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Boom, bust, repeat: China’s US$8 trillion equity market is behaving like a penny stock

A man reacts as he looks at stock market prices at a brokerage house in Shanghai, China, Monday. The manic ups and downs are testing the resolve of the China\'s amateur investors, who piled into shares at a record pace as the market soared earlier this year.

It looks like the cost chart of the over-the-counter penny stock: dizzying gains, abrupt U-turns, harrowing declines.

If you believe Greece is bad, China could actually be a much bigger problem

China\’s equity markets happen to be taking a real whacking for a while now, as a result. That\’s disquieting enough.

Yet the actual concern is any knockdown effect within the overall economy that may follow the weeks-long string of sell offs in stocks.

Continue reading.

But this is no obscure security in the rough-and-tumble fringes of Wall Street. It\’s China\’s Shanghai Composite Index, the yardstick for an US$8.1 trillion equity market – the world\’s largest after the U.S. – where extreme volatility has become the norm.

Fuelled by record levels of borrowed money and also the whims of more than 80 million individual investors, swings in the Shanghai Composite have climbed towards the highest levels since 2008. They\’re bigger than every other benchmark index worldwide after Greece, along with a quarter from the 100 most-traded small cap stocks on U.S. bourses, according to data compiled by Bloomberg.

\”You\’d think you wouldn\’t see this volatility in this large equity benchmark,\” Ankur Patel, the chief investment officer at R-Squared Macro Management LLC, said by phone from Birmingham, Alabama. \”The flows in and out have been so substantial and it is been driven by retail investors. These are the same characteristics you see in penny stocks.\”

China\’s wild ride is unlikely to relax any time soon, according to Reorient Group and Summit Research Partners. After eliminating a record US$668 billion of market price on Friday, mainland stock traders reacted Monday towards the central bank\’s decision to cut interest rates to all-time lows – moving some analysts say was timed over the past weekend to lift Chinese equity prices from the brink of a bear market.

Until the marketplace becomes more institutional in nature, it\’s going to be boom and bust

Like their counterparts all over the world, investors in China will also be grappling with the prospect of the Greek default and exit from the euro following the nation\’s bailout talks broke down. The Shanghai Composite sank around 7.6 per cent on Monday after rising 2.5 percent earlier within the day, recording the biggest intraday point swing since 1992.

The gauge\’s 10-day volatility reading jumped to 60 on Friday, the greatest since November 2008, while its 3.8 per cent average intraday move this month is much more than four times bigger than that of the Standard & Poor\’s 500 Index.

The manic good and the bad are testing the resolve from the China\’s amateur investors, who piled into shares in a record pace as the market soared earlier this year.

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Liu Chang, 28, says his colleagues in the tobacco industry near Shanghai are vacillating between liquidating their positions and betting on the rally. Wang Yan, a 26-year-old who is employed by a publisher in China\’s eastern Zhejiang province, says her friends are too terrified to even check the balance of their online trading accounts.

\”Given that it\’s a very retail-driven market, it\’s always going to be more sentiment driven,\” said David Welch, the head of equity sales trading at Reorient Group in Hong Kong. \”That works for both, both around the upside and lately on the downside. Before the market becomes more institutional in nature, it\’s going to be boom and bust.\”

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