Two summers after a major Chinese stock market crash, Monday's stock tumble points to how much steadier the mainland markets have become.
Nearly 500 stocks on the small-cap ChiNext index plunged before hitting the 10 percent lower limit, according to Reuters. The technology-heavy index dropped 5.1 percent to close at its lowest since Jan. 16, 2015, according to FactSet. Some news outlets deemed it a "Black Monday" for Chinese stocks.
However, broader indexes containing stocks of bigger companies fared relatively better. The Shanghai composite fell 1.4 percent, marking its worst day since Dec. 12, while the CSI 300 fell 1.1 percent in its worst day since June 14. Hong Kong's Hang Seng index closed slightly higher.
It was enough to remind people how much markets have changed since the summer of 2015, when the Shanghai and Shenzhen stock indexes crashed more than 40 percent, resulting in hundreds of stock trading suspensions. Chinese regulators also heavily intervened in the stock market by preventing major shareholders from selling and reportedly creating a group of stock buyers to support the market.
In the year-and-a-half since, China has replaced its stock market regulator and emphasized financial market stability. Stock index company MSCI also gave the mainland stocks a vote of confidence in June when it announced some of the largest mainland stocks would join its benchmark emerging markets index. Disappointment from MSCI's earlier rejection of those stocks in June 2015 also contributed to the market selloff that summer.
"This is nothing like in 2015 anymore. Back then, leadership was legitimately panicked," said Chris Beddor, associate, Asia, for consulting firm Eurasia Group.
"Officials are not as concerned about market swings as they were given there's less pronounced government intervention in the market," he said. Beddor noted that voluntary trading suspensions and stock market intervention by the so-called national team exist on a much smaller level than two years ago.
Chinese stocks (Jan. 2015 to July 2017, indexed to June
12, 2015, market peak)
The Chinese small-cap stocks' sharp decline Monday followed weeks of underperformance since April, when Chinese authorities began to force banks to rein in off-balance-sheet lending, Beddor pointed out.
The financial work conference is held once every five years, and this weekend's meeting comes ahead of a key National Communist Party Congress scheduled for the fall when Xi is expected to consolidate his power.
The ChiNext's drop to 2015 lows "really is an indication of how seriously investors view the current financial clampdown and how vulnerable many of the firms listed on the ChiNext are to a deleveraging campaign," he said. "Small-cap ChiNext stocks usually amplify broader movements in the market because they're so highly leveraged."
The ChiNext is down 15.6 percent year to date. In contrast, the Shanghai composite is up a muted 2.4 percent, amid increased regulatory scrutiny on firms' financial practices.
The Chinese tech stocks also fell after Leshi Internet Information & Technology said Friday it expects to post a net loss of between 636.7 million yuan ($94 million) and 641.7 million yuan for the first half of the calendar year, compared to a net profit of 284.4 million yuan a year earlier.
"Maybe some concern, smaller-cap names might not be able to meet high expectations," said Brendan Ahern, chief investment officer of KraneShares, which sells exchange-traded funds for Chinese stocks.
Analysts also noted worries that regulators would allow more initial public offerings, potentially taking away buying demand from the small-cap tech stocks.
Meanwhile, China's 10-year government bond yield held higher, near 3.56 percent. On Monday, the world's second-largest economy reported second-quarter GDP growth of 6.9 percent, slightly better than expectations.
— Reuters contributed to this report.
Hong Kong Standard (press release)
Hong Kong Exchanges and Clearing (0388) plans to launch a consultation this year on reforming listing regulations to face "downward price manipulation," which involves practices such as consolidating shares and conducting rights issue, in light of the ...
The 16 Deutsche Bank X-trackers ETFs ceased trading on Wednesday, according to a Hong Kong exchange filing. Most of the funds have assets of less than $40 million.
The closures highlight the challenge of operating ETFs in markets where investors have yet to be persuaded by their allure. While the $4.5 trillion global ETF market is setting new asset records almost every month, Hong Kong is bucking the trend -- investors have pulled money from ETFs this year even as equity prices in the former British colony climb to a two-year high.
“Deutsche Bank was one of the early adopters of ETFs in Europe, but Hong Kong is at a slower stage of development and client needs are different here,” said Melody He, head of ETF and index solutions at CSOP Asset Management Ltd. “Distributing ETFs is harder in Asia and they may not have seen enough demand.”
Money flowing into U.S. equity ETFs increased by 7.5 percent or $177.6 billion this year, according to data compiled by Bloomberg. In Hong Kong, assets dwindled by 6.6 percent, or $2.3 billion, the data show.
Hong Kong’s ETF market is hampered by factors including use of a commission-based fee model where banks or other distributors receive higher fees for selling active funds rather than ETFs, said Chris Pigott, head of Hong Kong ETF services at Brown Brothers Harriman & Co.
The ETF closures include 10 funds on China’s CSI300 Index covering sectors including banks, health care, financials and energy. BlackRock has been shutting down funds in Hong Kong, most recently earlier this year. Six of those had also tracked sectors on the CSI300 index. BlackRock, the world’s largest money manager, and Deutsche Bank still operate ETFs in Hong Kong.
“Most ETFs in Hong Kong are Greater China-based and a handful of those are already successful,” said Pigott. “It’s tough to differentiate so I could see why they may want to clean up some of those products.”
Karene Dufour, a spokeswoman for Deutsche Bank in Hong Kong, declined to comment.
Hong Kong’s Securities and Futures Commission said Thursday that it will “no longer act behind the scenes” and will use its existing legal powers to regulate listed companies more directly and proactively, a move which marks a major change in how the city’s stock markets are supervised.
“We are no longer acting behind the scenes, but instead we are increasing our direct presence when dealing with the more crucial listing matters that fall within the scope of the SMLR (Stock Market Listing Rules) or the SFO (Securities and Futures Ordinance),” said Ashley Alder, SFC chief executive officer, in a public speech on Thursday.
It implies a change in the city’s long standing listing regulation convention, whereby the SFC has taken a back-seat in gate-keeping and deferred to Hong Kong Exchanges and Clearing (HKEX) as front-line regulator and single point of contact in all listing matters.
The new approach will be “front-loaded, transparent, and direct”, Alder said.
“This means that we are more routinely triggering our formal statutory gate-keeping and intervention powers so that we can interact directly with the market at an early stage.”
Under this approach, the SFC will have early, direct communication with the company involved, instead of routing its concerns via the exchange.
Companies that are affected can also challenge the SFC to its face and pursue statutory rights of appeal over any final decisions that the regulator makes.
“We believe this more direct presence enables the SFO to be deployed far more effectively to drive market quality and market development, while at the same time ensuring that our decisions are made in a transparent, efficient, fair and accountable manner,” Alder said
He said the SFC has discussed the changes with the HKEX and will publish a new, regular bulletin which will summarise what they have done and why they did it.
The changes come after the SFC and HKEX issued a joint public consultation last summer on how to regulate listed companies more efficiently, amid growing concerns of extreme price volatility and suspected stock manipulation of some firms trading on the exchange.
When the consultation ended in November, around 8,000 submissions had been received.
Alder said the SFC will function as the statutory market regulator, as distinct from the exchange’s role in administering its own non-statutory listing rules.
The exchange operator will still remain the single point of contact with the market on its own listing rules disclosure, but not in relation to concerns that the SFC raises under the SMLR.
The exchange will decide whether the listing is “suitable” by its rules, while the SFC’s SMLR are concerned with the more serious disclosure and public interest issues, Alder said.
“It would theoretically be open to the Exchange to reject an IPO as being unsuitable even if the SFC has not identified grounds for objection under the SMLR,” he said.
If the SFC is likely to raise an objection to a listing, it will issue a formal “letter of mindedness” and set out concerns in detail, while giving the company an opportunity to challenge these before any final decision is made.
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