Roller-coaster year for China stocks

The Shanghai Composite Index has risen 25 per cent from the low in the mid-year rout and is heading for the biggest gain among major benchmark global indexes this quarter. The measure spent all but 18 weeks of the year in a bull market, and about six
The Shanghai Composite Index has risen 25 per cent from the low in the mid-year rout and is heading for the biggest gain among major benchmark global indexes this quarter. The measure spent all but 18 weeks of the year in a bull market, and about six companies have gained for each that fell.PHOTO: AGENCE FRANCE-PRESSE

Less frenzied trading after rout as patient investors are rewarded

BEIJING • In a year that saw the biggest destruction of Chinese stock market value, investors who held on to the nation's shares have actually done pretty well.

The Shanghai Composite Index has rallied 13 per cent this year, five times the average annual advance over the previous five years and crushing the MSCI All-Country World Index, which slumped 5 per cent. The measure spent all but 18 weeks of the year in a bull market, and about six companies have gained for each that fell.

But buy-and-hold investors would have needed strong nerves. After shares peaked in June, a 21/2-month rout wiped out US$5 trillion (S$7 trillion) in value, equivalent to Japan's entire stock market.

The Shanghai gauge has risen 25 per cent from the low and is heading for the biggest gain among major benchmark global indexes this quarter. While normalcy is returning to some corners of the market, the frenzied trading that marked the boom is absent.

"(This year was) a roller-coaster ride for mainland stocks, but the index is probably where it ought to be," said Mr Sandy Mehta, the Hong Kong-based chief executive officer of Value Investment Principals.

"Investors are focused too much on what happened in the middle of the year."

The Shanghai Composite fell 0.4 per cent at the close yesterday, dropping from its highest level in four months.

For most of the first half of the year, the only way was up.

Even as warnings about a bubble increased and price-to-earnings ratios climbed to the highest levels in five years, speculators borrowed record sums to bet on further gains.

When the reckoning came, it was swift. The Shanghai Composite sank 32 per cent from a seven-year high in just four weeks as investors were forced to pay back loans.

With the rout presenting a threat to financial stability, the Chinese government took drastic steps.

Major shareholders were banned from selling stakes, more than 1,400 companies were allowed to halt trading, initial public offerings (IPOs) were stopped and state agencies were ordered to buy equities. Stocks finally bottomed out on Aug 26 at the end of a five-day, 23 per cent plunge.

As stability returns, the government is removing some support measures. IPOs resumed this month, signs of state buying waned and the ban on shareholder sales is set to expire next month. To reduce the need for such extreme intervention again, China's two exchanges will implement a circuit breaker system from the start of next year.

Other curbs remain. Trading in the country's CSI 300 Index futures has fallen 99 per cent from this year's highs after policymakers raised margin requirements, tightened position limits and targeted short-sellers. Top executives have also fallen victim to a widening probe into the finance industry.

While valuations are still below levels reached earlier in the year, they are not cheap.

The median stock on mainland exchanges trades at 74 times the earnings, the highest among the world's 10 biggest markets.

The Shanghai Composite, which has a heavy weighting in low-priced banks, has a ratio of 19. That compares with its five-year average of 13.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on December 24, 2015, with the headline 'Roller-coaster year for China stocks'. Print Edition | Subscribe