Shanghai’s low stock market volatility mystery
Monthly swings on China’s benchmark stock index have been decreasing since the equity bubble burst in 2015
China’s stock market has been so tame over the past year.
The monthly swings for the benchmark Shanghai Composite Index were less than 8 per cent in the period, compared with an average of 9.4 per cent since 2010 based on statistics from Haitong Securities. The gauge’s fluctuation is only 2.8 per cent so far in March.
Volatility of Chinese stocks has been decreasing since the equity bubble burst in 2015, wiping out nearly US$5 trillion in market value, and after a now-defunct circuit breaker system triggered a 23 per cent plunge in January last year. Tougher regulatory oversight against speculative trading, state intervention in equities and a weak economic recovery are cited as the main reasons for the subdued market by analysts and investors.
``The regulator’s strong law enforcement has curbed speculative trading and abnormal stock-price movements,’’ said Fu Jingtao, a strategist at Shenwan Hongyuan Group. ``Those who used to cause high volatility and fast turnover velocity have now disappeared from the market.’’
China’s stock market is usually known for wild boom-to-bust cycles as retail investors make up almost 80 per cent of trading, making price movements more volatile. The last big swing was from June to August in 2015, when the Shanghai Composite tumbled more than 40 per cent just after it more than doubled over the previous 12 months.
The market mayhem led to the resignation of Xiao Gang, former chairman of the China Securities Regulatory Commission, in 2016. His successor Liu Shiyu frequently reiterates the need to clamp down on malpractice to help maintain market order. In February’s annual regulatory meeting, he said the CSRC would go after some ``crocodiles’’ on the capital market to maintain stability. Two months earlier he lashed out at some insurers for bidding for controlling shares in listed companies through illegal fund-raising.
Wang Zheng, chief investment officer at Shanghai Jingxi Investment Management, says the state has an invisible hand in the market, as a state-backed fund created by policymakers in the 2015 market rout to support stocks is now used as a tool to restrict price movements as well.
``The government is actually using administrative means to manage the market,’’ he said. ``When the market falls, the national teams buys to prevent stocks from falling further and vice versa.’’
The state still holds shares worth about 1.2 trillion yuan (US$174 billion) in market value, or equivalent to 13 per cent of China’s mutual fund industry, according to fund tracker Howbuy.
However, dullness on the benchmark index doesn’t necessarily mean investors cannot make money from the market. Companies with solid earnings prospects and leading companies in their industries are now favoured by investors amid the backdrop of a weak economic recovery and the neutral monetary policies, says Chen Hao, a strategist at KGI Securities.
``It’s becoming difficult to play in the market now and there are only structural opportunities,’’ said Chen. ``The market now likes companies that have pretty secure earnings, while dumping those thematic plays without fundamental support.’’
Midea Group, China’s biggest maker of home appliances, while Gree Electrical Appliances, the nation’s No 1 maker of air-conditioners, have gained at least 20 per cent this year. Anhui Conch Cement, China’s biggest maker of the material, has advanced 26 per cent in 2017.
The Shanghai Composite Index, which is dominated by big state-owned companies, has been outperforming the ChiNext gauge of small-cap stocks this year, with a gain of 4.4 per cent versus a decline of 1.7 per cent.
Analysts still expect stocks to trade in a narrow range in coming months as there’s no immediate catalyst that will help the market to break out of the pattern. Still, they are divided over the outlook once the pattern winds up. Haitong Securities says stocks would probably rise on a stabilising economy and improved earnings, while KGI’s Chen predicts shares are likely to drop because of the worsening prospect of the property market and the risk of tighter monetary policies.
For Fu, low volatility will become a “new normal,” a term used by President Xi Jinping to refer to China’s slowing economic growth, for the stock market.
``It will help to make the market more institutionalised and encourage value investing,’’ said Fu. ``For fund managers, they only need to grasp companies’ fundamental changes now rather than care too much about thematic plays. It’s more conducive for institutional investors to play in the market.’’