The world’s worst stocks are in China, with no end to misery seen

As global stocks rally to new records, one part of China’s equity market is heading in the opposite direction.

The ChiNext index of small-cap shares plummeted 5.1 per cent on Monday, its biggest loss in seven months, and extending its retreat this year to 16 per cent. That’s worse than any of the 96 global benchmarks tracked by Bloomberg, and compares with a 10 per cent advance by the MSCI World Small Cap Index.

Concern about rising funding costs, corporate governance issues, liquidity pressures and tougher regulatory oversight are hammering companies on the Shenzhen gauge, with at least 15 members falling by the 10 per cent daily limit on Monday. The rout, triggered by a high-level conference over the weekend attended by President Xi Jinping, threatens to undermine already shaky investor sentiment in the broader US$7 trillion equity market.

“Risk control seems to be the top priority on the regulators’ agenda, instead of growth,” said Sun Jianbo, president of China Vision Capital. “People are cutting risks in their portfolio.”

President Xi said the central bank will play a stronger role in defending against risks, and called for more work on safeguarding the financial system and modernising its regulatory framework. Strategists also interpreted discussion at the conference on the need to increase direct financing as a signal that officials may accelerate the approval of initial share sales, diverting investor cash from existing stocks.

The sell off spread to the benchmark Shanghai Composite Index, which fell the most since December, trimming its gain this year to about 2 per cent.