SHANGHAI, China – The Chinese stock market is facing potential downside risks as small-cap stocks continue to underperform, despite renewed support pledges from regulators. While large-cap stocks saw a slight gain, small-cap shares sank to their lowest level since 2018, signaling a lack of confidence in policy support for the smaller companies.
Investors are losing faith in small-cap stocks, believing that government support will focus on rescuing larger, blue-chip stocks. The stark underperformance of small-cap shares has led to record trading volumes in certain exchange-traded funds, fueling speculation that state funds have intervened to prevent further losses.
According to Vincent Chan, a China strategist at Aletheia Capital Ltd, the market’s current reliance on support from the national team has discouraged small-cap investors, as they lack the downside protection enjoyed by big-cap stocks. The recent selloff has also been amplified by quantitative hedge funds, leading authorities to ban some of them from placing sell orders.
The CS 300 Index has wiped out all gains since policymakers were reportedly considering a 2 trillion yuan stock stabilization fund, leaving investors concerned about deeper losses before the Lunar New Year holiday. This follows a period in which $7 trillion worth of equities in China and Hong Kong have been erased from their value due to various economic challenges.
Market sentiment remains fragile as investors brace for further losses and seek to reduce positions ahead of the holiday. Margin calls, forced liquidation, and selling pressure from snowball derivatives have emerged as new risks amidst the market slump. While overseas funds continue to buy mainland equities, the China Securities Regulatory Commission has pledged to prevent abnormal fluctuations and crack down on illegal activities in the market.
Despite these measures, the market is unlikely to see any significant improvement unless bolder steps are taken to address the lack of confidence haunting investors. Daisy Li, a fund manager at EFG Asset Management HK Ltd, believes that the market is in need of more forceful policy stimulus to restore confidence and the economy, which may come later in the second quarter.
Overall, the Chinese stock market is on shaky ground, with small-cap stocks signaling a warning about potential downside risks if government support doesn’t materialize as expected. As investors brace for further losses and uncertainties before the Lunar New Year holiday, the market’s future remains uncertain.