SHANGHAI, NETRALNEWS.COM — China’s renewed efforts to cleanse its stock markets of a reputation for casino-like speculation are stoking a near-term selloff as jittery investors react to the latest crackdown.
The Shanghai Composite Index, the country’s leading stocks benchmark, has this week seen its biggest weekly drop in four months, falling for four of the last six days to close at 3173.15 on Friday. Shares in Shenzhen, China’s other major stock market, have meanwhile slipped to around a three-month low.
The market slide intensified after officials last weekend slammed what they called short-term speculators. Liu Shiyu, the head of China’s securities regulatory agency, urged stock exchanges to “display their swords” and fight “without mercy” behavior that threatens market stability.
Late last week, the regulator said it would punish investors involved in “malicious manipulation,” particularly of newly listed companies’ shares. The stock fall has also come during a continuing fight against corruption in China’s financial system, which in the past year has led to the removal of top regulators and the toppled of some the country’s most prominent investors.
The timing of Beijing’s latest salvo against stock-market speculation might look strange. After a tumultuous 2015 and early 2016, when Chinese stocks first soared and then spectacularly crashed, the country’s markets have for several months been unusually calm. Despite this week’s drop, Chinese shares haven’t fallen by 1% or more on any day this year.
But with the governing Chinese Communist Party set for a major five-yearly leadership turnover later this year, stability has become the watchword for Beijing policy makers and regulators. China’s central bank has been tightening key interest rates, in part to tamp down sharp rises in other domestic markets such as bonds and commodities.
Some say a crackdown on market irregularities will increase the appeal of domestically listed Chinese stocks, known as A-shares, to foreign investors. Leading index provider MSCI Inc. is currently considering admitting Chinese shares to key products such as its Emerging Markets Index, a move that over time could see hundreds of billions of dollars flood into the market.
“It’s clear that the regulator is willing to sacrifice the market’s upward momentum in the short term in exchange for systematic reforms,” said Shen Meng, director of Shanghai-based investment firm Chanson & Co. “It’s hard to educate the child if you are too lenient.”
Yet Beijing’s heavy-handed rhetoric risks stoking the kind of market turbulence it is trying to avoid. On Monday, more than 100 listed Chinese stocks plunged by the 10% daily maximum allowed, the highest one-day number since December.
The regulator’s approach could also drive away retail investors, whose trading provides the bulk of market liquidity. Daily trading volume in Chinese stock markets was close to 500 billion yuan this week ($72.6 billion), well down from the 2.3 trillion yuan daily mark at the height of the bull market run in early 2015, according to Wind Information Co.
Some market participants say a bit of speculation is necessary to oil the market’s wheels. “Water which is too pure has no fish,” said Deng Wenyuan, an analyst at Soochow Securities , quoting a Chinese proverb.
Several retail investors have already been scared off trading. Mark Lu, an investor in Shanghai with 2 million yuan in his account, says he hasn’t traded for three months.
He says recent regulatory scrutiny of companies that have announced stock splits—whereby companies issue new shares to existing shareholders in proportion to their holdings—is the latest example of the regulator’s unpredictability.
“It’s much harder to pick winning stocks,” Mr. Lu said. “You never know what new rules will come out next.” One recent focus for regulators has been to cool speculation in companies that investors expect could benefit from the Chinese government’s plans, announced earlier this month, to build a new megacity called Xiongan, a two-hour drive away from Beijing.
Trading in 14 companies linked to the project was suspended last week due to what the regulator called “abnormal volatility”. “There is no logic to such regulatory interventions, but there is nothing I can do,” said Gong Xiaotao, manager of the Yixinweiye Fund, a Shanghai-based private-equity firm which manages around $15 million.
Some argue that driving out short-term traders could help make Chinese markets more professional, by allowing large institutional investors such as pension funds, which typically invest over the longer term, to play a more prominent role.
“The shift is clearly under way, where old speculative money will be forced out and new players will come in,” said Heather Hsu, manager of Shanghai Beacon Bridge Investment, a small private-equity fund she set up last year that has around $1.4 million of assets.