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Volatility returns to Chinese stocks as regulatory crackdown sparks sell-off

China volatility index surged to the highest in a month as the Shanghai Composite falls for four straight days

PUBLISHED : Thursday, 20 April, 2017, 3:53pm
UPDATED : Thursday, 20 April, 2017, 10:47pm

Volatility has returned to China’s stock market.

The China volatility index, a gauge of implied price swings for the biggest 50 stocks on the Shanghai exchange in the next 30 days, surged to a one-month high of 10.7 on Wednesday. The benchmark Shanghai Composite Index suffered a four-day losing streak of 3.2 per cent before rebounding less than 0.1 per cent on Thursday.

A pattern of narrow-range trading seems to have been broken as increased regulatory scrutiny of speculative activities, excessive gains in stocks linked to hot thematic investments – those driven by news and events, rather than fundamentals – and concerns about the strength of the economic recovery have triggered a sell-off.

The monthly swing on the Shanghai Composite has widened to 4.6 per cent so far in April, compared with 2.8 per cent a month earlier, which was the lowest since the measure’s inception in 1990.

“The market will probably be in for bigger volatility going forward as there will be increased selling from some investors who want to take profits from hot thematic plays,” said Wu Kan, a fund manager at Shanshan Finance.

A rally in the Shanghai Composite seems to be faltering after the index rose to the highest level of the year last week. New listings of smaller firms, and stocks linked to the creation of a new economic zone in Hebei’s Xiongan area have led the recent declines amid a regulatory crackdown on speculative trading.

Among them, Clenergy Technology, which started trading on the Shanghai bourse in January, has plummeted 33 per cent this month after jumping more than seven fold from its debut, while RiseSun Real Estate Development, a developer based in the vicinity of the Xiongan district, has retreated 18 per cent over the past five days after almost doubling within two weeks.

The sell-off came after the China Securities Regulatory Commission said it has punished manipulators of newly-listed small-cap firms, and the Shanghai exchange said it would demand more accurate information disclosure and immediately suspend trading in the event of rampant speculation.

Concerns that the economic recovery may be coming to an end have also prompted some investors to switch out of equities. Though China’s economy expanded by a better-than-expected 6.9 per cent in the first quarter, both Haitong Securities and Guotai Junan Securities warn that growth risks faltering in the next three months because of weakening producer prices, property markets and financial deleveraging.

Haitong Securities strategist Xun Yugen recommends selling Chinese stocks as the market enters the “sell in May” spell. His research data show the Shanghai Composite historically delivers an average return of 4.6 per cent in the May-to-October period, while the average return for the other six months of the year is 20.2 per cent.

Chinese investors typically start to sell stocks to pocket profits in May because the market gauges the strength of the economy and there’s a lack of catalysts for economic policies until near the end of the year, Xun said in a report.

Still, investors do not anticipate excessive swings in stocks as the government may intervene at any time to curb volatility through funds it created during the turmoil that tore through the market in 2015. The state holds shares worth about 1.2 trillion yuan, equivalent to 13 per cent of China’s mutual fund industry, according to fund tracker Howbuy.

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