China small-cap stocks boosted by state rescue package as 220 million individual investors gain confidence in outlook

The CSI Small-cap 500 Index is up 15 per cent from the start of February, compared with a 10 per cent gain for the benchmark CSI 300 Index

Hopes for further policy loosening and a lull in economic data releases mean ‘the moment on small-caps has yet to run its course’, analyst says

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An electronic ticker displays stock figures in Pudong’s Lujiazui Financial District in Shanghai on February 19, 2024. Photo: Bloomberg

Published: 2:01pm, 4 Mar 2024Updated: 3:13pm, 4 Mar 2024

Chinese small-capitalisation stocks have been beating the country’s largest companies, adding to signs that investor confidence is on the mend since Beijing intensified its efforts to stem a market rout.

The CSI Small-cap 500 Index has risen 15 per cent from the start of February when a slew of rescue measures – including the appointment of a new boss for the securities regulator and direct state buying – were put in place. The CSI 1000 Index of a wider array of smaller companies has climbed 13 per cent in the span. Meanwhile the CSI 300 Index of the largest companies has risen 10 per cent.

The turnaround in small caps, a barometer of retail sentiment, signals growing buying interest from the nation’s 220 million individual traders, fuelling optimism that the rebound driven by the policy support has legs. Smaller companies previously bore the brunt of the sell-off due to risk stemming from leveraged financial derivatives issued by brokerages, known as snowball products.

Expectations about further policy loosening set off a frenzy on liquidity-sensitive small-caps, and a lull in the release of economic data has investors placing event-driven thematic investments in stocks linked to artificial intelligence (AI) and humanoid robots, according to Fu Jingtao, a strategist at Shenwan Hongyuan Group in Shanghai.

People practice tai chi in front of buildings in Pudong’s Lujiazui Financial District in Shanghai on February 19, 2024. Photo: Bloomberg

“Thematic trades have been pretty active, and that is fuelling the breeding ground for small-caps,” he said. “Given the wealth effect from the sector, the moment on small-caps has yet to run its course.”

China’s major commercial banks made the biggest cut on record to a key lending rate tied to mortgage rates last month. Meanwhile, official data on retail sales, industrial production and investment in January and February is not due for another two weeks; the nation’s statistics bureau does not publish separate data in the first two months of the year because of seasonal distortion by the Lunar New Year holiday.