China stocks continue their wild ride as ‘spoofers’ are targeted

While the headlines celebrated Beijing winning the bid to host the Winter Olympics in 2022, there was grimmer news again from China’s bourses as the rollercoaster that is the country’s stock market continues its wild ride.

The main share markets have lost about 30 per cent of their value since the middle of June, and Monday of last week saw an 8.5 per cent decline, the Shanghai Composite's biggest fall since 2007. Now anxiety is growing that heavy speculative selling could have a destabilising effect on the world's second largest economy.

The regulator has declared war on “malicious short sellers” and on the practice of share dumping.

Some of the measures to try to halt the sell-off include an investigation by the securities watchdog into the impact of automated trading on the stock markets. The China Securities Regulatory Commission is checking out "spoofers" who anonymously place orders, creating an illusory demand, and then cancel orders to help move prices.

Misleading

The commission’s spokesman,

Zhang Xiaojun

, said it was examining some cases, and both Shanghai and Shenzhen exchanges have restricted 24 accounts “suspected of disturbing share prices or misleading other investors by frequent orders and cancellations”. These accounts will be suspended until October 30th.

Analysts say the probe is off-target, as spoofing also drives markets higher, so why is it a problem when the market falls? The sell-off is still down to excessively high valuations and selling by leveraged buyers, they say.

And, they add, the sell-off was triggered by fears the government was easing back on measures to prop up the market, which the government denies.

In its bid to stop the sell-off impacting on the broader economy, the Communist Party is requiring state financial institutions, such as the central bank and the government-owned China Securities Finance, and organisations such as the commercial banks, brokerages, fund managers, insurers and pension funds to buy shares to keep the exchanges stable. The Politburo has also promised to step up targeted adjustments of economic policy to encourage stable growth.

The episode has underlined the difficulty the government faces in convincing investors equity markets will deliver sustained gains, according to Chang Liu and Mark Williams at Capital Economics.

Speculation

“The market is driven more than ever by speculation about official intentions, and any positive momentum will raise questions about whether support will be withdrawn. Policymakers would have a better chance of succeeding if they could credibly argue that prices are now unreasonably low, so that investors willing to put up with short-term volatility stood to make strong medium-term returns,” they wrote.

There are concerns about capital outflows in China after the country’s headline foreign reserves declined by around $300 billion in the year to the end of the second quarter of this year, despite rising current account surpluses and significant inflows of foreign direct investment.

"We believe that these estimate and concerns about the outflows are exaggerated, especially as regards to outflows in [the second quarter], which stabilised rather than worsened," said UBS in a research note.

UBS say half of that was due to valuation effects – depreciation of other reserve currencies against the US dollar and mark-to-market changes on bond holdings. “We estimate that valuation changes accounted for about $150 billion in headline FX reserve loss between end Q2 2014 and end Q2 2015,” the analysts wrote.