China stock market

The seven oddest things about China's US$7.4 trillion stock market

PUBLISHED : Thursday, 31 May, 2018, 10:46am
UPDATED : Thursday, 31 May, 2018, 10:46am

China may be something of a mystery to the majority of international investors who will soon find themselves owning mainland shares for the first time.

The country’s main bourse, opened in Shanghai in the early 1990s, is accessible only through a link with Hong Kong or by using either of two licences available to institutions like insurers or pension funds, both of which impose quotas and limitations.

But there will be a third route come Friday, when anyone tracking MSCI’s indexes will be forced to own a piece of the 234 Chinese companies that were picked for inclusion this month.

US$400 billion expected to flow into Chinese stocks after MSCI inclusion: top fund manager

A gauge tracking Shanghai shares has taken quite a beating in the past six days, closing Wednesday at its lowest level since October 2016. While the bearish sentiment hardly bodes well for China’s big debut, it does mean foreigners are getting in at the cheapest valuations in more than two years.

Below are seven things that outsiders might find strange about China’s US$7.4 trillion equity market, the second-largest in the world:

1) Names matter

Sometimes investors buy stocks just because they sound right. They piled into companies with “king” and “emperor” in their names after China’s move to let President Xi Jinping stay in power indefinitely. A stock that sounds like “Trump wins big” jumped after the 2016 US presidential election, while one that sounds like “Aunt Hillary” slumped. Even a Qingdao-based refrigerator and air conditioner maker whose Mandarin name sounds like Barack Obama rallied over six days following his 2008 victory.

2) IPO lottery

One of the best ways to get rich quick is to win a slice of an IPO, though you have to be pretty lucky – the odds of getting an allocation are about 1 in 2,000. Stocks tend to surge on the first day of trading because pricing is kept artificially low. In 2018, all new listings have closed up by the 44 per cent limit on their debut.

3) Get in line

And as for companies, the queue to list is long: 310 candidates were still waiting for approval as of May 24. The median wait from getting the green light to pricing in China is 536 days, according to two-year data compiled by Bloomberg. That compares to just 32 days in the US or 25 days in Japan.

4) Sea of Red

This is a good sign in mainland China. Unlike in other exchanges around the world, red means a share price is rising in Shanghai and Shenzhen, while green means it’s falling. That’s because it’s seen as a lucky hue in Chinese culture, while green has negative connotations. The Tokyo Stock Exchange also uses auspicious red to denote stock advances.

MSCI adds PetroChina, ICBC and more than 230 Chinese stocks to US$1.5 trillion emerging market index

5) Mum and dad

Forget about the long term, it’s a punter’s market in China. Institutional investors are largely absent from Shanghai, where individuals and day traders make up about 80 per cent of the trading volume. Fuelling the bubble and collapse in China’s equities three years ago were millions of new investors, some of whom had never attended or graduated from high school.

6) Frozen

Halts to trading in China – a way for local companies to prevent their stocks from falling – happen more frequently than in other major markets. In March, the value of frozen shares on the country’s exchanges exceeded US$456 billion – 3,150 times more than in the US, where suspensions are capped at 10 days.

7) A little help

Watch out for signs of intervention by the national team, as China’s state funds are called. They often step in to stabilise the market during routs, or sometimes just to lift sentiment ahead of important political events. Last year, China increased scrutiny of traders before the government was due to host representatives from more than 100 countries at a summit in Beijing. After the Shanghai Composite Index’s recent rout, traders are looking at the 3,000 level as its the next key line of support.