China stocks go on wild roller-coaster ride before regulator shoots down rumour on short-selling

China’s stock markets went on a wild roller-coaster ride Tuesday, fuelled in part by a rumour – later shot down by the securities regulator – that the key task for the regulator in 2019 is to promote the mechanism for short-selling.

The Shanghai Composite was down by as much as 1.4 per cent at one point, but closed down just 0.1 per cent.

Morning trading started off rocky in the mainland over news that the US charged Huawei

Technologies with bank fraud and conspiracyto steal trade secrets. That weighed on sentiment about the prospects for a positive outcome from the US-China trade talks starting later this week.

Meanwhile, small cap growth stocks took a hit when a number of them unexpectedly revised earnings expectations from gains to losses.

Then some local media said Yi Huiman, the newly appointed head of the China Securities Regulatory Commission, said at a press conference that he will set the regulator’s main task in 2019 as further advancing of a short-selling mechanism in the country.

“We have noticed the news. Chairman Yi has not held any press conference recently. It’s purely rumours,” said the CSRC in a statement posted on the site around noon. It asked the news media not to spread rumours.

Meanwhile, Hong Kong’s Hang Seng closed down 0.2 per cent, to 27,531.68. The Hang Seng China Enterprises Index dipped 0.1 per cent to 10,867.42.

Bian Fengwei, a Shanghai-based analyst for Guotai Junan Securities, said he expects eventually China will allow short selling.

“I think it’s necessary to allow short selling against some companies in the longer term, ” he said.

On the tech-heavy Shenzhen exchange, the Component Index and the Composite Index closed down 0.5 per cent and 1.1 per cent respectively to 7,551.30 and 1,300.34, after the sour earnings adjustments from a barrage of small-caps dimmed the outlook for the coming earnings season.

The start-up board index ChiNext dropped 1.3 per cent to 1,243.59. The CSI 300 Index of big companies on the mainland’s exchanges fared better, rising 0.3 per cent to 3,193.97.

Traders were caught off guard and rushed to cut their exposure to small-caps as companies from Shenzhen Clou Electronics to Zhejiang Dun’an Artificial Environment posted overnight exchange filings saying they probably recorded significant losses for 2018, compared with earlier forecasts for profitability.

Chinese publicly traded companies will start to release 2018 earnings report after the Chinese lunar new year that falls on February 5.

“The risk is increasing that lots of small-caps will miss their earnings estimates and that’s why there’s a rushed sell-off,” said Wang Zheng, chief investment officer at Jingxi Investment Management in Shanghai. “Taking account into the lower-than-expected factor, the valuation of small-caps still looks a bit stretched.”

In Hong Kong, Sunny Optical Technology, which supplies smartphone camera modules to Huawei, fell 0.9 per cent to HK$75.85.

Chinese insurers were weak, after the banking and insurance regulator encouraged insurance firms to buy domestic stocks and bonds of listed companies by using long-term capital, to “help support the stability and healthy development of the capital market”.

China Life Insurance lost 1.6 per cent to HK$19.26. New China Life Insurance also fell 1.6 per cent to HK$30.60.

In mainland China, Shenzhen Clou, a maker of electric automation equipment, tumbled by the 10 per cent daily limit to 4.25 yuan after saying it probably posted an annual loss of as much as 1.1 billion yuan (US$163.1 million) because of provisions on asset impairment and losses on asset disposal. It had forecast an annual profit of as much 137.6 million yuan in the third-quarter report in October.

Zhejiang Dun’an, a manufacturer of cooling equipment for air conditioners and nuclear power stations, slumped 9.9 per cent to 4.73 yuan after saying it probably suffered a loss of between 1.95 billion and 2.25 billion yuan. That compared with its earlier estimate of a profit ranging from 64.6 million yuan to 92.3 million yuan.

Tangel Publishing plunged 10 per cent to 3.80 yuan after the company said it expects a loss of as much as 1.1 billion yuan last year.