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CICC: Index futures may trigger falls in small equities

China’s smallest stocks are poised to fall as the government’s approval of index futures prompt investors to switch to larger equities that are half as expensive, according to China International Capital Corp (CICC).
A 131 percent rally in the CSI Small Cap 500 Index last year drove its price-earnings ratio to 76.5 times, compared with 39 times for the CSI 300 Index, which tracks the 300 biggest stocks traded in Shanghai and Shenzhen.
“Valuations for small-cap stocks are looking stretched and news of the approval of index futures may spur a rotation into large-cap stocks,” Gao Ting, Beijing-based strategist at CICC, the top-ranked brokerage for China research in the annual survey by Asiamoney magazine, said in a phone interview yesterday.
The rally in the small-cap index reflects demand for equity investments by local retail investors, who made up 99.6 percent of trading accounts opened on Shanghai’s stock exchange in the first 11 months of last year, based on data from China Securities Depository and Clearing Corp. The approval of index futures on Jan 8 may attract more institutional investors and boost shares of larger stocks including banks and automakers, according to CICC, partly owned by Morgan Stanley.
Morgan Stanley advised investors to buy shares of the index’s largest companies by weighting, as well as brokerages. The new rules that includes margin trading and short selling may boost trading volumes by 50 percent “in the long term”, it said.
Short sales
In a short sale, an investor borrows an asset and sells it, hoping to profit from a decline by repurchasing it later at a lower price. An investor arbitraging China might buy shares in Hong Kong and sell short the same company trading on the mainland.
China Shenhua Energy Co, the nation’s biggest coal producer with a market cap of 687 billion yuan, gained 1.2 percent on Monday. Shanxi Coal International Energy Group, with a market value of 23 billion yuan, led declines among small-cap stocks, falling 7.8 percent to 30.92 yuan.
“Big-cap stocks will be given a premium for their high liquidity, as index futures are expected to bring more market participants,” said Chen Wenzhao, a strategist at China Merchants Securities Co.
The average market value in the CSI Small Cap index is 5.9 billion yuan, compared with 70.8 billion yuan for the CSI 300, on which the first stock index contracts will be based.
Gao also recommended automobile stocks because they will rebound as the government promotes domestic consumption and sales continue to grow.
SAIC Motor Corp has slid 14 percent this year after more than quadrupling in 2009. FAW Car Co, which makes passenger cars in China with Volkswagen AG, has slumped 15 percent after rallying 262 percent.
“The recent declines in automobile stocks present investors a buying opportunity,” Gao said.

China’s stocks tumble 3% after bank move

Chinese equities saw their sharpest dip in seven weeks on Wednesday after the central bank asked lenders to set aside more reserves as record bank lending last year ignited fears of inflation and asset bubbles.
The benchmark Shanghai Composite Index went down 3.09 percent, or 101.31 points, to close at 3,172.66 points.

Traders are seen at a stock trading hall in Shenyang, capital of northeast China’s Liaoning Province, Jan. 13, 2010. China’s benchmark Shanghai Composite Index on the Shanghai Stock Exchange closed at 3,172.66 points Wednesday, down 3.09 percent, from the previous close. The Shenzhen Component Index on the Shenzhen Stock Exchange closed at 13,016.56 points Wednesday, down 2.73 percent, from the previous close. (Xinhua/Li Gang)
The Shenzhen Component Index lost 2.73 percent, or 364.69 points, to close at 13,016.56 points.
Combined turnover expanded to 322.79 billion yuan (47.69 billion U.S. dollars) from 294.3 billion yuan on the previous trading day.
The People’s Bank of China announced on Tuesday evening to lift deposit reserve requirement ratio by 0.5 percentage points from Jan. 18, the first such move since June 2008, which aimed to prevent possible inflation and the recurrence of lending surge.
Banks led the fall as investors worried about liquidity drain. Industrial and Commercial Bank of China (ICBC), the country’s largest commercial bank, sank 5 percent to 5.09 yuan. Bank of China fell 4.17 percent to 4.14 yuan.
A higher reserve ratio would help soak up excess liquidity in the banking sector, but capital would remain abundant in the market, said Wang Xiaoguang, analyst with the National Academy of Governance, a government think-tank.

A trader is seen at a stock trading hall in Shenyang, capital of northeast China’s Liaoning Province, Jan. 13, 2010. China’s benchmark Shanghai Composite Index on the Shanghai Stock Exchange closed at 3,172.66 points Wednesday, down 3.09 percent, from the previous close. The Shenzhen Component Index on the Shenzhen Stock Exchange closed at 13,016.56 points Wednesday, down 2.73 percent, from the previous close. (Xinhua/Li Gang)
He said the new policy would stir up volatility in the capital market in the short-term, but the long-term prospects would remain positive as the real economy would keep growing.
Chinese lenders extended a record 9.21 trillion yuan of loans in the first 11 months of last year, 5.06 trillion yuan more than the corresponding period of 2008 and far exceeding the government target of 5 trillion yuan for the whole of 2009.
Realty firms dropped as the government reaffirmed its crackdown on property speculation and pledged 6 million new affordable homes this year.
China Vanke Co., the country’s largest property developer by market value, fell 2.43 percent to 10.04 yuan. Poly Real Estate Group Co., the country’s second largest developer, dipped 4.13 percent to 20.43 yuan.

Hong Kong stocks close 2.59% lower on Wednesday

Hong Kong stocks shed 578.04 points, or 2.59 percent, to close at 21,748.60 on Wednesday after China’s central bank raised bank reserve ratio after the market close on Tuesday.
Turnover totaled HK$97.62 billion ($12.52 billion), compared with Tuesday’s HK$81.22 billion.

Earnings revision to support equities market: JPMorgan

A fresh infusion of liquidity and earnings revisions should support China’s equities market in early 2010, said Jing Ulrich, Hong Kong-based chairwoman of China equities and commodities at JPMorgan. However, the second half may prove more challenging if China’s monetary policy stance turns more neutral.
Looking to the full year¡ªas the pace of investment growth decelerates from very high levels and money supply growth slows down from last year’s rate, the momentum that propelled Chinese stocks in 2009 may gradually slow down, in spite of resilient domestic demand and an improving external environment, she said.
The forces that will shape Chinese equity markets and the economy in the medium term can be broadly defined in three themes: reacceleration of loan growth in the first quarter 2010; government policy shifting to forestall asset price bubbles and promotion of private consumption.
Ulrich’s statement came following the central bank yesterday raised banks’ reserve requirement ratio by 50 basis points¡ªthe first adjustment since November 2008.

Financial companies lead fall in equities

China’s stocks declined the most in seven weeks, led by financial companies and commodity producers, after an unexpected shift by the central bank to restrain lending spurred concern that higher interest rates will follow.
Industrial &Commercial Bank of China dropped 4.7 percent to 5.09 yuan, the most since October 2008. Poly Real Estate Group Co slumped 4.1 percent to 20.43 yuan. The central bank raised the proportion of deposits that banks must set aside as reserves by 50 basis points starting Jan 18.
Jiangxi Copper Co dropped 5.6 percent to 38.02 yuan on concern tighter credit will sap demand for commodities.
The Shanghai Composite Index lost 101.31, or 3.09 percent, to close at 3172.66. That’s the most since Nov 26, when concern that banks would increase share sales drove the gauge 3.6 percent lower. The index has dropped 3.2 percent this year, after rallying 80 percent in 2009 on government stimulus and record bank lending.
The CSI 300 Index declined 3.22 percent to 3421.14.
An index tracking 50 financial companies on the CSI 300 tumbled 5 percent, its biggest loss since Aug 31.
China’s stocks will underperform their regional rivals and investors should underweight shares on the prospect of higher interest rates, according to Emil Wolter, Singapore-based head of Asian Regional Strategy at ABN Amro Bank NV.
The Shanghai Composite “looks expensive”, Wolter said.
Brokerages declined as the number of new stock trading accounts slowed for a sixth consecutive week. Investors opened 235,778 trading accounts for the week ended Jan 8, according to the China Securities Depository and Clearing Corp. That’s the lowest level for a five-day week since the period to Feb 6.
CITIC Securities fell 5.3 percent to 31.79 yuan even after saying in a preliminary earnings statement its 2009 net income rose 23 percent.
Hang Seng falls
Hong Kong stocks fell, dragging the benchmark index to its biggest drop in more than six weeks.
Aluminum Corp of China Ltd slumped 7 percent to HK$9.65. China CITIC Bank plunged 6.6 percent to HK$5.71, leading a drop in bank shares. China Overseas Land &Investment Ltd fell 4.7 percent to HK$15.7.
The Hang Seng Index slid 2.59 percent to close at 21748.6, its sharpest drop since Nov 27. The Hang Seng China Enterprises Index dipped 3.7 percent to 12482.18.

Hong Kong stocks reverse early gains to end slightly lower

Hong Kong stocks tracked the Chinese mainland stock market to open higher on Thursday but reversed early gains to close lower.
The benchmark Hang Seng Index opened 0.56 percent higher at 21,871.01 and once climbed to as high as 21,988.93 before reversing gains in the afternoon. Turnover totaled 84.20 billion HK dollars (10.80 billion U.S. dollars).
The Hang Seng Index futures were trading at a discount of 53 points. Analysts were mixed on the market outlook but were almost unanimous about the resistance at 22,000.
The finance sub-index and the properties category both lost ground, with the former down 0.4 percent and the latter down 1.00 percent. However, the utilities sub-index gained 0.24 percent and the commerce and industry, 0.38 percent.
Market heavyweight HSBC gained 0.65 HK dollars, or 0.75 percent, to close at 90.85 HK dollars. HSBC local unit Hang Seng Bank closed up 0.44 percent.
The mainland banking giants suffered from selling pressure in the afternoon, with ICBC down 1.52 percent, China Construction Bank down 0.97 percent and Bank of China down 1.00 percent. Insurance stock China Life was down 0.67 percent.
Cheung Kong, the business conglomerate headed by Hong Kong’s richest man Li Ka-shing, closed down 0.5 HK dollars, or 0.53 percent, at 98.3 HK dollars.
Sun Hung Kai Properties, the leading residential housing developer in Hong Kong, finished the day down 1.24 percent at 111.6 HK dollars.
China Mobile, the leading mobile carrier on the Chinese mainland and a market heavyweight, surged 2.65 percent to 79.4 HK dollars on market news that authorities would make efforts to promote the integration of information service networks.
Cathay Pacific Airways surged 3.16 percent to close at 14.38 HK dollars, benefiting from the surge in December passenger and cargo traffic reported earlier. (7.8 HK dollars = 1 U.S. dollar)

Index futures on deck for foreign investors

Foreign investors will be able to trade China’s new stock index futures within two or three years, according to Leo Melamed, chairman emeritus of CME Group Inc, the world’s biggest futures exchange.
The China Securities Regulatory Commission said last week that it will allow trading of Chinese stock-index futures, agreements to buy or sell an index at a present value on an agreed-upon date. The regulator has yet to release details on who will be allowed to trade the futures.
Index futures are part of China’s push to make more investment options available in the world’s third-biggest stock market by value. China restricts overseas investors to buying so-called B shares that trade in US dollars in Shanghai and Hong Kong dollars in Shenzhen. Yuan-denominated shares are limited to Chinese citizens and approved overseas investors under the qualified foreign institutional investor, or QFII, program.
China may also expand bond market trading in the next two to three years “if everything goes smoothly” with stock index futures, Melamed said in Chicago, following a Bloomberg Television interview. Melamed advises China’s regulators on the creation of its futures market.
QFII program
Foreign institutions may also be allowed to trade index futures using a portion of their QFII quota, according to Jing Ulrich, chairwoman of China equities and commodities at JPMorgan Chase &Co in Hong Kong.
The nation’s stock watchdog approved 94 foreign institutions, including Abu Dhabi Investment Authority, Deutsche Bank AG, and Goldman Sachs Group Inc, as of the end of 2009 to buy bonds and stocks in China. The nation’s currency regulator, the State Administration of Foreign Exchange, grants a quota to QFIIs and has set the total quota at $30 billion.
Index futures may help ease volatility after the benchmark Shanghai Composite Index doubled in 2007, slumped 65 percent in 2008 and rebounded last year. Until now, Chinese investors could only profit from gains in equities.
The first stock index contracts, based on China’s CSI 300 Index, may begin trading after the annual National People’s Congress meeting in March, an official with knowledge of the matter said earlier this month.
Stock index futures are agreements to buy or sell an index at a preset value on an agreed date. The value of the futures contracts will be points of the CSI 300 multiplied by 300 yuan, according to the trading rules the exchange set.
The China Financial Futures Exchange plans to increase the amount of money investors must set aside to trade stock index futures to 12 percent of the contract value from 10 percent, the Shanghai Securities News reported on Jan 12.
The exchange will also limit the number of contracts for the same settlement date an investor can hold to 100, according to the newspaper.

ChiNext stock market up — January 14

The ChiNext went up on Thursday as all the 42 shares at China’s start-up board for small and medium-sized enterprises gained.
The board, which is based in Shenzhen and started trading on October 30, 2009, is tailored to the needs of enterprises engaged in independent innovation and other enterprises with great growth potential.