Shanghai stock outlook darkens amid data showing major shareholders reduced their holdings in early June
New data shows that hundreds of major shareholders took advantage of the recent rally in Chinese shares to cash out, an ominous sign that the market could be headed lower.
According to data provider Wind Information, major shareholders conducted 341 share sales worth about 12 billion yuan (HK$14.16 billion) during the first six trading days of June.
The selling in just six days was equivalent to the average monthly divestment during the previous six months. It also follows a 3.3 per cent jump in the benchmark Shanghai Composite Index on May 31.
A total 661 million shares of listed firms changed hands during the six trading days.
“As large shareholders exhibit their worries about company fundamentals or market outlook by massively selling shares, it looks certain that a further slide will happen in the near future,” said He Yan, a hedge fund manager at Shanghai Shiva Investment. “After all, weaker company earnings are expected.”
Selling by major shareholders is sometimes viewed as a negative indicator for share prices, as these investors often have better knowledge of the operating conditions and may be reducing their holdings ahead of a coming slowdown.
According to Wind, the majority of share disposals involving big shareholders were conducted on the Shenzhen Stock Exchange where small companies and start-ups are concentrated.
Investor sentiment in China has been dampened by a series of perceived blunders by regulators, including a botched introduction of a circuit breaker mechanism that resulted in trading suspensions earlier this year. Investors are also tallying losses in the wake of the 43 per cent decline in the Shanghai Composite during the past year.
From early June through August last year as much as US$5 trillion of market value was erased from the Shanghai Stock Exchange.
The benchmark Shanghai indicator shed 17.3 per cent year to date.
In an effort to restore investor confidence, Beijing eventually scrapped the circuit-breaker system.
The China Securities Regulatory Commission (CSRC) has also delayed the implementation of the registration-based IPO system.
In spite of declines in the major indexes, analysts caution that corporate earnings by Shenzhen-listed small firms couldn’t support current prices.
On the Shanghai Stock Exchange, listed companies trade at 14.4 times their 2015 earnings. The Shanghai and Shenzhen bourses are closed for a holiday on Thursday and Friday and will reopen Monday.
Small companies on the SME board in Shenzhen saw trade at price-to-earnings multiple of 48.3, while the Nasdaq-style ChiNext market stood at 73.6.
Small companies are often favoured by mainland equity investors in search of short term trading profits.
It is expected that the Shenzhen-Hong Kong stock link under which foreign institutions will be able to directly buy shares in Shenzhen will receive formal approval soon.
Expectations that global index compiler MSCI will add A shares to its emerging market benchmarks has also helped to bolster sentiment in recent weeks.
The MSCI will announce a decision on whether A shares would be included in the benchmarks next week, as part of its annual review.
The inclusion could result in capital inflows as foreign institutions may buy China stocks to match the MSCI weightings.
“It’s highly likely but not certain,” said Ivan Shi, head of research at fund consultancy Z-Ben Advisors. “Besides, foreign funds will still assess the fundamentals before buying the shares.”
In order to put a floor under the plummeting stocks, Beijing channelled at least 1.5 trillion yuan into rescue funds last year to stabilise the market. These government-held shares are an overhang for the market as investors remain wary that an uncoordinated attempt to sell them would force share prices lower.