Small stocks shine in China’s faltering stock market

SHANGHAI/HONG KONG (Reuters) – China’s terrible year has seen stock markets plunge, funds suffer losses and foreign investors rush out. But areas of the country dominated by small-cap stocks and frequented by retail investors have performed surprisingly well.

Dozens of retail investors trade small-cap stocks — stocks with little market value — operating under the radar of the big funds and investors and their huge market-moving inflows.

Take self-employed retailer Joseph Coy, for example. By buying small-cap stocks of AI companies, Cui picked a corner of the market that big fund managers could barely get into, and made a huge 20% return on his investment of 2 million yuan ($273,347.27).

“It’s a difficult environment for large capital. But for short-term funds, it’s easy,” Cui said.

Strategies like Tsui’s stand out this year in a stock market stagnant due to China’s wobbly economy, rising geopolitical risks, and rising interest rates abroad.

The Wind Micro Market Cap Index, which tracks 400 Chinese-listed A-shares with a market capitalization of less than 3 billion yuan each, has risen 37% so far this year. In contrast, the CSI300 blue-chip index (.CSI300) lost 8%.

While companies dominated by large-cap institutions in sectors such as banking and manufacturing have faced selling pressure from investment funds in a faltering economy, small-cap stocks have become nifty countercyclical targets.

Such stocks are susceptible to speculation, especially when they are linked in some way to Chinese chip giant Huawei Technologies Co. or hot concepts like artificial intelligence, making the retail rush somewhat similar to last year’s meme stock frenzy in the U.S., albeit without the short sellers. The other side of the deals.

Meanwhile, Chinese regulators appear unhappy with the micro-cap craze, even though it is disturbingly reminiscent of China’s casino-like market culture more than a decade ago.

“Regulators seem to be giving the green light to speculative activities to support the stock market,” said Yuan Youwei, fund manager at Water Wisdom Asset Management.

“Collusion harms the value investing system, encourages misconduct, and harms the long-term health of the market.”

The China Securities Regulatory Commission (CSRC) did not immediately respond to a request for comment.

Conceptual stock

Retail investor Helen Wu isn’t shy about talking about “stir-frying” — the practice of pumping up stocks with trendy concepts.

“We mainly pick stocks that have a big story to tell, like AI or Huawei, so that stir-frying becomes easy,” Wu said, referring to the mania in China around ChatGPT, as well as much-touted technology breakthroughs in the United States. Huawei is blacklisted.

“We do not deal with stocks with large institutional holdings, due to significant selling pressure in a downbeat economy.”

Retail investors are a major force in China. CSRC Chairman Ye Huiman notes that their transactions accounted for about 60% of the total A-share sales volume in late 2022.

An index tracking equity funds actively managed in China (.CSI930890) has fallen 14% this year after sell-offs in previously favored sectors such as battery companies and alcohol beverage makers. In contrast, an index tracking ChatGPT concept stocks such as 360 Security Technology (601360.SS) and TRS Information Technology (300229.SZ) rose more than 40%.

In a recent case, loss-making Ningbo Shenglong Automotive Powertrain System Co (603178.SS) jumped nearly 250% in three weeks on speculation that it is a supplier for Huawei’s planned electric car, forcing the company to report investment risks last week.

Retail trader Lu Diong said he made a 100% profit of 100,000 yuan betting on Huawei shares Seres Group (601127.SS), whose shares have more than doubled in the past two months even as it posted a loss in the three months. The first. 2023 quarters.

“The market is buying Ceres for the fantasy of its future, not its current fundamentals,” Lu said.

Some brokerage firms have begun recommending penny stocks to clients.

GF Securities said in a strategy report issued in October that buying small stocks is part of a new investment model in a stock market that is suffering from weak growth and global decoupling risks.

“Conceptual stock speculation has been active all year, with regulators’ eyes almost closed,” said Huang Yan, general manager of Shanghai QiuYang Capital Co.

“A crackdown would weaken an already lifeless market.”

($1 = 7.3167 Chinese yuan)

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