- Exchanges intensify scrutiny of unusual market movements
- High-pressure policies pushed investors to sideline: Jingxi
China’s regulators are intensifying scrutiny of unusual movements in stocks as they seek to damp speculation in the nation’s financial markets.
Exchanges in Shanghai and Shenzhen have opened 774 investigations into wild price swings since the start of July and halted 38 investor accounts, according to the two bourses’ official micro-blogs. They’re also being more public about their campaign, publishing case studies of “abnormal trading” and challenging companies for extreme price movements. Liu Shiyu, who was appointed chairman of the China Securities Regulatory Commission in February, has emphasized the need for a tough stance on market excesses.
Investor concern that their trades could be swept up in the crackdown is curtailing activity in a market struggling to recover from last summer’s $5 trillion rout. While the attempts to curb speculation may improve the attractiveness of Chinese equities to global money managers, regulators risk alienating retail investors who account for about 80 percent of volume and are accustomed to quick profits or losses. The moves come amid signs China’s policy makers are also looking to cool gains in the bond and real estate markets.
“Lots of active traders are on the sidelines now because of the exchanges’ high-pressure policies,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co., which oversees about $300 million. “Regulators want to crack down on the speculative atmosphere. But there is a bunch of shares in China supported by speculators without which stocks have no momentum.”
The crackdown has muted stock swings, with the number of shares that jumped by the 10 percent daily limit dropping by a third over the past month from the previous 60 days, according to data compiled by Bloomberg. The Shanghai Composite Index has advanced 0.7 percent since July 26, compared with an increase of 8 percent in the preceding two months. The gauge was little changed on Monday, while 10-day volatility on the measure fell to the least since July 2014.
The increased scrutiny on stocks comes as Chinese authorities step up efforts to cool markets. The nation’s leaders in July pledged to curb asset bubbles, while the central bank last week spurred speculation it was trying to cut down on the use of excessive leverage in the bond market after the 10-year yield fell to a decade low on Aug. 15. The government has also imposed limits on lending by peer-to-peer platforms to individuals and companies in an effort to limit risks in the shadow-banking sector.
The argument for more focused regulatory efforts was bolstered recently by the case of Dandong Xintai Electric Co., the first company to be ordered to delist from the ChiNext board of smaller companies. Despite the July 8 announcement and repeated warnings from the Shenzhen exchange that the delisting is irreversible, traders bought a record number of Xintai shares on July 27 and pushed the stock price up by the 10 percent daily limit.
The bourse reacted quickly, sending written statements to member brokerages that had made large purchase of Xintai shares and asking them to take targeted measures. Securities firms including Zhongtai Securities Co. responded by requiring investors to come to branches and sign risk documents before buying into the stock, according to a report in the Securities Daily. Trading in Xintai shares has now been halted.
“Chinese investors come to this market to do something like gambling,” said Jingxi Investment’s Wang. “They’re here to make a fast buck, and not to buy something that has fixed returns.”
The Shanghai bourse has strengthened rules as well, saying in a micro-blog post that it is extending its supervision to brokerage reports that have the potential to move share prices, while company executives and intermediary agencies that fail to make timely disclosures will be subject to more severe punishments.
The exchange also revealed seven examples of how manipulators use “spoofing,” a practice where orders are placed to create the illusion of demand but canceled before they can be executed. This allows them to move markets by bidding for shares at prices significantly higher than or below prevalent rates.
Some brokerages including Citic Securities Co. and Industrial Securities Co. say the crackdown will squeeze out small-cap bubbles and guide funds into low-valuation, bigger companies.
“The pressure of the recent intensive supervision will start to shift the market style to focus on value stocks with low valuations and stable earnings,” Industrial Securities analysts led by Wang Delun wrote in a report.
Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai, said the crackdown will choke market moves. China has a strong atmosphere of speculative trading and the market relies on the wealth effect it creates to attract capital, he said.
— With assistance by Amy Li, and Shidong Zhang