China Investors Begin De-Risking
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Chinese small-cap stocks saw an aggressive sell-off Monday as investors in the country look to avoid putting their capital at risk.
The Shanghai composite index rose 2.4% on Monday after spiking over 8% in early morning trading, but was one of just a handful of Chinese stock indices to see gains on Monday.
Small cap stocks in China fell over 3.6% on Monday, leading the declines of several other stock markets throughout the country.
Other stock indices have suffered similar declines, with the Shenzhen and ChiNext indices also posting losses.
Chinese small-cap stocks saw an aggressive sell-off Monday as investors in the country look to avoid putting their capital at risk.
The Shanghai composite index rose 2.4% on Monday after spiking over 8% in early morning trading, but was one of just a handful of Chinese stock indices to see gains on Monday.
Small cap stocks in China fell over 3.6% on Monday, leading the declines of several other stock markets throughout the country.
Other stock indices have suffered similar declines, with the Shenzhen and ChiNext indices also posting losses.
All Chinese stock indices have now lost over 20% of their value in the past month, except for the Shanghai 50 A-Share Index, which has lost only 16.7% in the past month. The trend towards large-cap and lower-risk stocks in China has gained momentum in the last month, as investor fears of the sustainability of China’s bull run have accelerated trading trends.
Despite the recent declines, all Chinese indices are up solidly for the past year. Some Chinese firms are encouraging more investment in stocks despite the decline. For instance, Guoxin Securities has proposed a 6.5 billion yuan large-cap ETF for retail investors, which Chinese commentators say is necessary “to maintain long-term stable development of the capital markets.”
Some, who note that several large holders of equities cannot sell their holdings, are questioning the severity of the sell-off in China. For instance, Chinese reports said the Social Security Council would not be able to sell their stock holdings, which could limit selling pressure, especially for large-cap names. Others, however, note that the median P/E ratio of companies on the Shanghai Stock Exchange is around 50, more than twice the level of the S&P 500.
Home Collateral
To help the market avoid a further sell-off, Chinese regulators have made several changes to rules on margin investing, including a controversial decision to allow retail investors to use their homes as collateral for margin loans. That decision came after over 7 months of cuts to interest rates and moves to increase liquidity throughout the country.
Critics called the rule-change a “desperate” act after stock prices began to fall, and a severe risk to the broader economy. If stocks continue to fall and brokers possess houses, it could cause a spiral of declining domestic demand at a time when China is looking to pivot from an export-driven to a domestic consumption-driven economy.
“1929 Playbook”
Despite the recent recovery in some large-cap stocks, commentators are likening the recent movement in Chinese stocks to the crash of 1929. In one Bloomberg News article, editors are likening the two crashes and suggesting that more pain is to come.
