Following the stock market slide in June that wiped out nearly 3.5 trillion yuan ($566 billion) of market capitalization, many analysts and commentators are repeating the argument that the market's long and painful revaluation process is now complete. At current prices, many Chinese stocks, including the big banks and large State-owned enterprises, are undervalued, they contend.

They may be correct. But if they believe that such seemingly indisputable statistics and analysis can lure investors back to the stock market, they are missing the point. It should have become

clear to keen observers of the Chinese stock market that no analytical tool has much effect in swaying market sentiment. What matters to investors now is money flow.

This was made abundantly clear in June when liquidity in the banking system was squeezed by a sudden surge in demand for short-term funds. Much has been written about the mad scramble for funds by many banks, driving up the overnight interbank rate to over 30 percent a year at one point.

Some banks were known to offer exceedingly high interest, to attract large - a million yuan or more - deposits from corporations and high net-worth customers. An offer that was too good to miss apparently.

The resulting diversion of massive amounts of investment funds from the stock market to short-term deposits at banks and other equally short-term wealth management products was widely considered to have triggered the share price slide which culminated in the crash on Monday, June 25. That has got little to do with stock market fundamentals, which have largely remained more or less the same for many months.

Of course, the economic prospects have been clouded by slowing export growth, sluggish consumer spending and the leveling off of domestic investments. But the expected slowdown in economic growth is deemed necessary to accommodate further reform and restructuring to achieve sustainable growth in future.

The stock market adjustment to this shift in economic emphasis is understandably lengthy and, at times, erratic, but the process has been greatly distorted by the proliferation of bank wealth management products that are mainly funds of short-term maturity invested in corporate and local government bonds. Promising high returns with seemingly minimal risks, these funds have sucked in many trillions of yuan from bank deposits and the stock markets.

Economists and analysts have noted that many manufacturing enterprises, including multinational companies in China, have invested their surplus funds in these financial products to make a quick gain instead of investing in plants and machinery and developing their core businesses.

Among the expanding crowd of investors in financial products are the owners of many small- to medium-sized enterprises in the private sector who have seen their profit margins in manufacturing savagely slashed by rising costs and dwindling overseas orders.

More and more property owners are pledging their real estate assets as collateral to secure loans for investing in wealth management products. Despite the narrow spreads, these investors are happy in the belief that they have made a sure bet.

But, of course, wealth management products are not as sure a bet as many investors believe. Many banks rely on new issues of such products to pay off those that have reached maturity. This game of musical chairs will go on as long as there is new money pouring in. However, when there is a massive outflow of hot money or investors get nervous about the capability of some enterprises and local governments in servicing their debts, the music can stop abruptly.

When investors begin to think of the hidden risks in those wealth management products and examine their real returns, they should realize that a safer bet lies elsewhere, in the stock market.

(China Daily 07/09/2013 page8)