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The Shanghai market fell 1.68 per cent on Tuesday, an improvement on Monday's eight-year record drop of 8.48 per cent. Photo: Reuters

Shanghai falls prey to edgy investors as big market swings promise more volatility

Big market swings promise more volatility as banks recover some ground while oil and gaming stocks struggle to regain footing

The 6 per cent peak-to-trough swing in Shanghai shares on Tuesday helped some of Monday's biggest fallers recover but also signalled that volatility will stalk the market for the foreseeable future, leaving it at the mercy of momentum-led retail investors.

Mainland Chinese banks and brokerages began a recovery in Tuesday's trading while oil and gaming stocks fought to regain their footing after Monday's dramatic collapse.

The Shanghai Composite Index dropped 1.68 per cent to 3,663 points  - an improvement on Monday's eight-year record fall of 8.5 per cent - while the Shenzhen Composite Index closed 2.24 per cent down.

By contrast, the CSI 300 Index of large-cap Shanghai and Shenzhen stocks edged down just 0.2 per cent, reflecting expectations that the central government would take further steps to prop up state enterprises and blue chips.

"Blue-chip companies, particularly banks, outperform as they are perceived as the likely recipients of support from the authorities," Gerry Alfonso, a director at Shenwan Hongyuan Securities, wrote in a note to investors.

All the big banks made gains in Shanghai, although not enough to scrub off Monday's heavy losses. The fight back was led by Minsheng Bank, which rose 4.11 per cent to 9.11 yuan, and China Construction Bank, which recovered 3.19 per cent to close at 6.15 yuan.

But mainland Chinese banks lost more ground in Hong Kong where local blue chips stood out. AIA Group had a delayed reaction to its strong annual results, rising 2.65 per cent to HK$50.35 and adding 47 points to the Hang Seng Index, while HSBC Holdings gained 1.62 per cent to HK$68.85, contributing 45 index points.

Dually listed brokerages matched the banks. Citic Securities, Huatai Securities and Haitong Securities slipped in Hong Kong but added between 3 and 7 per cent to their share prices in Shanghai.

The country's insurance giants could not keep pace with other financials. Ping An Insurance was the worst performer, falling 2.44 per cent to HK$46 in Hong Kong and 3.99 per cent to 35.10 yuan in Shanghai.

Hong Kong-listed oil majors CNOOC, Sinopec and PetroChina recovered from Monday's 12-month lows, despite low global prices, in line with JP Morgan and Jefferies reports that said sentiment and consumption demand were improving in the sector.

Watch: China markets can't shake volatility

Despite falling in mainland China, PetroChina and Sinopec stocks retain a substantial buffer over their Hong Kong counterparts. PetroChina's A shares trade at a 94 per cent premium over its H shares, reflecting a divergence between Hong Kong and mainland Chinese investors.

Mainland Chinese stocks have been sold heavily by foreign investors, with 13 out of the past 17 trading days recording net outflows through the Shanghai-Hong Kong stock connect that links the two cities' bourses.

Casino stocks slid in Hong Kong on Tuesday on Macau government estimates that annual gross domestic product could shrink 15 per cent due to contraction in the gaming sector. But most stocks recovered after an initial plunge to close only slightly down.

Louis Tse, a director of VC Capital, said the current volatility was related to the fact that July futures will expire tomorrow.

"There has to be some squaring in the blue chips as well for those who have short positions," Tse said. "It's a volatile market with more than US$110 billion in turnover today. There's a resistance at 25,000 points on the Hang Seng Index."

Manulife vice-president Steve Chiu said the volatility could lead investors to hold more cash.

"Concerns over interest rate rises by the US Fed and recent stock market turbulence may drive the city's investors to put more money into cash in the months ahead," Chiu said.

Hong Kong investors allocate 61 per cent of their assets in cash and other low-return assets while spending more than half of the rest betting on stocks, according to a Manulife poll in May.

"There are a lot of opacities. It is unknown how much more the overleveraging caused by grey margin financing will affect share prices," Chiu said of the mainland Chinese market.

Beijing's stimulus-fuelled stock market in April rallied to a seven-year high on a bull run that saw its benchmark index more than double in one year. That winning streak came to an abrupt end last month and the market is still on a slide that has proven hard for Beijing to arrest.

This article appeared in the South China Morning Post print edition as: Shanghai falls prey to edgy investors
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