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”

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.