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China Small Caps Fall Into Bear Market as Trade War Takes Toll

The ChiNext index fell 2.4% Thursday, taking its decline from an April high to beyond 20%, which marks the start of a bear market.

China Small Caps Fall Into Bear Market as Trade War Takes Toll
A man gestures in front of electronic boards displaying stock information at a securities brokerage in Beijing, China (Photographer: Qilai Shen/Bloomberg)

(Bloomberg) -- China’s tech-heavy ChiNext stock gauge entered a bear market as the pressures of the trade war, the expected start of a rival board and evaporating investor interest weighed on sentiment.

The index fell 2.4% Thursday, taking its decline from an April high to beyond 20%, which marks the start of a bear market. The ChiNext was the first major equity gauge in China to enter a bull market in late February, as investors wagered that liquidity conditions would be eased because the economy showed signs of slowing. It’s now the first to enter a bear market, at the end of a shortened week as markets are closed Friday for a holiday.

Risk appetite took an abrupt turn in May as more U.S. tariffs on Chinese goods and comments from President Donald Trump rattled markets. Investors stepped back: weekly turnover in stocks declined for the longest streak on record and foreign selling of A shares via exchange links with Hong Kong snowballed to 53.7 billion yuan ($7.8 billion) last month, also a monthly record. Trump escalated the rhetoric Thursday, saying that tariffs could be increased, while China said after mainland markets closed that it plans to strengthen domestic consumption.

China Small Caps Fall Into Bear Market as Trade War Takes Toll

Chinese small caps are more vulnerable to turns in risk appetite as relatively volatile earnings and poor governance make them easy targets in a sell-off. Cracks were emerging before the escalation in the trade dispute, as valuations on the ChiNext reached the highest since July 2015 and more than 1.5 times the 10-year average. The gauge also saw its wildest swings since 2016 shortly after buying momentum hit the strongest on record in early March.

Concern that the launch of a technology board in Shanghai will lure funds from Shenzhen peers also weighed on the ChiNext. The Shanghai exchange on Wednesday announced the first three companies approved to list. There’s no published timetable for the start of the new board.

“The imminent launch of the new tech board hurt sentiment as it stoked fear of liquidity being diverted away from existing stocks, especially when people are reluctant to trade,” said Shen Zhengyang, a Shanghai-based strategist with Northeast Securities Co.

The Shanghai Composite Index slipped 1.2%, taking its loss from an April high to 14%. Hong Kong stocks were slightly weaker, with a gauge of Chinese shares down 0.3% as of 3:34 p.m. local time.

--With assistance from Jeanny Yu.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net

To contact the editors responsible for this story: Sofia Horta e Costa at shortaecosta@bloomberg.net, Will Davies, David Watkins

©2019 Bloomberg L.P.

With assistance from Bloomberg