China stock market

SCI caps steepest monthly drop in 2017 as regulators beef up surveillance and economy stutters

Benchmark stock gauge fell 2.1 per cent in April and investors say weakness in equities expected to continue

PUBLISHED : Sunday, 30 April, 2017, 8:08pm
UPDATED : Sunday, 30 April, 2017, 10:46pm

China’s benchmark stock index in April posted its worst monthly performance for this year as strengthened regulatory supervision dampened investor appetite for trading in equities.

The Shanghai Composite Index fell 2.1 per cent last month and has breached the 200-day moving average for the first time since September.

As the China Securities Regulatory Commission increased its oversight of the market to guard against stock manipulation, the banking watchdog also issued at least seven documents aimed at reducing commercial lenders’ leverage.

Bocom International Holdings, the securities and asset management flagship of Bank of Communications in Hong Kong, and Hengsheng Asset Management, another leading player, both agree it will take a while for equities to recover because of sapping demand for risky assets and concerns over the strength of the Chinese economy.

“This is just the start for regulatory reforms and near-term uncertainties will increase as the rules are being rewritten,” said Hong Hao, managing director at Bocom International, who is credited as accurately calling China’s boom-and-bust equity cycle of 2015.

“The economy will lose some momentum in the second quarter relative to consensus expectations. The market will languish for a little longer yet.”

The Shanghai index has gone into reverse after rising to its yearly high on April 11. The sell-off peaked on April 24, when the gauge shed 1.4 per cent to end an 86-day span of daily drops of less than 1 per cent.

Recently listed companies led the losers, with both Linewell Software and Clenergy (Xiamen) Technology retreating at least 34 per cent last month.

Speculative trading on new listings started to recede after the securities regulator meted out fines on manipulators that were found to have rigged the share prices of companies by taking advantage of their small proportions of free-floating stocks.

A rally in stocks linked to the new Xiongan economic zone, near Beijing, has also faltered as the Shanghai Stock Exchange said it would immediately suspend trading in stocks where excessive speculative buying was detected.

As top Communist Party leaders call for more regulatory co-ordination to ensure financial stability, both the banking and insurance regulators are taking firmer action, too.

For instance, the China Banking Regulatory Commission has ordered commercial lenders to cut their off-balance-sheet loans and prevent arbitrage – the simultaneous purchase and sale of an asset to profit from the price difference – in financial markets, while the insurance regulator has warned industry players against aggressive investments.

A rebound in the shadow banking sector in the first quarter has also spurred an increased crackdown and ongoing deleveraging, raising the risk of tighter liquidity in the stock market, according to Citic Securities, China’s biggest listed brokerage.

“The re-emergence of the shadow banking sector is the core risk facing A shares,” Citic Securities analysts Qin Peijing and Yang Lingxiu said. “Over the medium term, big risks lie in a rise in interest rates, a direction that is hard to change.”

The general strength of the economy is another area of concern for investors.

While China’s economic expansion reached a better-than-expected 6.9 per cent in the first quarter, growth projections have slowed for the rest of the year with the price of industrial goods and properties likely to weaken, according to Haitong Securities and Guotai Junan Securities.

Gains in factory-gate prices also slowed in March after rising at their fastest pace since 2008 the month earlier as the authorities imposed purchasing restrictions in at least 32 cities this year to rein in the real estate market.

Investors, meanwhile, have been loading up on larger companies with a low valuation as havens against the uncertainty over economic growth.

An index tracking the 50 biggest stocks on the Shanghai exchange fell only 0.5 per cent last month, with companies including liquor giant Kweichow Moutai and SAIC Motor even rising to record highs.

For the month, Moutai advanced 7 per cent and SAIC added 7.4 per cent.

However, Guosen Securities said large-caps still had “remarkable” room to grow, judging by their valuations.

The China volatility index, a measure of implied price swings for the 50 largest stocks in the next 30 days, fell to a record low last week, indicating prices might have flattened out.

The measure is valued at 10.5 times reported earnings, 37 per cent less pricey than the Shanghai Composite Index of 1,306 stocks.

However, the broader market is likely to remain lacklustre until June, according to Dai Ming, a fund manager at Hengsheng, as investors gauge the impact of the escalating clampdown on various areas of the economy and weaker corporate earnings.

“The cross-market regulatory crackdown is still in its early stages, and that may last another two or three months,” he said.

“There are also worries that the current restocking stage is over and the economy is entering a downward cycle. The market will remain cautious until things get clearer.”