Shenzhen warns investors of market risk

The Shenzhen Stock Exchange yesterday issued a stern warning to investors, cautioning them about the risks of chasing the current market rally, a sign regulators are wary of a boom-to-bust cycle now that the key index has climbed 52.86 per cent this year.

The exchange said investors should not be too greedy when they bet on short-term stock movements, and pointed out that the fundamentals of some companies might not support their prices.

'Blind and rampant trading of stocks is risky,' the statement said. 'Those practices are probably also on the regulator's radar screen as it tries to spot irregular trades.'

It was the second time in three days that the Shenzhen exchange warned investors about possible losses.

Earlier this week, it reminded investors to buy equities based on fundamentals.

It is unusual for the stock exchange to directly warn investors about the potential for losses on the market.

The Shanghai Stock Exchange did not publish similar caution statements, but an official said it would also warn investors of risks, if necessary.

'A bubble is shaping up in some of the stocks listed on the [small and medium enterprises] board at the Shenzhen exchange,' said Zhang Xiuqi, an analyst at Guotai Junan Securities. 'The regulator was prompted to curb the over-speculative spree on the market.'

The SME board attracted a flood of investors this year as people believe stocks with small capitalisations are easy to bid up when the market turns bullish.

Beijing established the board in 2004 at the Shenzhen exchange for small companies whose offering volumes are less than 100 million shares. The board is considered a rudimentary stage for an eventual Nasdaq-style growth market.

The SSE Medium Composite Index, tracking the SME board, has jumped 47.6 per cent this year.

Analysts said the regulator's warning was also part of efforts to pave the way for the launch of the Nasdaq-style market.

The China Securities Regulatory Commission recently announced that it would kick off the long-expected second board, with vice-chairman Yao Gang predicting that the technology-laden market would debut in August.

Regulators are now concerned that runaway investment on the second board will undermine the newly created market.

'The growth enterprise market is high risk because the firms' earnings may not be stable and they are not sure-fire bets,' said the statement.

The Shenzhen Stock Exchange is also studying whether to set a threshold for retail investors who are interested in buying equities on the growth market.

The exchange said some of the companies on the SME board had seen their prices jump irrationally in the past few months and the market had shown signs of overheating amid strong liquidity.

'Prior to the official launch of the country's own second board, investors must learn that the risks there are higher than on the main board,' the exchange said.