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Beijing's Market Rescue Leaves China Stocks Stuck in the Doldrums

Six weeks after the Chinese stock market hit a floor following a sustained selloff, Beijing can claim credit for halting the decline--but not much else.
The Chinese government, which some analysts estimate has spent hundreds of billions of yuan buying stocks to stop the crash, is now left with a market in the doldrums. Shares are languishing near their lows, trading volume is down by about 70% from a peak in June, and volatility has fallen by more than half since July's record. Valuations in some parts of the market remain among the most expensive anywhere.
"Low volume, low volatility and a tight trading range" are hallmarks of a market getting stuck, said Hao Hong, managing director at Bank of Communications Co.
If history is a guide, the market could be stuck for some time. Shanghai's largest selloff on record, which lasted more than four months during the global financial crisis, knocked 50% off the market's value. After the benchmark rallied in 2009, it languished for years thereafter.
In the heat of this summer's selloff, Beijing promised that brokerages would buy shares as long as the Shanghai Composite Index remained under the 4500 level. But authorities appear to have given up. After plunging as much as 41% from June to its low point on Aug. 26 , the benchmark settled into a tight trading range for more than a month.
The Shanghai index rose 4% in the two trading days the past week, after the market reopened on Thursday following a weeklong holiday. It closed up 1.3% on Friday at 3183, still 41% away from the 4500 level.
The weeks of late-day stock surges--indications of intervention by state-backed funds--have been absent recently. Shares of resource-investment company Guangdong Meiyan Jixiang Hydropower surged as much as 153% after disclosing in early August that government agency China Securities Finance Corp. had become its largest shareholder. They have since plummeted 38%.
By late September, trading volume for China's domestic stock market thinned to below 30 billion shares in a single session. That compares with a record of more than 100 billion shares in early June. The average daily volume last month was at its lowest since February.
Volatility has fallen by more than half since a record in July. During the selloff, the Shanghai Composite swung as much as 10% in a single session. In the past 10 trading days, the range has narrowed to an average of less than 2%.
One reason for the relative quiet is that regulators have clamped down on the official and unofficial channels that funded investors' stock-buying. Debt provided by mostly local brokerages has dropped below one trillion yuan ( $157 billion ) for the first time since last year, having hit a record 2.27 trillion yuan in June.
At 2.2% of total mainland market capitalization, the level of such margin lending in China is comparable to that in the U.S., according to research by Goldman Sachs Group Inc. Leveraged bets now account for less than 5% of the mainland market's turnover, compared with more than 19% in March, according to database provider Wind Information Co.
China's stock-futures market has suffered an even bigger reversal. Trading volumes plunged on Sept. 7 , when a ban on individual investors trading more than 10 contracts a day took effect. The main CSI 300 stock futures index became the most actively traded of its kind globally last December. Now, daily volumes have been lower than when the product first traded in April 2010 .
One factor that hasn't changed: Chinese stocks' extreme valuations.
The ChiNext Price Index, a gauge of startup shares, trades at an average 68 times price-to-earnings, compared with more than 100 times before the selloff. Shanghai's average of 13 times compares with seven times for Chinese firms trading in Hong Kong .
"Valuations are cheap on an aggregate market level" in Shanghai , said Caroline Maurer , who manages greater Chinese equities for BNP Paribas Investment Management . But that is because financial companies, a bellwether for the Chinese economy, comprise a disproportionate share of the index, she added. Median valuations for Shanghai are still at around 39 times, skewed by technology stocks.
The selloff has made investors wary. BNP Paribas cut its exposure to the domestic market during the selloff to as little as 4% of its greater China equities fund from as much as 15%.
Beijing's aggressive moves to curb activities it deems "malicious" or speculative also have discouraged buying.
To be sure, local investors have returned to the market after previous bubbles have burst. The Shanghai benchmark has gone through more than 50 bull and bear markets in its short 25-year history.
Still, projections by local brokerages that the Shanghai Composite will trade in the 3000 to 3500 range are overly optimistic, said Bank of Communications' Mr . Hong. "Domestic brokers are still quite reticent to speak out and tend to be a bit more bullish," he said.
For the time being, the Chinese appear to be finding other assets far more attractive. Yields on municipal and short-term corporate bonds have fallen, signaling high demand.
Wealth-management products, many of them invested in bonds, can return more than 4% annually, and China's property market is showing signs of recovery. China Vanke Co. , one of the nation's largest developers, was recently able to sell five-year bonds at 3.5% yields, comparable to returns for long-term Chinese government bonds.
Write to Chao Deng at [e-mail]
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(END) Dow Jones Newswires
10-11-15 0200ET
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