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)