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The global stock markets have been experiencing a bullish trend recently, with a notable increase in indices around the world. However, in stark contrast, the Chinese A-shares have been under performing, putting pressure on the 2900-point support level. It's evident that the A-share market has been stuck around the 3000-point mark for an extended period, which raises questions about its sustainability and underlying health. Notably, the A-shares are currently evaluated at historically low levels, but what factors contribute to their long-standing lethargy?

One of the pivotal reasons behind the prolonged stagnation of the A-share market is the chronic oversupply of stocks. Over the course of 17 years, the number of listed companies has surged from approximately 1,400 to 5,400, pushing the total market capitalization from 20 trillion RMB to an astonishing 70 trillion RMB. Despite this massive growth, the market index remains firmly around the 3000-point mark. This persistent imbalance in supply and demand is a significant contributor to the current market malaise.

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Another crucial factor is the availability and usage of sophisticated short-selling mechanisms within the A-share market, where the rules appear to favor institutional investors. Tools such as convertible bonds and securities lending have historically created challenges for retail investors. During periods of market downturns, these risk-hedging tools can exacerbate negative sentiments and lead to a more significant decline in prices.

Recently, after high expectations, the convertible bond lending service has been temporarily suspended. It's essential to note that this is a pause, not an outright cancellation. However, it has certainly sparked a glimmer of hope for many investors seeking stability and confidence in the market.

Effective July 11, the convertible bond lending activity has officially been halted. This action was taken to mitigate the pressure on institutional investors' arbitrage opportunities, which could effectively stabilize the market. The existing convertible bond agreements, however, have been given a short window of about two months to be resolved, with the contracts needing to be concluded by September 30.

Beyond just halting new activities in convertible bonds, the margin requirements for securities lending have also been significantly raised. The margin ratio for securities lending has been increased to 100%, while private equity funds now require a 120% margin. This decision represents a notable increase in short-selling costs, which can discourage aggressive positioning against the market.

It’s crucial to distinguish between the convertible bond and securities lending sectors. Regular securities lending occurs with stocks held in a brokerage's inventory, while convertible bond lending derives from shares borrowed from other financial institutions. With the suspension of the latter, the sources available for securities lending have shrunk, indirectly limiting the breadth of activities in that market.

From a broader perspective, the suspension of the convertible bond lending service can be viewed favorably, particularly for retail investors. This development contributes to preserving a fair trading order within the capital markets, preventing excessive speculative actions from institutional players that could trigger sharp price fluctuations. Furthermore, this pause can help to restore investor confidence, creating a more stable emotional landscape for market participants.

However, the enduring sluggishness of the A-share market cannot be solely attributed to the influences of convertible bonds. A fundamental improvement in the investment ecosystem is pivotal for nurturing a sustainable bull market in A-shares. For instance, enforcing strict quality controls on listed companies and redefining the mindset that equates listing with the endpoint of struggle could be crucial for long-term growth.

It may be surprising to acknowledge that only an estimated 1% of listed companies in the A-share market are genuinely worthy of long-term investment. This leads us to ponder: why do majority stakeholders in A-share listed companies relentlessly seek arbitrage opportunities or Liquidation of their holdings?

Reflecting on this, one central theme emerges: for many entrepreneurs, the act of going public signifies the culmination of their efforts. Once their objectives are met, it’s only natural for them to cash out and withdraw. In other cases, the underlying belief that their company lacks resilience in the market may drive them to divest as soon as they secure financial freedom, thus selling stock quickly after the IPO.

From the issuance of limited stock rights to the more contemporary approach of securities lending of non-restricted stocks, these actions stem from a deep-rooted insecurity among major shareholders and strategic investors about their own companies. If A-shares feature only 1% of investable companies, while over 5,000 others focus on exit strategies over growth, it substantially undermines the perceived value of the capital market. Creating a healthy and dynamic ecosystem, where the mentality among business leaders shifts from “listing equals culmination” to a focus on sustainable growth, could ultimately pave the way for A-shares to thrive in the long run.