25 October 2016
SASAC, led by chairman Zhang Yi, has denied rumors about a merger of state-owned giants but it did not stop speculators from plunging in. Photo: SASAC
SASAC, led by chairman Zhang Yi, has denied rumors about a merger of state-owned giants but it did not stop speculators from plunging in. Photo: SASAC

Beware: Mainland market is trading on rumors

Rumors have been swirling around the mainland stock market, creating an excuse to speculate.

The State-owned Assets Supervision and Administration Commission (SASAC) has denied reports about a merger of two state-owned enterprises (SOEs) controlled by the central government but it did not stop market speculators.

Turnover in Shanghai has topped 1 trillion yuan (US$162.24 billion), sending the benchmark index to a record high on Tuesday. 

On the same day, the China Securities Regulatory Commission (CSRC) warned stock investors to be wary of market risks which dragged the index down 1.3 percent to close at 4,476 points.

A large number of retail investors, particularly those with little experience, should do their homework and invest sensibly, rather than blindly follow trends, the CSRC said.

Shanghai’s red-hot stock market has been attracting large inflows from new individual investors.

In the first quarter, more than 7.95 million new stock accounts were added, up 433 percent from the previous year.

About 62 percent of investors are 35 years old or younger while only 5.2 percent are over 55. These individual investors represent about 80 percent of market transactions. 

More than 90 percent of their stock accounts hold equities worth below 500,000 yuan.

Most retail investors treat stock investment as gambling which is quite worrying. They are easily influenced by market rumors.

They could be largely responsible for driving market turnover which has surged 67.2 percent year on year.

The temporary correction won’t change the uptrend given the market momentum.

The combined market turnover of Shanghai and Shenzhen has reached 1.7 trillion yuan, showing the market is not about to run out of steam.

Despite SASAC’s denial, the market thinks the rumor may not be groundless.

Also, there has been growing speculation about another version of central SOE reform.

Authorities have reportedly earmarked 10 SOEs that are vital to the nation’s economic interests. Those not on the list will be left to fend for themselves.

The 10 SOEs include China North Industries Group Corp., COFCO, China Guodian Corp., three big oil companies and three telecom operators.

In fact, the rumors are quite believable and are in line with Beijing’s repeated pronouncements about opening the market to competition.

Disposals of non-core assets by the three oil companies are expected to be stepped up, but a merger to form an even bigger giant does not make sense.

SOE reform is giving loss-making companies a second chance.

For example, Aluminum Corp of China (601600.CN) reported a net loss of 16.22 billion yuan last year, the biggest loss-making listed firm in the mainland.

Apart from lower aluminum prices, poor management and inefficiency contributed to the mess.

The market might have bloated expectations of bad-performing SOEs, which could explain why it continues to drive the stock.

This month, Aluminum Corp. of China is up 65 percent. Rallies in steel and coal plays are signs of fancy expectations.

This article appeared in the Hong Kong Economic Journal on April 29.

Translation by Julie Zhu

[Chinese version中文版]

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a columnist at the Hong Kong Economic Journal

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