Chinese stock exchanges have released rules that effectively banned short selling within the same day by traders in another bid to stabilize the beleaugered market.
The Shanghai Composite Index rose 3.69% on Tuesday to 3756.54 points after falling by a total of 5.5% on two consecutive trading days from July 31 to August 1.
The new rules on short selling were issued separately by the Shanghai Stock Exchange and the Shenzhen Stock Exchange Monday night.
On Tuesday, major Chinese brokerages Citic Securities and Huatai Securities said they would temporarily halt their short-selling services, followed later by smaller peer Great Wall Securities.
Chinese market watchers say the timely and effective measures gave investors some confidence that the market has stabilised after the massive 30% correction that hit its lowest point on June 12.
The market correction has also increased consciousness among regulators and investors on the importance of investor education for the long-term development of China’s stock market.
Joanne Goh, regional equity strategist, DBS Vickers say the big correction was a “wake-up” call for domestic investors on the market's volatility. Retail investors account for about 80% of the market and most of them “had insufficient understanding and alertness involving market risk," according to Goh.
Most risk-taking investor in Asia
In a recent survey by Manulife Asset Management on Asia’s five wealthiest markets (China, Japan, Hong Kong, Taiwan and Singapore), results indicate that Chinese investors take the most risk while Japanese investors are the most risk averse.
The diversity in the level of risk aversion is attributed to four main reasons. Different markets are in different stage of development, investor education on various financial instruments are varied, the social safety net provided by respective governments are different, and the availability of different asset classes vary, Ronald CC Chan, Manulife Asset Management’s chief investment officer, equities, Asia (ex-Japan) tells The Asset in an interview.
Chinese investors hold a larger proportion of relatively higher risk assets in their household portfolios (44% compared with 32% in Japan). In addition, despite almost a third of investors in China raising concerns about market volatility (29%), they still have the greatest appetite among the five markets for investing in more risky penny stocks (27% in comparison to only 12% in Japan).
“The recent stock market slide in China can be considered a cautionary tale for investors taking on too much risk,” Chan says. “Many commentators were speculating that Chinese equities were in bubble territory by mid-March 2015. However, investors went on to accumulate an additional one trillion renminbi in debt to finance short-term investments in richly valued stocks before the market peaked in mid-June and began to lose ground.”
But Chan expects the risk aversion of Chinese investors will increase and the deviation between their desire for yield and investment behaviour is likely to narrow.
3300-4500 index range
DBS’ Goh expects the Shanghai Composite Index to fluctuate between 3500-4300 points, while Manulife’s Chan gives similar prediction between 3300-4500 over the next few weeks or months.
“Any strong market movement on the downside, you will see some support from the government. The support basically provides time for the deleveraging process to come through,” Chan explains.
Chan believes as Chinese equity market evolves, more sophisticated investors will go into the market, such as institutional investors, government pension funds which have a much longer-term view than retail investors. Corporates are buying back their shares, some of which will go into the employee share option scheme as well. “Those will be long-term investors and positive for the market development,” Chan says.
Chan expects China market will continue to increase and hopefully stabilize in the third quarter or early fourth quarter when there might be some economic numbers from China. If the reform momentum is strong, people will take a second view on China.
Manulife Asset Management has done very little amid volatility in the China market. “We are looking at when to get back to the market and be more active as opposed to thinking about when to get out of the market,” Chan tells The Asset.
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