China’s stock markets are calm, but its traders are restless

by Yifan Xie and Steven Russolillo

October 25, 2017 | 1:13 pm
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The placid trading that has swept global markets this year has reached an unlikely destination: China.

Once synonymous with large daily swings, Chinese stock markets are having one of their calmest stretches ever. The Shanghai Stock Exchange Composite Index, which tracks the fourth-biggest global stock market by market value, has moved more than 1% on 10 trading days this year. That’s down from 65 times for all of 2016 and 141 times in all of 2015.

The past 30 trading days, coinciding in part with the 19th National Congress of the Communist Party, have been the least volatile of any 30-day period since the Shanghai exchange reopened in the early 1990s, according to an analysis of FactSet data.

A number of factors help to explain the muted trading, ranging from record low stock volatility in the U.S. to a stable economic backdrop in China. Institutional investors, known for a longer-term focus, are taking on a greater share of trading in Chinese markets.

Perhaps most important, many investors and traders say Beijing has taken on a more muscular role in markets, following a spectacular market boom and bust in 2015. Securities regulators have called many brokerages and funds over the past year, urging them to say publicly they were bullish about stocks and to refrain from selling shares, market participants say. Some traders cite the price-supporting effect of the “national team” of state investment funds, which they say steps in to buy shares when prices fall.

The developments have left China’s armies of retail investors—nicknamed “jiu cai,” after the leaves of Chinese chives that quickly regenerate—increasingly disillusioned. While lower volatility can serve the government’s goal of projecting an image of stability, it can sharply reduce the opportunities for quick profits that many traders depend on.

“I’m out of the game,” said Gu Yuan, 34, an information-technology worker in Shanghai who sold almost 70% of a portfolio worth 600,000 yuan ($87,336) after the 2015 market slump and pared down some more this year. “It is more difficult to identify strong tech companies or convincing investment themes since the crash.”

Mr. Gu said he didn’t like to invest in China’s big state-owned companies, such as oil giant Petrochina or banking behemoth ICBC, because their returns were more modest. This year, however, those shares have helped lead the Shanghai market’s 9% rise.

The perception of increased state involvement in stock markets seems to conflict with efforts by China over many years to open its economy and markets to the rest of the world. Mr. Xi said in his congress-opening speech last week that markets would continue to play a “decisive” role in the allocation of resources.

Chinese markets are important for international investors. Index provider MSCI Inc. will next year add some mainland-listed Chinese stocks to its popular emerging markets index, meaning funds using the index as a benchmark will need to allocate money into China. Foreigners can already trade stocks in Shanghai and Shenzhen, China’s other major market, through a trading link with Hong Kong.

Institutional investors’ holdings rose to 16.3% of China’s stock market last year from 14.5% in 2015, the highest since 2009, according to SWS Research, a Shanghai-based brokerage firm.

The country still has 128 million individual investors, according to China Securities Depository and Clearing Corp, a clearing house. Individual investors directly owning stocks fell to 42% in February, the most recent available data, from 55% at the height of China’s bull market in 2015.

Mike Shiao, Invesco Ltd.’s chief investment officer for Asia excluding Japan, said investors in China are taking a more prudent approach to stock picking.

“You’re seeing people becoming more sensitive to fundamentals and valuations,” he said. “If there is no momentum to trigger the stock market, then there’s no reason for [speculators] to act.”

Beginning in late 2014, Chinese authorities made it easier for ordinary investors to borrow money to buy stocks, while the Communist Party-backed People’s Daily contended the market’s rise was part of China’s “grand development strategy.” Months later, after the market suddenly slumped by over 40%, the securities regulator clamped down on such so-called margin trading. It also imposed a six-month ban on share sales by major corporate shareholders and a temporary halt for initial public offerings.

Some restrictions remain: big shareholders are forbidden from making large block share sales. Although IPOs have resumed, long-discussed reforms to make them easier have been delayed. Other planned overhauls have been shelved, such as removing the ban on small investors buying and selling shares in the same company on the same day. Market rules still prevent stocks moving up or down by over 10% each day.

Since 2015, traders say Beijing has also used the “national team”—large state-backed companies including China Securities Finance Corp. and Central Huijin Asset Management—to help steady markets by buying shares when the market falls sharply and selling when it rises.

These state funds’ shareholdings hit a record high of 4.12 trillion yuan ($622 billion) in June, according to the most recent research by Sinolink Securities , or 7.2% of the total market cap of listed Chinese shares.

This year’s subdued volatility doesn’t mean China’s markets have truly modernized,  said Michael Pettis, a finance professor at Peking University. He said that the quality of financial information still needs to improve.

“Real value investing requires corporate transparency, high quality of data and predictable government behavior,” said Mr. Pettis. “In China, none of these is easily available yet.”

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by Yifan Xie and Steven Russolillo

October 25, 2017 | 1:13 pm
  |     |     |   Start Conversation

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