China Turning Screws on Leverage Creates Record Divide in Stocks

(Bloomberg) -- China’s campaign to cut risk in the financial sector this year has helped make the nation’s stock market the most divided on record.

As investors worried about the impact of rising funding costs for companies, they rushed into the safest of stocks -- large-cap firms, mostly state-owned. The result is a performance gap of 27 percentage points between the FTSE China A50 Index of China’s biggest companies and the 1,400-member Shanghai Composite Index, the widest margin since at least 2003.

The A50, the Shanghai Composite and the CSI 300 Index of large and medium-cap shares moved mostly in unison in the first three months of the year, before diverging from April when the deleveraging campaign took a more serious turn. Regulators overseeing banking, insurance and securities trading issued a flurry of directives, coming down on everything from excessive borrowing to speculation in equities.

The result has been declines for most of the $7.5 trillion market, and surging prices for the biggest companies. Since President Xi Jinping chaired a gathering to discuss “safeguarding national financial-market security” on April 25, about twice as many shares have fallen as have risen on the broader Shanghai gauge. In the same time span, heavyweights such as Ping An Insurance Group Co. and Kweichow Moutai Co. notched up gains of more than 60 percent.

While buying large-cap shares makes added sense in a market where state intervention typically involves purchasing index heavyweights, the government has tried to wring some complacency out of such bets by warning last month about the fast pace of gains. Confidence in stocks like Moutai was dented for a few weeks, before the shares began rising once again. No such luck for small caps: the ChiNext gauge is down 9.2 percent for the year.

To contact the reporter on this story: Richard Frost in Hong Kong at rfrost4@bloomberg.net.

To contact the editor responsible for this story: Sarah McDonald at smcdonald23@bloomberg.net.

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