China’s high-stakes bid to boost stocks risks stoking bubble

Bloomberg

Beijing is walking a tightrope between reviving its downbeat equity market and engineering another bubble.
China’s securities regulator has started to remove many of the curbs designed to keep out speculators, signaling an end to the highly restrictive era that started when a boom in the country’s stocks turned to bust in 2015. The result has been an intensifying appetite for risk not seen in years. A gauge of small cap stocks has surged almost 11 percent over the past four trading days, the most since 2016.
While investors and index providers have called on China to scale back restrictions barring the use of short-selling, leverage and derivatives, critics caution that the misuse of those tools could be dangerous. The concern is that taking deregulation too far may encourage the whirlwind trading that has fueled two massive bubbles in the past decade.
“The risk is that everyone will want a piece of the risk-on momentum that’s building now,” said Tai Hui, chief market strategist for Asia Pacific at JPMorgan Asset Management in Hong Kong. “It’s important that we avoid another roller coaster. It signals authorities no longer think we’re in emergency mode, and that’s a big confidence boost.”
One way to make a rebound less speculative, says Hui, would be to loosen rules for institutional investors only. Increasing the presence of professional money managers in China’s $5.9 trillion equity market, which is host to about 148 million day traders, would help shed its reputation as a casino.
Such herd behavior was in evidence following the January appointment of Yi Huiman as chairman of the China Securities Regulatory Commission.