to dump their holdings while there was still profit to be made. Back in the minds of many analysts and investors is the gnawing worry that the central bank is moving to tighten credit to ease inflationary pressure.

Such worries short-circuited an earlier rally that pushed the Shanghai Composite Index up by about 22 percent, despite occasional faltering, to a high of 2,432.50 on Feb 8, just before the long Chinese Lunar New Year break, from about 2,000 a few months ago. Since the market reopened after the holiday, the index has plunged almost 10 percent from the latest peak to about 2,200.

As usual, the Internet is rife with opinions and rumors started by self-styled investment gurus in their blogs. Numerous financial news publications and websites are carrying multitude of stories trying to make some sense of the sharp change in market sentiment.

In a market heavily influenced by the finicky mood of hundreds of thousands of individual investors, many of them staking their pensions or life savings in the hope of making some quick money, any news - especially those relating to the all-important property sector - has the potential to be blown out of proportion.

It is easy to make a connection between the government's housing policy and stock market performance. To be sure, the property sector has only a small impact on the index because many of the largest developers are not listed. But the movement of property prices can have a far-reaching impact on corporate earnings, especially those of banks, because of the vast amount of their property-related loans.

What's more, home value makes up a large part of the net worth of a typical investor. When an investor senses that the value of his home is going to fall, he's much less likely to risk his savings in stocks or other investments. For this reason, many analysts are of the opinion that the Chinese stock market is particularly sensitive to property price movements.

Against such a backdrop, the stock market appeared to have over-reacted to the central bank's latest move to activate a repo program. Rather than seeing it as a modest and routine exercise to mop up excess liquidity, some stock analysts and commentators took it to mean that the central bank had turned "hawkish" to rein in money growth. Such talks suggested that the central bank is poised to introduce more drastic monetary measures in the coming months.

The real question that the jittery investors should ask themselves is whether the government's housing policy and the central bank's cautiousness have changed the market fundamentals. The answer is, of course, no.

We have seen the short-term impact of the two factors over the past several weeks. But the real issue, in the longer term concerns the revaluation of Chinese stocks in the light of the improving economic outlook not only in China, but also in the United States.

The revaluation process, which began late last year, triggered a stock market rally because investors were confident that corporate performance in 2013 would be better than the year before. They also hoped to see improvements in corporate governance and, thanks to the efforts of the watchdog agency, greater market transparency.

Also, the authorities have introduced various initiatives to further open the market to foreign institutional investors by progressively lifting the amount they can invest and easing the restrictions on what they can do, including the proposal to allow foreign participation in index futures trading.

The market has recovered much ground since the sharp fall early last week, which means it has apparently agreed that the fundamentals have remained bullish.

(China Daily 03/09/2013 page5)