China stock­mar­kets among 2016’s worst

At­tempt to re­duce volatil­ity trig­gered spec­tac­u­lar melt­down

Kuwait Times - - BUSINESS -


China is the world’s sec­ond­largest econ­omy and has one of the fastest growth rates of any G20 na­tion, but its stock mar­kets have been among the worst per­form­ing in the world this year. Start­ing with a botched at­tempt to re­duce volatil­ity that in­stead trig­gered a spec­tac­u­lar melt­down, Chi­nese bourses have spent the year strug­gling against feck­less pol­i­cy­mak­ers, mas­sive cap­i­tal flight and a lan­guish­ing cur­rency.

The bench­mark Shang­hai Com­pos­ite In­dex (SCI) closed yes­ter­day down 12.3 per­cent for the year, com­pared to a rise of 0.4 for Ja­pan’s Nikkei 225, while Hong Kong’s Hang Seng in­dex also rose 0.4 per­cent. China was vy­ing with debt-rid­den Por­tu­gal for last place among the 40-plus coun­tries tracked by Wall Street Jour­nal’s Mar­ket Data Cen­ter.

It is a sig­nif­i­cantly worse per­for­mance than 2015’s wild ride, when the SCI surged by 60 per­cent in the first half be­fore plung­ing by more than 40 per­cent in un­der three months. Even so, it fin­ished the year with an over­all gain of 9.4 per­cent. Then au­thor­i­ties brought in a “cir­cuit breaker” mech­a­nism in Jan­uary to au­to­mat­i­cally shut down trad­ing if prices plunged. It went into ef­fect twice in one week, kick­ing off a self-re­in­forc­ing sell­ing panic that spread to global mar­kets, and was scrapped af­ter just four days. “The Chi­nese mar­ket had a melt­down this year, and so far it has only half re­cov­ered from that,” North­east Se­cu­ri­ties an­a­lyst Shen Zhengyang told AFP, adding the mar­ket was still in “slow and grad­ual restora­tion”. The chair­man of the China Se­cu­ri­ties Reg­u­la­tory Com­mis­sion was sacked over the de­ba­cle. His re­place­ment, Liu Shiyu, has kept a low pro­file, hurt­ing mar­ket con­fi­dence and leav­ing in­vestors seek­ing di­rec­tion, said Oliver Rui, a pro­fes­sor at the China Europe In­ter­na­tional Busi­ness School (CEIBS).

“Peo­ple don’t un­der­stand much about the reg­u­la­tor’s pol­icy di­rec­tion,” he said, adding that the lack of clar­ity partly ex­plained the mar­ket’s weak per­for­mance. The fall­ing yuan-low­ered seven per­cent by the cen­tral bank over the year in the face of a surg­ing dol­lar-has also driven in­vestors abroad in search of bet­ter per­for­mance. “When the yuan falls, mar­ket cap­i­tal runs off over­seas to hedge the risks,” said Dickie Wong, Hong Kong-based re­search di­rec­tor for Kingston Se­cu­ri­ties, adding it also made for­eign in­vestors “less op­ti­mistic about main­land com­pa­nies”.

Missed con­nec­tion

Even the year’s few bright spots have failed to live up to ex­pec­ta­tions. Ear­lier this month, China launched a long-de­layed pro­gram con­nect­ing its sec­ond ex­change in Shen­zhen-which has lost 14.7 per­cent this year-with the bourse in Hong Kong. The Hong Kong-Shen­zhen Stock Con­nect builds on a sim­i­lar scheme with Shang­hai and gives for­eign in­vestors ac­cess to many main­land tech shares.

But it has so far failed to live up to the hype, with Shen­zhen’s shares more ex­pen­sive than those in Hong Kong, mak­ing it unattrac­tive to for­eign in­vestors, while the en­try thresh­old for main­lan­ders to buy Hong Kong shares was set as high as half a mil­lion yuan ($72,000). Other an­tic­i­pated re­forms, such as a new sys­tem for ini­tial pub­lic of­fer­ings (IPOs), have all failed to ma­te­ri­al­ize or were qui­etly shelved af­ter Jan­uary’s drama. Cur­rently, the Chi­nese gov­ern­ment-rather than the mar­ket-de­cides which com­pa­nies of­fer shares and when, and at what price. As a re­sult Chi­nese flota­tions are al­ways un­der­priced, which “sends the wrong sig­nals to the mar­ket”, ac­cord­ing to Oliver Rui of CEIBS. Au­thor­i­ties should “not in­ter­vene too much” but “are al­ways afraid that the mar­ket will lose con­trol”, he told AFP. “But if you do not let go, then you will never know if the mar­ket can ac­cept the new sys­tem or not. Mis­takes are a nec­es­sary step.”

‘Least prof­itable’

Un­like most global ex­changes where in­sti­tu­tions hold sway, China’s stock mar­kets are dom­i­nated by small in­vestors, height­en­ing volatil­ity and short-ter­mism. Gov­ern­ment-backed funds in­jected bil­lions of dol­lars into China‘s mar­kets in 2015 in an ef­fort to stop them bleed­ing out, and still play a ma­jor role, ig­nor­ing profit, loss and every­thing in be­tween, and cre­at­ing huge price dis­tor­tions.

“In such an en­vi­ron­ment, it’s quite dif­fi­cult for in­vestors to ap­ply what­ever money-mak­ing strate­gies that they have learned over the years,” said Citic Se­cu­ri­ties an­a­lyst Zhang Qun. He called China’s stock mar­ket “the least prof­itable” op­tion in China or abroad. Even so, bro­kers are mildly op­ti­mistic about next year-but hedge their bets with huge ranges for their 2017 year-end fore­casts.

China Mer­chant Se­cu­ri­ties projects the SCI at any­thing from 2,900 — a six per­cent de­cline-to 3,800, which would rep­re­sent a leap of 23 per­cent. “With the gov­ern­ment tak­ing tighter con­trols over the prop­erty mar­ket and bonds also fall­ing, not many choices are left,” said Kingston’s Dickie Wong. “Funds must go some­where and stocks are ul­ti­mately one choice.” — AFP

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