China Small-Cap Stocks Extend January Slump on Liquidity Squeeze

  • ChiNext declines on higher funding costs, IPO flood concerns
  • Gauge trades at 38 times reported earnings, double CSI 300’s

A gauge of China’s small-cap shares slid, extending a monthly retreat, as a liquidity crunch pressured the most speculative part of the nation’s equities.

The ChiNext index fell 1.4 percent in Shenzhen, taking its January loss to 5.1 percent. The measure of mostly technology shares has underperformed the large-cap CSI 300 Index this year as funding costs rose and speculation mounted the regulator will accelerate the pace of initial public offerings, already at a 19-year high -- thereby diverting liquidity from existing shares.

Volatility among small-cap shares increased this month, with a 30-day gauge of price swings on the ChiNext climbing to the highest since August. While technology stocks are lagging behind old economy equities such as steel producers and industrial companies, they remain pricier -- the ChiNext trades at 38 times reported earnings, more than double the level of the CSI 300.

"Tighter liquidity will make ChiNext’s rich valuation an even more acute issue," said Hao Hong, an analyst at Bocom International Holdings Co. based in Hong Kong. "Any bounce in the ChiNext will likely remain technical in nature within a longer-term trend that has now reversed."

Technology shares were at the epicenter of 2015’s boom-to-bust amid surging demand from novice investors, with valuations on the ChiNext index reaching 130 times earnings at the peak. The gauge is still down more than 50 percent from its June 2015 high. The CSI 300 was little changed today, while the index has gained 1.6 percent this year.

The Hang Seng Index advanced 0.2 percent, taking its rally this year to 4.3 percent. The Hang Seng China Enterprises Index added 0.3 percent.

Beijing Originwater Technology Co. tumbled 9 percent in Shenzhen, its biggest loss in 11 months. Gosuncn Technology Group Co. sank 8.4 percent.

China’s shares have been under pressure since the start of December, along with the nation’s bonds, as monetary conditions tightened. Traders were rattled last week when the ChiNext gauge plunged as much as 6.1 percent in a day. In the money markets, China’s benchmark seven-day repurchase rate surged by the most in two years on Jan. 18.

  • Mainland investors bought a net 3.26 billion yuan ($475 million) of Hong Kong shares through an exchange link with Shanghai on Tuesday, the most this year, according to data compiled by Bloomberg
  • Nine Dragons Paper Holdings Ltd. jumped 11% in Hong Kong after the company said it expects six-month net income to rise at least 45 percent from a year earlier.
  • China Coal Energy Co. rose 6.5% in Hong Kong after announcing Friday that 2016 full-year profit may increase to 1.8 billion yuan from 2.2 billion yuan
  • China Oilfield Services Ltd. gained 5% in Hong Kong after Mizuho Securities Co. and China International Capital Corp. raised their ratings of the stock
  • Yanzhou Coal Mining Co. rose 4.8% in Hong Kong after Yancoal Australia Ltd. was said to be nearing an agreement to buy a stake in Rio Tinto Group’s Hunter Valley operations for around A$3 billion ($2.3 billion)
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