Depressed Evaluations and Obscurity.
Although foreign equity market management is not unique to Chinese listed companies, it is negatively affected by portfolio managers’ reluctance to hold unfamiliar “emerging market” securities within their portfolios.  Other portfolio managers have been “hurt” by Chinese investments and refuse, as policy, to get involved with Chinese investments regarded as “high risk.”  This overall negative association toward Chinese small cap stocks, within western portfolio management, has affected an investment paralysis in Chinese businesses. A confluence of market cycles, market uncertainty, and indiscretion within Chinese business conduct, provides further difficulty for this troubled market.

In a stable market, the highs and lows of market cycles have a moderate effect on the financial market as a whole. Conversely, because China is an emerging market, the highs and lows of its market cycles have a significant effect on its overall market performance. For example, in 2008 the U.S. equity markets were down 38%, while the Chinese market, including U.S. listed Chinese equities, was down 68%(7). Presently, as the Chinese market is nearing the end of its growth cycle (the lowest point of its growth cycle), the negative effect of the financial low point continues to result in a depressed Chinese market, followed by lack in liquidity in listed Chinese securities. Moreover, as growth cycles end, corruption within Chinese businesses becomes rampant. And emerging markets, China’s specifically, lack security laws and corporate governance to protect investors.

To continue, the global financial climate strongly affects the Chinese market. A slowdown in U.S. and/or European markets will result in a reactive slowdown in China’s market, particularly in its export market. As China’s market growth is driven by demand from developed markets for the country’s manufactured goods (including commodities), and capital flows downward from developed markets to emerging markets, China will not continued to grow at a time when mature markets are slowing down.

As China is unequivocally dependent upon its country’s core business in the export market, it will will, thereby, be substantially affected by the current downturn in world markets, while, at the same time, the dollar continues to grow stronger. In the short-term the RMB exchange rate will be influenced by the fluctuation between the dollar and other currencies.  However, in the long run, its value depends on the progress of China's exchange rate reforms.

Currently, China is still running a substantial trade surplus, which should support the currency, in the short-term. However, the surplus may decline substantially in 2009 due to the world wide economic recession. Additionally, China is facing competition challenges.  Its vast export sector now has a profit problem, and the demand collapse is now forcing exporters to close. Alternatively, the so-called “housing crisis” in the U.S. proved to be a worldwide market adversity, with banks lending money not only to marginal homeowners in the U.S. but also to the marginal “factory” in China. Consequently, banks will continue to restructure loans in the effort of correcting the financial havoc that has stunned the global economy. Many loans will, thereby, result in default.