China Stock Trading Sinks Most in World as Volatility Disappears

Jun 09, 2014 10:15 pm ET

June 10 (Bloomberg) -- China’s stockbrokers are bearing the brunt of the worldwide tumble in equity volatility.

As swings in both Chinese and global shares fall to the lowest levels in at least a decade, trading on the Shanghai Stock Exchange has slumped the most among the world’s 10 biggest markets this year. Shares of 16 Chinese securities firms tracked by Bloomberg have retreated an average 13 percent, the second- most among peers in 22 nations after Japan.

Shrinking price moves in China’s $3.2 trillion equity market are deterring speculators just as investors retreat on concern a weak property market will drag down growth in the world’s second-largest economy. Chinese investors liquidated stock accounts for a second straight month in May, while the benchmark Shanghai Composite Index’s valuation fell to a record low versus emerging-market peers.

“The stock market is very boring,” Zhang Limin, an investment adviser at China Securities Co., said by phone from the northeastern city of Harbin. “No one really cares any more.”

The Shanghai Composite’s 50-day volatility reading fell to 12.5 last week, the lowest level since October 2003, according to data compiled by Bloomberg. The benchmark index has moved less than 1 percent on a closing basis for the past 14 days, the longest such stretch since 2001, and fell less than 0.1 percent to 2,028.85 at 10:01 a.m. today.

No Confidence

The 30-day average value of shares traded on the Shanghai exchange slid to 60.95 billion yuan ($9.6 billion) yesterday, the lowest level since December 2012. The 31 percent drop this year compares with a decline of 1.2 percent on the New York Stock Exchange.

China’s investors are staying out of the stock market in part because of a lack of confidence in the economy, said Arthur Kwong, the Hong Kong-based head of Asia Pacific equities at BNP Paribas Investment Partners, which manages about $650 billion.

Traders liquidated about 346,000 stock accounts in China during April and May, leaving the number of funded accounts at 53.5 million, within 0.1 percent of a four-year low. The four- week average of new account openings fell to the lowest level since at least 2007 in the period ended May 23, according to regulatory data compiled by Bloomberg.

Chinese home prices fell 0.3 percent in May from April, the first monthly drop since June 2012, according to SouFun Holdings Ltd., the nation’s biggest real estate website owner. The slowdown in housing demand is likely to last longer than previous downturns in 2008 and 2011 amid home-purchase curbs, relatively tight credit conditions and slowing economic growth, Moody’s Investors Service said last week.

Slowing Growth

China’s economy is projected to grow 7.3 percent this year, which would be the weakest pace since 1990, according to a survey of analysts in May. Expansion slowed to 7.4 percent in the first quarter from a year earlier, compared with 7.7 percent in the previous period.

The Shanghai Composite has dropped 4 percent this year through yesterday, versus a 4.6 percent gain in the MSCI Emerging Markets Index. The Chinese gauge is valued at 9.9 times reported earnings, compared with 13.3 for MSCI’s developing- nation measure, the biggest discount since Bloomberg began compiling the data in 1997.

“There’s no catalyst for stocks to go up,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “Low trading volumes and volatility signal pessimism over the market outlook.”

Beer Bets

Employees are filling their extra down time by betting beer tabs on which nation will win the soccer World Cup that starts in Brazil June 12, Zhang of China Securities said. Zeng Xianzhao, a Chongqing-based analyst at Everbright Securities Co., China’s eighth-biggest brokerage by market value, said he’s detected similar disinterest from the firm’s customers.

“Even when our sales people are visiting clients, the clients avoid talking about stocks,” Zeng said. “They would rather talk about the World Cup.”

The slump will weigh on earnings at Chinese brokerages, which depend on trading commissions for about half their revenue, Zhou Lin, an analyst at Huatai Securities Co., said by phone from Nanjing June 4.

Shares of mainland-listed securities companies have fallen 13 percent this year through June 6, according to a market- capitalization weighted average of 16 firms tracked by Bloomberg. That compares with a 16 percent decline in Japan and a 1.4 percent drop in the U.S.

Everbright Securities has lost 8.8 percent in the period, while Citic Securities Co., China’s largest brokerage by market value, sank 11 percent.

Client Calls

“My estimate is that our trading volumes have plunged almost 50 percent this year,” said Wei Wei, an analyst at West China Securities Co. in Shanghai. “Few clients have called me recently about stocks.”

The decline in market swings probably won’t last, said Hao Hong, China equity strategist at Bocom International Holdings Co. in Hong Kong. Potential triggers for volatility may be defaults in China’s investment trust industry or an increase in currency swings, he said.

The Shanghai Composite sank 3.9 percent in January as investors speculated a troubled trust product distributed by Industrial & Commercial Bank of China Ltd. may lead to a wave of losses on similar products. Unidentified buyers eventually bailed out investors in the trust.

Uncertainty over the scope of government efforts to support the economy and financial markets is one reason volatility has remained so low, according to Steven Leung, director of institutional sales at UOB-Kay Hian Holdings Ltd. in Hong Kong.

New Normal

While President Xi Jinping said in May the nation needs to adapt to a “new normal” in the pace of expansion, policy makers have reduced reserve requirements for some lenders, accelerated spending on railways and eased financing restrictions for developers to support growth.

Speculation that state-linked funds purchase equities when the Shanghai Composite falls toward the 2,000 level has helped to limit losses in Chinese shares. While that level has proven a profitable buying point for investors, the size and duration of gains have gotten smaller each time since an 11-week rally that lifted the Shanghai gauge by 16 percent from its June low.

“People are likely to wait and see,” Leung said. “That’s why the market volume and volatility have been so low these days.”