In­vestors in China think small, in a big, big way

Vol­ume on the Small and Medium En­ter­prise Board has surged “The mar­ket fo­cus is on the small caps”

Bloomberg Businessweek (Asia) - - CONTENTS -

The Shang­hai Stock Ex­change’s reign as the premier venue for trad­ing Chi­nese eq­ui­ties is com­ing to an end. The new vol­ume leader is Shen­zhen’s Small & Medium En­ter­prise Board, a 12-yearold mar­ket mostly for non-state-owned com­pa­nies. Daily trad­ing on the SME Board first eclipsed that of Shang­hai,

the old­est of China’s four ma­jor ex­changes, in mid-May. Both av­er­aged about 180 bil­lion yuan ($27.1 bil­lion) in trades in the five days to June 27.

The devel­op­ment marks a dra­matic re­ver­sal for the Shang­hai ex­change, where a spec­u­la­tive ma­nia pro­pelled trad­ing vol­umes to all-time highs just 12 months ago. Ac­tiv­ity has since slumped by 86 per­cent as in­vestors shun govern­ment-run en­ter­prises in fa­vor of the new-econ­omy com­pa­nies that dom­i­nate the SME Board. In one ex­am­ple of how ex­treme the shift has be­come, daily trad­ing vol­ume of Bei­jing Seven­star Elec­tron­ics, a lit­tle-known tech­nol­ogy com­pany, is now twice that of Shang­hai-traded

In­dus­trial & Com­mer­cial Bank of

China, a state-owned lender whose mar­ket value is more than 100 times larger. “In­vestors are dump­ing Shang­hai as that’s dom­i­nated by tra­di­tional sec­tors, which don’t have much growth po­ten­tial,” says Dai Ming, a money manager at Heng­sheng As­set Man­age­ment in Shang­hai. “The mar­ket fo­cus is on the small caps.”

China has 107 mil­lion in­di­vid­ual stock traders, and they of­ten crowd into sec­tors that prom­ise rapid growth when the broader mar­ket is fall­ing. To­day, those hot in­dus­tries in­clude bat­tery mak­ers, man­u­fac­tur­ers of or­ganic light-emit­ting diodes, and e-com­merce com­pa­nies. Among the lead­ing gain­ers this year are Guangzhou Tinci Ma­te­ri­als Tech­nol­ogy, a maker of elec­trolytes for lithium ion bat­ter­ies used in elec­tri­cal ve­hi­cles, and Haox­i­angni

Ju­jube, which owns a lead­ing on­line re­tailer of nuts. Both stocks have gained more than 120 per­cent in 2016. “In­vestors seek­ing ab­so­lute re­turns are hud­dling to­gether to hold these hot stocks,” says Fu Jing­tao, a strate­gist at Shen­wan Hongyuan Group in Shang­hai.

SME shares are more volatile than their Shang­hai coun­ter­parts, a char­ac­ter­is­tic that at­tracts day traders and other short-term spec­u­la­tors. Price swings in the SME Board In­dex over the past 30 days were 53 per­cent more ex­treme than those of the 1,145mem­ber Shang­hai Com­pos­ite In­dex, where au­thor­i­ties of­ten in­ter­vene to con­tain fluc­tu­a­tions.

The SME In­dex surged 54 per­cent in 2015 be­cause of op­ti­mism that China would tran­si­tion to an econ­omy fu­eled by ser­vices and con­sumer spend­ing. Con­cerns that slow­ing growth will hurt earn­ings and trig­ger cap­i­tal outflows have re­sulted in a 19 per­cent de­cline this year. Shang­hai’s bench­mark in­dex is down al­most as much. What­ever hap­pens in the near term, the SME Board will likely come to be China’s dom­i­nant ex­change, says Fu: “The hope re­mains that the new econ­omy will be the fu­ture of trad­ing.” �

The bot­tom line Trad­ing vol­ume on the Shang­hai Stock Ex­change has plunged 86 per­cent in the last 12 months as in­vestors flee old-line in­dus­tries.

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