Chinese Stocks Are Unnerving Investors Again as Losses Steepen

  • Shanghai Composite is falling at fastest pace in four months
  • Volatility is climbing after dropping to multi-year lows

Investors stand at trading terminals at a securities exchange house in Shanghai.

Photographer: Qilai Shen/Bloomberg

The stability in China’s stock market this year is showing signs of cracking.

The Shanghai Composite Index has lost 3.2 percent in a four-day slump, the steepest such decline since mid-December. The psychologically key 3,200 level has been breached for the first time in two months, the gauge has dropped below its 100-day moving average, while a measure of volatility is climbing.

Finding explanations for the loss of confidence in a $7 trillion market dominated by individual investors isn’t straightforward. Traders point to the securities regulator’s tougher line on irregularities in the market as the most likely cause, along with tensions on the Korean peninsula and fears that a strengthening economy will prompt more tightening by the central bank. The ChiNext gauge of small-cap shares, historically a barometer for the availability of speculative liquidity, is approaching its lowest level since September 2015.

"The stock regulator has been proactive recently in snubbing speculative trades," said Yin Ming, vice president of Baptized Capital in Shanghai. "We might see more such scrutiny for over the year," he said, adding that state-backed funds may step in to shore up the market if losses turn excessive.

To be sure, a 30-day index of price swings remains historically low after the authorities clamped down on speculation in the wake of 2015’s $5 trillion stock-market collapse. The Shanghai index, which traded at 15-month high just over a week ago, hasn’t closed down more than 1 percent on a day since Dec. 12. The index pared losses in late trading to keep that record on Wednesday. Yet the steady losses and increase in volatility are making some traders jumpy.

Hong Kong’s Hang Seng Index slumped 1.4 percent on Tuesday as the city’s markets reopened after the Easter holidays, its steepest loss in four months, and dropped a further 0.4 percent on Wednesday. The absence of panic in mainland Chinese equities was a contributing factor behind the gauge’s 9.6 percent jump in the first quarter -- one of the biggest among global indexes.

Show Swords

Liu Shiyu, who took over the helm of the China Securities Regulatory Commission last February after the equity market fell apart, has been quick to put down any signs of speculative activity as he sought to restore order. Last year he labeled as "robbers" insurers conducting leveraged buybacks. The insurance regulator took a series to steps to curb short-term speculation, while China’s anti-graft agency announced this month it was probing the top insurance official for disciplinary violations.

A surge by stocks seen benefiting from a new economic zone south of Beijing in the past couple of weeks spurred the Shanghai exchange on Friday to warn investors that quick declines usually follow such speculative rallies. Beijing Capital Co., which almost doubled in seven trading sessions, tumbled by the daily 10 percent limit on Tuesday after saying it doesn’t see any immediate boost from the Xiongan plan.

On the weekend, Liu called in a speech for China’s bourses to "show swords" and crack down on behavior that disrupts the market order "without mercy."

— With assistance by Richard Frost, Amanda Wang, and Tian Chen

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