China’s desire to lift its equity market has had an unintended consequence: volatility is surging.
A measure of realised 10-day swings for the Shanghai Composite Index has jumped to about 45%, the highest of 47 benchmarks tracked by Bloomberg in emerging and developed markets. Momentum has shifted dramatically as the state pledges support for shares, with all but 21 members of the Shanghai gauge rising yesterday, one of its broadest rallies ever.
More than 70 stocks gained by the permitted 10% daily maximum, spurring the index to a 4.1% rally, its best showing since March 2016. That followed Friday’s 2.6% increase, and it’s the first time in more than three years that such a big gain has been followed by an even greater advance. The index is still down about 25% since January and hasn’t posted a three-day gain since August.
“It’s either heaven or hell – there’s no stability,” said Dong Baozhen, a fund manager at Beijing Tonglingshengtai Asset Management. 
“Though the market could still go either way on a daily basis, at least we won’t see any more avalanches. Perhaps the boost from the regulators has set a larger trend. There’s nothing to rejoice about in huge fluctuations.”
It’s taken a sweeping and co-ordinated effort from top officials to arrest the downward spiral in Chinese equities. Previous attempts this year to instil confidence either didn’t last or fell flat, leaving investors with the steepest losses in the world. Starved of cash and facing margin calls, some private firms were on the brink of collapse before the government stepped in last week.
Authorities have been more targeted in their approach in the past three days, directly addressing concerns that Chinese firms are running out of ways to both service and refinance their debt obligations. Over the weekend, President Xi Jinping vowed “unwavering” support for non-state firms, while the country’s stock exchanges committed to help manage share-pledge risks.
The People’s Bank of China also said on Friday that officials were studying measures to ease companies’ financial difficulties. And the securities regulator said firms with rejected applications to debut on the mainland can try to raise cash on the stock exchange after six months by restructuring a listed company, or a backdoor listing. They previously had to wait three years.
While the two-day rebound looks big in isolation, it is only a small reprieve for a market that lost more than $3tn in value since January. Part of the problem is most economic data are weakening, a trend the government is seeking to offset with a cut to personal income taxes. With the US dialling up its anti-China rhetoric – whether on the trade or currency front – caution prevails.
“While a sharp rebound makes sense for now, the long-term outlook still depends on economic fundamentals,” said Lin Jinghua, an analyst at Capital Securities Corp. “The biggest uncertainty is the trade war.”
Signs that China’s stock market has bottomed would encourage the nation’s 144mn retail traders who drive more than 80% of turnover. While foreigners sold A shares through stock links Monday, soaring volume suggests at least domestic investors were more optimistic. Turnover totalled 422bn yuan ($61bn), the highest since July, data compiled by Bloomberg show.
“The stock rally will definitely spur retail investors’ enthusiasm, though we’re yet to see a huge number of retail investors rushing to the market,” said Guo Weiwen, an analyst with Qianhai Matrix Partners Capital Management (Shenzhen) Co. “We need more time for investor confidence to fully recover.”
Investors look at computer screens showing stock information at a brokerage house in Shanghai. A measure of realised 10-day swings for the Shanghai Composite Index has jumped to about 45%, the highest of 47 benchmarks tracked by Bloomberg in emerging and developed markets.
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