An investor checking stock index in a localbrokerage firm, at Fuyang, Anhui province, Dec 2, 2014. [Photo/IC]

The Chinese mainland stock market may have suffered its biggest loss on Monday, but rebounded on Wednesday. 2015 is set to be the first of what is likely to be a three-year bull run for Chinese equities.

We (at Nomura) have noted, "data on margin financing activities show that the year-end surge in A-shares was partially fuelled by borrowed money. This is a risk factor to consider as we head into the expected bull run of Chinese equities, given that such leverage positions are likely to be shaken out in occasional market pullbacks, which could aggravate declines in stock indices." The latest sharp correction in A-shares serves as a fresh reminder that one is only good as one's trade can last.

There will be further pullback and consolidation, led by financials, in the MSCI-China index during a good part of the first quarter of 2015. But such a correction is not inconsistent with our bullish outlook for three years.

A key piece of the puzzle of deleveraging local governments is for China to have a reasonably robust capital market over a number of years, so that it can fund the sales of various central and local government assets. This way central and local-level State-owned enterprises may inject quality assets into listed companies or new listed companies to monetize more of their hard assets and lower the leverage ratio by shoring up the asset side of their balance sheets.

This year, we anticipate more concrete evidence of reforms that truly benefit the Chinese public. For example, administrative reform is about putting government officials' powers in the cage of rules, with increased processes, transparency and information symmetry. This means that instead of interfering and competing with the private sector, the government will leave more room for it to run businesses.

The hukou (house registration) and rural land reforms are about providing rural residents and migrant workers with more social benefits, partly funded by governments of coastal provinces that have benefited the most from migrant workers. These two reforms need to go hand-in-hand, but how exactly the costs of urbanization will be funded is still being debated.