China’s nervous investors flee to quality

Mainland Chinese investors on Thursday sold down their holdings of smaller speculative stocks and bid up blue-chips in a flight to quality that analysts said was prompted by the government’s efforts to deflate the stock market bubble.

The benchmark Shanghai Composite index closed up 1.4 per cent on Thursday, a day after it fell 6.5 per cent in response to a tripling of the share trading stamp duty.

The rebound was led by banks and petrochemicals groups that have trailed the soaring market in recent weeks.

The share price of China Petroleum & Chemical Corporation, commonly known as Sinopec, had been relatively stagnant for the past two months. On Thursday, Asia’s largest oil refiner led the gains among blue-chips, rising by the daily 10 per cent limit in Shanghai to close at Rmb14.85. Earlier in the day, it announced a major oil discovery in western China.

Industrial and Commercial Bank of China, which listed last year in the world’s biggest IPO, rose 3 per cent in Shanghai on Thursday to close at Rmb5.48, while Bank of China rose 4.6 per cent to close at Rmb5.73.

ZTE, China’s largest listed telecoms equipment manufacturer, was also up 10 per cent after months of relatively flat performance.

Of the total 1,400 listed companies in China, more than 270 stocks — most of them small and of poor quality — fell by the daily limit of 10 per cent in Shanghai and Shenzhen on Thursday as nervous investors liquidated speculative bets of recent months.

When the current bull run first began to gather steam at the end of last year, it was led by a handful of quality blue chip stocks. But in recent months, these companies have fallen behind as a massive number of new retail investors poured into the market and speculated on small, low quality companies with little underlying value.

Isaac Meng, an analyst at BNP Paribas, said: “We expect turnover will drop off [because of the new stamp duty] and so will heavy speculation in rubbish stocks.”

“Good quality companies were up a lot while all the low quality stocks people have recently been speculating on fell dramatically,” said Wu Chunlong, equity strategist at CITIC Jiantou Securities.

Because of China’s capital controls, there is little direct correlation between Chinese companies’ mainland and offshore share prices, but on Thursday, H shares also recovered, closing up more than 3 per cent. These Hong Kong-listed shares of mainland companies had lost 2 per cent the previous day.

“As the mainland bubble expanded international investors have been increasingly worried that the government will introduce serious market cooling measures,” Mr Meng said. “Raising the stamp tax is seen as a relatively cautious move and investors feel the major risk to the market has been removed, at least temporarily.”

Sinopec’s Hong Kong-listed H shares also rose nearly 10 per cent to close at HK$8.72 on Thursday but they are still at a discount of more than 70 per cent to Sinopec’s A shares.

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