Chinese market’s allure wanes
CHINA has lost its title as the world’s most liquid stock market as trading halts and regulatory efforts to curb bearish transactions drive away investors.
CHINA has lost its title as the world’s most liquid stock market as trading halts and regulatory efforts to curb bearish transactions drive away investors.
Daily turnover on mainland exchanges has averaged the equivalent of $202bn over the past 30 days, down from $288bn at the start of last month. After exceeding turnover on US bourses for about a month to the July 8 close, the value of shares traded in China is now $72bn lower than in the US. Volume in Shanghai yesterday was 36% below the 30-day average.
The unprecedented boom in Chinese stock trading during the first half of this year has fizzled as the Shanghai composite index sank 27% from this year’s high and mainland exchanges allowed hundreds of companies to halt their shares. The drop in volumes deepened this week as authorities curbed short sales, investigated algorithmic traders and warned investors against placing large sell orders.
“What happened recently will definitely leave a bad taste in investors’ mouths,” said Tang Yayun, a Shanghai-based analyst at Northeast Securities. “There has been too much regulatory intervention in this market and some institutional investors may be unwilling to enter the market for the long term.”
While proponents of the intervention say it is necessary to restore confidence after an almost $4-trillion selloff in mainland shares, critics have argued that China is backtracking on its pledge to give markets more sway in the world’s secondlargest economy.
Global investors have sold almost $8bn of Shanghai shares through the city’s exchange link in the past four weeks.
Regulators are also probing “malicious” short selling and have examined the futures trading accounts of foreign investors. They have banned stake disposals by major shareholders, suspended initial public offerings and compelled staterun institutions to support the market with equity purchases. About 520 firms are still halted on mainland exchanges, versus more than 1,400 last month.
In the latest curbs, China’s two main exchanges introduced measures that restrict short sellers’ ability to sell and buy back shares in a single day, a practice the Shenzhen bourse said may “increase abnormal fluctuations in stock prices and affect market stability”. Citic Securities, China’s largest brokerage, and several of its peers said they suspended short selling after the revised rules.
In a short sale, traders sell borrowed stock, anticipating the price will drop so they can profit by buying back the shares at a lower price. China already bans investors from purchasing and then selling the same stock in a single day.
The decline in trading volumes is likely to continue, putting pressure on earnings at brokerages, according to Thomas Ho, an analyst at Daiwa Capital Markets Hong Kong. Even after the recent slump, 30day average daily turnover on mainland bourses is double its
There has been too much regulatory intervention … and some investors may be unwilling to enter the market
level in March, according to data compiled by Bloomberg.
“We are entering a period of low volume in the next three to six months at least,” Mr Ho said. That will have “implications on valuation for some brokerages, which are highly valued given a change in market conditions”.
Citic Securities dropped 1% in Hong Kong trading yesterday while GF Securities fell 1.9%.
The surge in volumes was unsustainable and a daily level of between 500-billion yuan ($80.5bn) and 600-billion yuan would make more sense for the Chinese market, Morgan Stanley analyst Richard Xu said.
Apart from regulatory curbs, volumes are also falling as leveraged traders reduce their positions and new investors enter the market at a slower pace. Margin debt in China has dropped about 41% from its June high, while the weekly number of new investors has shrunk by 76% from its May peak.