Reuters
Investors watch an electronic board showing stock information at a brokerage house in China’s Anhui province last month.
After stocks on mainland China were rocked on Monday by their worst day of trading since 2011, investors are undecided over whether the three-month bull-run in Chinese shares is over.
While there are signs that the all-important contingent of retail investors is calling it a day, some say the recent fall was only natural after the market rose so quickly, and they are holding on for further gains.
Trading has been topsy-turvy in Shanghai. On Monday, the Shanghai Composite plummeted 3.7% after Beijing announced new tightening measures to control the housing market, pushing shares of Chinese developers off a cliff.
On Tuesday, the market made a substantial recovery, ending up 2.3%. Stocks recovered as China’s parliament kicked off its annual meeting, the plenary session of the National People’s Congress–an event that could result in some hints on the policy direction of the incoming government.
The sharp moves are the latest episode in a sharp recovery for China’s domestic stock market, which started in early December after the Shanghai Composite crashed to a multiyear low. The market suddenly revived, climbing 24% to its recent peak in early February.
With the market down 4.4% since then, some investors are now convinced that the good times are over–including some retail investors, who dominate the trading of China’s domestic stocks.
“The rebound that started in December has come to an end as heavyweight banks, a favorite of institutional investors, had already risen a lot,” said Mr. Liu a retail investor in Shanghai, who declined to give his full name. He said he sold his stock holdings after the market started to fall in February.
Recent gains in Chinese stocks were mostly attributable to a better outlook for the domestic economy. Last year, growth slumped to its slowest pace since 2009, but economic indicators over the last few months have reassured the market that Asia’s largest economy had avoided a so-called “hard landing.”
But Friday’s property measures cast a cloud over the economic recovery. The housing market is an important contributor to growth, affecting not just developers, but also companies that supply materials used to build houses, as well as banks that lend to home buyers and real estate companies.
“We are not that optimistic about the domestic economic outlook, especially following Beijing’s latest property tightening policies which could hurt the pace and magnitude of the economic rebound in the coming quarters,” said Thomas Wang, a partner at Shanghai Yaozhi Asset Management, which manages assets worth about 2 billion yuan.
“China’s stock market is likely to be under pressure in the second half of this year given rising inflation pressure and lackluster economic recovery,” Mr. Wang said.
Some investors see the recent declines as a natural development for a market that had risen so much so quickly.
Audrey Kaplan, senior portfolio manager at Federated Investors in New York, said Monday’s decline was “understandable” after the strong gains posted by Chinese stocks in recent months. Ms. Kaplan is overweight on China, via exposure to Chinese companies are listed outside of mainland China.
In fact, Chinese companies that are listed offshore have been subject to less volatile moves over the last few days than those listed onshore. This suggests foreign investors are less concerned by the property measures than their domestic counterparts.
The Hang Seng China Enterprises Index, which measures Chinese companies listed in Hong Kong, fell by 2.1% on Monday and recovered 0.6% on Tuesday.
“We expect the new government is supportive of the equity markets,” said Ms. Kaplan. “We envision a continued recovery primarily because there are firm labor market conditions, improving domestic demand and relatively accommodative policy support not-withstanding the property measures.”
– Daniel Inman and Amy Li
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