China stocks: small-cap ETFs send danger signals to bulls in world’s biggest market frenzy

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At least 15 ETFs linked to the ChiNext benchmark of small companies on the Shenzhen exchange issued warnings to investors within the first hour of trading today

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China’s flag juxtaposed with the stop sign outside the China Securities Regulatory Commission (CSRC) building on the Financial Street in Beijing on July 9, 2021. Photo: Reuters

Zhang Shidongin Shanghai

Published: 5:30pm, 9 Oct 2024Updated: 8:30am, 10 Oct 2024

Many exchange-traded funds (ETFs) that track China’s least valuable stocks have been halted from trading after their prices overshot the underlying equities, raising red flags about the frenzy in the world’s biggest market rally.

At least 15 ETFs linked to the ChiNext benchmark of small companies on the Shenzhen exchange issued warnings to investors within the first hour of trading today after their prices overshot the net-asset values of the underlying portfolios.

E Fund Management’s ChiNext ETF commanded a 25 per cent premium, while a similar financial product by Guotai Asset Management traded almost 30 per cent higher than its underlying value.

“If investors buy at high premiums, they may face significant losses,” because secondary-market prices are affected by demand-supply relations and liquidity risk, Guangzhou-based E Fund said in a statement that called for sobriety among its customers.

The investment frenzy in small-cap ETF offers a peek at how frantic China’s 200 million retail investors and tens of thousands of institutional funds have become, as they jostled to get into a market that has risen in value by 3 trillion yuan (US$424.8 billion) in just three weeks. The speed of the gains have raised doubts about how durable and sustainable the rally is.

Underscoring the scepticism, China’s stock market has seesawed between surges and plunges, as investors locked in short-term profits from outsize gains and a briefing by the nation’s top planning body failed to deliver on investors’ expectations. The CSI 300 Index, which tracks the largest stocks in Shanghai and Shenzhen, has swung between today’s 7.4 per cent drop and yesterday’s 10.8 per cent increase, following a 35 per cent rally over 10 days.