China A-Shares ETF Slumps as Regulator Urges Caution

The largest U.S. exchange-traded fund that tracks mainland stocks fell after China’s securities regulator urged caution as a rally in Shanghai shares pushed their premium over Hong Kong companies to a 30-month high.

The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF fell 0.9 percent on Dec. 5, reducing its gain for the past month to 30 percent. The drop on the last trading day of the week contrasted with a 1.1 percent jump in the iShares China Large-Cap ETF, which tracks Hong Kong-listed companies, and a 0.9 percent advance in the Bloomberg index of the most-traded Chinese stocks on U.S. exchanges.

Investors must consider risks while putting money into stocks, China’s securities regulator warned on Dec. 5 after a buying spree fueled a 21 percent rally in the Shanghai Composite Index over the past month, the most among 93 global indexes tracked by Bloomberg. Companies with equity listings in both cities are about 16 percent more expensive on the mainland than in Hong Kong after China opened up its market to foreigners with the Shanghai bourse link and the central bank unexpectedly cut interest rates for the first time since 2012 in November.

“They are trying to warn people from getting too far into buying into sentiment,” Paul Christopher, the St. Louis-based chief international investment strategist at Wells Fargo Advisors LLC, which oversees $1.4 trillion, said by phone on Dec. 5. “It is difficult to know how long the market enthusiasm will last, but when it is disconnected from the fundamentals, there has to be a correction back to the reality.”

Illegal Activities

Illegal activities including stock manipulation have recently been “raising their head” and investors should invest rationally, Deng Ge, a spokesman for the China Securities Regulatory Commission, said in a statement on the agency’s website published after the close of regular trading on local exchanges last week. A stable market is important for the economy, Ge said.

The Shanghai Composite Index advanced 1.3 percent to 2,937.65 on Dec. 5, after posting the biggest price swings in four years. The measure gained as much as 2.7 percent and fell 3 percent within the first 90 minutes of trade. For the week, the index jumped 9.5 percent, the most since February 2009. Daily trading turnover climbed above 1 trillion yuan ($163 billion) for the first time.

Mainland stocks trade at the widest valuation gap since June 2012 over their Hong Kong counterparts, according to the Hang Seng China AH Premium Index. The Deutsche X-trackers Harvest ETF fell to $34.49 and the iShares fund climbed to $41.98.

‘Similar Exposure’

“It is reasonable to expect that people may be looking to get similar exposure and not paying up for premium,” Stephen Tu, a senior analyst at Moody’s Investors Service, said by phone on Dec. 5. “Shorter term, if there is any overshooting and they are really looking at the valuation, you may see flows that may rotate exposure.”

China’s world-beating equity rally is drawing out skeptics who say the gains are amplified by borrowed money and don’t reflect the nation’s economic fundamentals.

The gains are “irrational,” Ken Peng, a strategist at Citigroup Inc.’s private bank in Hong Kong, said last week. The advance is another bubble driven by leveraged traders, said Andy Xie, a former World Bank economist who was one of the 50 most influential people in global finance, according to Bloomberg Markets magazine rankings last year.

Increasing Supervision

“We note that recently there has been stock price manipulation and illegal activities surfacing,” the CSRC’s Ge said. “We will increase market supervision, resolutely crack down and earnestly safeguard the normal market order.”

The Shanghai index has rebounded 39 percent this year on speculation the central bank will loosen monetary policy to support economic growth. It dropped 35 percent from the start of 2010 through the end of last year.

“Investors are trying to shy away from Brazil and Russia and they have been jumping on China where the reins on the economy have been loosened by the central bank and the stock market moved significantly,” Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in New York, said by phone last week.

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