China’s stock market appears to predict future corporate earnings, but this predictability does not necessarily mean prices are a clean “crystal ball” for fundamentals. High valuations also appear to pressure firms to cater to investor expectations by inflating reported earnings, especially through non-recurring gains and losses. The result is a distinctive pattern: short-run earnings predictability followed by longer-run reversal, suggesting that price informativeness and earnings management can reinforce each other.

Can stock markets discipline firms and allocate capital efficiently when the accounting system is still developing? This question is central to current debates about China’s capital markets. Policymakers have sought to make the A-share market a more important venue for financing innovation, disciplining listed firms, and giving households a larger stake in corporate growth. At the same time, China’s equity market remains known for speculative trading, retail investor dominance, weak delisting discipline in earlier years, and recurring concerns about the quality of listed firms’ financial reports.

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