Chinese regulators have spent much of the past year trying to tame the country’s famously bubble-prone and unruly stock markets. Recent trading patterns suggest they may have succeeded.
But the way in which the country’s markets have been subdued could raise concerns for global investors ahead of Morgan Stanley Capital International’s decision, due Wednesday, on whether to include mainland-listed shares in a key index, a move that could make Chinese stocks a bigger part of international portfolios.
Despite a 3.2% drop on Monday, the Shanghai stock market has just passed one of its least-eventful months ever. The market moved less than 1% either way on all but two trading days in the last three weeks.
That is a far cry from the turmoil earlier this year, when stocks plummeted 10% in the first week of January alone, taking global markets with them. The calm also comes after a tumultuous 2015, when stocks surged 43% in the first half of the year before slumping.
Critics say Chinese regulators’ often heavy-handed tactics—from suspected frequent trading by state-backed funds to keep stocks in check to direct warnings to investors—have driven investors away. The China Securities Regulatory Commission couldn’t be reached for comment.
“I think the market fever is over,” said Yiwen Jiang, a 29-year old investor from Shanghai, who has stayed away since January. “No one talks about stocks anymore.”
Average daily trading turnover of shares on China’s two main markets, Shanghai and Shenzhen—so-called A-shares—plunged last month to less than one-third of its level at its peak in June 2015. The amount of money investors are borrowing from brokers to trade, known as margin debt, has dropped to its lowest level since December 2014, while a measure of the Shanghai market’s volatility, introduced last June, is at its lowest since then.
One factor behind the subdued trading is that initial public offerings have slowed to a trickle, leaving more than 800 companies awaiting approval to float, and planned changes to ease the listing process have been put on hold.
Another explanation, analysts say, are the restrictions imposed last September on trading in stock-index futures, meaning that investors are largely unable to use them to hedge their stock positions.
“There are aspects of Chinese market that investors realize are still not normalized from a global perspective,” said Barry Lau, managing partner of Adamas Asset Management in Hong Kong, which manages $650 million.
A thumbs-up from MSCI now might not be enough to offset the lack of interest in Chinese shares, which if included would make up just 1.1% of its popular Emerging Markets Index, tracked by $1.5 trillion of global funds. An extra $20 billion to $30 billion could end up in Chinese stocks over the next year from MSCI index inclusion, HSBC estimates.
Still, it would be a significant step toward China’s integration into global markets. Chinese stocks’ index weighting could grow toward 20% in the future if Beijing allows foreigners greater access to its markets, MSCI has said. Local regulators are impatient for the MSCI nod.
A green light would come a year after MSCI decided against including Chinese stocks in the index, citing concerns such as the way companies could suspend their shares from being traded indefinitely. In a regulatory change made in May to address that issue, companies involved in a major restructuring such as a merger now may halt their shares for at most three months.
Still, Beijing’s influence over the market has grown, in part via enormous state-backed investment funds, known locally as the “national team.”
Two such funds—the China Securities Finance Corp., which lends money to brokers, and Central Huijin Investment, the domestic arm of China’s sovereign-wealth fund—were among the top 10 shareholders in 1,221 listed firms at the end of March, with total stakes valued at roughly 1 trillion yuan ($152 billion) , or 2.8% of the Chinese market, according to analysts at Essence Securities.
Several investors have said the “national team” has been selling down its blue-chip shareholdings whenever the market rallies for more than two days, buying them back if any selloff steepens.
The size of this intervention and the extent to which it is coordinated is hard to verify. The CSFC declined to comment. Central Huijin didn’t respond to emailed requests for comment.
“When every investor is blabbering about the national team [and] their ‘buy low, sell high’ strategy, it solidifies the expectation of flat trading,” analysts at GF Securities said in a recent report.
Chinese authorities have also been contacting investors directly when trading gets too frothy, according to Gong Xiaotao, an investment manager at Shanghai-based Yixinweiye Fund, a private-equity firm. He said one of his firm’s traders received a text message alert in March from the Shanghai Stock Exchange warning them not to hype up stock prices.
Meanwhile on April 29, China’s government news agency announced the formal arrest ofXu Xiang, a renowned fund manager, and Cheng Boming, the former president of Citic Securities Co. Ltd., the country’s largest broker. The report said Mr. Xu was charged with insider trading, but didn’t elaborate on the charges against him or specify the charges against Mr. Cheng in their separate cases. Both men were initially detained last autumn on allegations of insider trading.
“This year, the market has been particularly influenced by intervention of the police and administrative factors,” said Mr. Gong. “This is unprecedented.”
By: Yifan Xie (Wall Street Journal).
Photo: South China Morning Post.
Review: Emerging Market Formulations &
Research Unit, FLAGSHIP RECORDS.
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