China has lost its title as the world’s most liquid stock market as trading halts and regulatory efforts to curb bearish transactions drive away investors.
Daily turnover on mainland exchanges has averaged the equivalent of US$202 billion over the past 30 days, down from US$288 billion at the start of July. After exceeding turnover on U.S. bourses for about a month through July 8, the value of shares traded in China is now US$72 billion lower than in America. Volume in Shanghai on Tuesday was 36 per cent below the 30-day average.
The unprecedented boom in Chinese stock trading during the first half of 2015 has fizzled as the Shanghai Composite Index sank 27 per cent from this year’s high and mainland exchanges allowed hundreds of companies to halt their shares. The drop in volumes deepened this week as authorities curbed short sales, investigated algorithmic traders and warned investors against placing large sell orders.
“What happened recently will definitely leave a bad taste in investors’ mouths,” said Tang Yayun, a Shanghai-based analyst at Northeast Securities Co. “There has been too much regulatory intervention in this market and some institutional investors may be unwilling to enter the market for the long term.”
While proponents of the intervention say it’s necessary to restore confidence after an almost US$4 trillion selloff in mainland shares, critics have argued that China is backtracking on its pledge to give markets more sway in the world’s second-largest economy. International investors have sold almost US$8 billion of Shanghai shares through the city’s exchange link in the past four weeks.
Regulators are also probing “malicious” short selling and have examined the futures trading accounts of foreign investors. They’ve banned stake disposals by major shareholders, suspended initial public offerings and compelled state-run institutions to support the market with equity purchases. About 520 companies are still halted on mainland exchanges, versus more than 1,400 in early July.
In the latest curbs announced overnight, China’s two main exchanges introduced measures that restrict short sellers’ ability to sell and buy back shares in a single day, a practice the Shenzhen bourse said may “increase abnormal fluctuations in stock prices and affect market stability.” Citic Securities Co., China’s largest brokerage, and several of its peers said they suspended short selling after the revised rules.
In a short sale, traders sell borrowed stock, anticipating the price will drop so they can profit by buying back the shares at a lower price. China already bans investors from purchasing and then selling the same stock in a single day.
The decline in trading volumes is likely to continue, putting pressure on earnings at brokerages, according to Thomas Ho, an analyst at Daiwa Capital Markets Hong Kong Ltd. Even after the recent slump, 30-day average daily turnover on mainland bourses is double its level in March, according to data compiled by Bloomberg.
“We are entering a period of low volume in the next three to six months at least,” Ho said. That will have “implications on valuation for some brokerages, which are highly valued given a change in market conditions.”
Citic Securities dropped 1 per cent in Hong Kong trading on Tuesday, while GF Securities Co. retreated 1.9 per cent.
The surge in volumes was unsustainable and a level of 500 billion yuan (US$80.5 billion) to 600 billion yuan a day would make more sense for the Chinese market, according to Richard Xu, an analyst at Morgan Stanley.
“The market probably needs to rationalize in terms of the trading volume as well as leverage,” Xu said in an interview in Hong Kong. “We are seeing some positive developments in my perspective — the volume has finally started shrinking.”
Apart from regulatory curbs, volumes are also declining as leveraged traders reduce their positions and new investors enter the market at a slower pace. Margin debt in China has dropped about 41 per cent from its June high, while the weekly number of new investors has shrunk by 76 per cent from its May peak.
China’s economic slowdown has also weighed on sentiment, according to Ken Chen, an analyst at KGI Securities in Shanghai. A private factory gauge released on Monday fell to a two-year low in July, while an official index on Saturday slipped to a five-month low.
“Investors are still in a panic after the stock rout and they are not willing to pile into the market to buy at this stage,” said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “It will take some time for the market to recover.”
— With assistance from Cindy Wang in Taipei and Alfred Liu in Hong Kong.