CSRC reports fuel ChiNext ‘bubble’ fears

Reports that China’s regulator is urging mutual funds to stay away from surging prices on the ChiNext board are reflecting market fears over valuations, analysts said.

With prices on the Shenzhen-based high-growth board having doubled in value this year, regulatory talk of a bubble spooked investors over the weekend.

But thanks to China cutting interest rates on Sunday, market euphoria over the easing pushed up ChiNext prices to a new high yesterday.

The China Securities Regulatory Commission has told Chinese mutual fund managers to reduce their exposure to the ChiNext growth enterprise board, according to foreign media reports over the weekend. The regulator was said to be concerned that inexperienced individual investors could be misled by the rapid increase in prices of small-cap listed companies on ChiNext, said an anonymous source cited in the report.

“[If the reports are true,] this would mean a CSRC intervention in fund companies’ investment operations, but it is not the regulator’s job [to do this],” said Ivan Shi, research manager at Shanghai-based consultancy Z-Ben Advisors.

“Many market participants have speculated that there will be regulatory intervention when the market has soared a lot over a short period of time. Many of them see this as a policy-driven market and assume the regulatory body may have a presumed valuation and return on the equity market, with a stance that it would be better for equity prices to increase at a slower pace.”

But the Securities Times, a state-run newspaper, said Chinese fund managers were not aware of such verbal guidance or an official notice from the CSRC.

Beijing-based China AMC and Harvest Fund Management, and Shenzhen-based China Southern Asset Management said they did not have any information about the rumoured new rules, when approached by AsianInvestor. The CSRC did not reply to AsianInvestor’s request before press time.

The ChiNext Composite index reached an all-time high of 3,150 points yesterday, and closed at 3,146 points, up 5.8% on Friday’s close. It has now increased by 113.8% this year while its trailing price-to-earnings ratio yesterday hit 103.8 times.

Part of the rise yesterday was due to the People’s Bank of China’s interest rate reduction. On Sunday the central bank cut its benchmark rate by 25 basis points to 5.1%, and cut its deposit rate by the same amount to 2.25%, which comes amid fears over a slowing Chinese economy.

In March, the Shenzhen Stock Exchange said the bourse was likely to include ChiNext-listed companies as part of the upcoming Shenzhen-Hong Kong Stock Connect. While investors worry that high valuations have caused a bubble, E Fund Management’s CIO David Zhang has said high-valuation small-cap companies could be short-selling opportunities to foreign investors if they were available to trade on the cross-border link.