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Asia Markets
Uncertainty Amid Volatility in Chinese Stocks
From the Wall Street Journal of Fri, 26 Dec 2014 03:09:56 EST
As Chinese stocks cap their best year since the financial crisis, investors looking for clues of next year’s performance have churned up volatility.
As Chinese stocks cap their best year since the financial crisis, investors looking for clues of next year’s performance have churned up volatility. Agence France-Presse/Getty Images

As the best year for Chinese stocks since the financial crisis draws to a close, the market is highly volatile with investors looking for clues whether the bull-run will continue or whether equities could fall just as quickly as they rose.

Trading swings in Shanghai have become more severe in recent weeks, signaling investors’ tug between buying inspired by rate cuts, and a weakening outlook for the world’s second largest economy.

The benchmark Shanghai index has dropped a combined 5% on Tuesday and Wednesday, just weeks after its biggest daily drop in five years on Dec. 9. The stretch of volatility continued, as the market bounced back 6.2% on Thursday and Friday.

Chinese stocks still remain up 49% so far this year—a sharp turnaround for the so-called A-share market, which for years lacked appeal to domestic and international investors. For local investors, a buoyant property market sucked in cash that might otherwise have gone into stocks. Foreigners, meanwhile, held back amid concerns over a slowing economy and rising debt levels.

China’s surprise cut in interest rates last month turned already strong buying into a frenzy. More than 322,000 new stock accounts opened in the week ending December 19.

But the spate of steep dips suggest the index is struggling to push significantly above 3100 points, and reveal a market highly dependent on a small number of large financial stocks. Banks, brokerages and insurance companies are the culprits, since they account for 37% of the index and have swung wildly in recent weeks.

“I think it could be very volatile going forward,” said Richard Gao, portfolio manager at Matthews Asia, which managed assets worth $27.9 billion as of November 30. “At this point, we are quite cautious in terms of trading those hot areas in the A-share market.”

Shanghai has seen extraordinary bull runs before, as well as spectacular crashes. In 2005, the market rocketed nearly sixfold in less than three years, culminating in a sharp crash in 2007. But at that time, the Chinese economy was growing at rate that led many to believe that it was overheating.

This time, the run-up seems out of step with a slowing economy. Chinese growth remains subdued and an early measure of factory activity, one of the first indicators to come out since the rate cut, slumped to a seven-month low last week.

“The Chinese government is making sure that there is at least one opportunity to make money and that is the equity market,” said François Perrin, head of greater China equities at BNP Paribas Investment Partners, which has 508 billion euros (US$620 billion) of assets under management globally.

Still, some expect waning enthusiasm for property could spur interest in equities among the market’s primarily local investors. Goldman Sachs estimates 400 billion yuan (US$64.36 billion) will be diverted from real estate to the stock market in 2015.

But those gains could be limited if the property market starts to recover. Monthly declines in house prices are shrinking, with prices down 0.6% in November compared with a 0.8% fall in October.

Some worry that a pickup in home prices on the back of lower rates could limit the scope of further easing—a prospect many are anticipating.

“Property price deflation is actually narrowing. So if we continue to recover, it will put constraints on how much monetary easing we can do,” said Hao Hong, managing director of research at Bank of Communications International. “We do have a property bubble ahead, and you don’t want to ease aggressively to encourage an even bigger bubble.”

Rising participation of foreign investors could give the market a boost. International money managers recently gained unprecedented access to China’s domestic stock market via the Shanghai-Hong Kong Stock Connect program. Hitherto, foreigners needed a license to trade stocks in Shanghai.

But the uptake of the program has been tepid, and foreign holdings of A-shares remain about 1% of the market. That could rise if index maker MSCI Inc. adds the domestic market to its benchmarks, or if the Connect program expands to include Shenzhen—the city that is home to China’s second stock market, which contains many private businesses in fast-growing industries. Investment bank Jefferies LLC predicts the level of foreign ownership will grow to as much as 20% by 2020.

Write to Daniel Inman at daniel.inman@wsj.com



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