Chinese stock investors emptied trading accounts at the fastest pace in 16 months last week, three days before the benchmark Shanghai Composite Index rallied the most in three months.
The number of Chinese stock accounts containing funds dropped by 205,000 to 55.6 million, the largest decline since the week ended July 8, 2011, according to regulatory data compiled by Bloomberg. The number of funded accounts slid to the lowest level since the week through Nov. 26, 2010, after reaching a high of 57.28 million in June 2011. About 112 million accounts are empty or frozen, the data show.
Investors may have reached the point of “capitulation,” a buy signal for contrarians, Oversea-Chinese Banking Corp.’s Vasu Menon said. The Shanghai Composite will rally 48 percent within nine months after its decline below 1,960 signaled selling has peaked, according to Tom DeMark, the creator of indicators that aim to show turning points in securities. The gauge closed 2.9 percent higher at 2,031.91 today, the most since Sept. 7.
“The best time to buy in certain markets is when there’s a very high level of skepticism,” Menon, who’s vice president of wealth management at Oversea-Chinese Banking, said from Singapore by phone today. “People are very skeptical about the market because it has underperformed for such a long period of time and people have become despondent.”
The Shanghai Composite closed below 2,000 for the first time since 2009 on Nov. 27 amid concern a seven-quarter economic slowdown may drag on earnings and a possible wave of new share sales would draw funds from existing equities. The index fell to 1,959.77 on Dec. 3, when the gauge traded at 10.8 times reported earnings, the cheapest on record.
Even after today’s gains, the index is down 7.6 percent for the year, heading for a third straight year of losses and the biggest decline among the world’s 10 largest stock markets. The advance is also the sixth time this year the Shanghai Composite has climbed more than 2.5 percent on a daily basis. The MSCI All-Country World Index has climbed 11 percent in 2012.
The number of stock-trading accounts that made transactions in yuan-denominated A shares last week increased to 6.1 million from 5.6 million the week before, which was the lowest since at least January 2008, excluding weeks that had holidays. The value of shares traded on the Shanghai exchange rose to 43.5 billion yuan ($6.99 billion) yesterday after falling to 33.1 billion yuan on Nov. 26, the least in four years.
The benchmark index for Chinese equities will advance to 2,900 after its decline produced a buy signal on the Sequential and Combo charts, designed to identify market tops and bottoms, said DeMark, who has spent more than 40 years developing market-timing indicators.
“Everyone is negative on SHCOMP index, absolutely everyone,” DeMark wrote in an e-mail, referring to the Chinese benchmark gauge’s ticker symbol. “And now is the perfect environment to make a low and be positive as the last seller, figuratively speaking, has sold.”
Chinese companies listed on the mainland traded at the biggest discount to their Hong Kong-listed counterparts last week since January 2011, according to an index from Hang Seng Bank Ltd., signaling global investors were more positive than locals toward the nation’s shares.
The Hang Seng China Enterprises Index of Chinese companies listed in Hong Kong climbed 18 percent since Sept. 5 through last week. Yuan-denominated shares are restricted to domestic investors and a limited number of foreign institutions, while their Hong Kong counterparts are open to overseas investors. The Hang Seng China index rose 2.6 percent today.
A Bloomberg investor poll showed confidence in China’s economy is at the highest in more than a year amid optimism the new leadership headed by Xi Jinping will be better for the financial climate. Respondents who see the Chinese economy improving or remaining stable surged to 72 percent last week, from 38 percent in September, in the quarterly global poll of investors, analysts and traders who are Bloomberg subscribers.
Today’s stock rally came after the ruling party held its first meeting headed by new leader Xi Jinping and the government allowed insurers to invest more in banks. Trading volumes were 135 percent higher than the 30-day average at the close.
“China’s domestic A-share market is one of the worst-performing equity markets in the world,” Tao Wang, chief China economist at UBS AG in Hong Kong, wrote in a note dated yesterday. “In the coming quarters, we do expect corporate earnings to recover, along with the economy, as destocking ends and output prices recover,” while the government will continue to push for reforms of initial public offerings, he wrote.
The economy expanded at the slowest pace since 2009 last quarter. More than 800 companies have applied to sell shares on the local exchange, according to a Credit Suisse Group AG report dated Nov. 29.