CHINESE retail investors are finally buying domestic blue-chip stocks, but not in the way Chinese authorities have long hoped.

    Regulators have for years failed to convince retail investors, who dominate the domestic stock markets, to stop speculating on small caps and buy undervalued blue chips.

    Now, however, the introduction of the Shanghai-Hong Kong stock connect pilot program, set to launch next week, has persuaded ordinary Chinese investors to move money out of small caps and into blue chips, particularly financials.

    This has helped fuel a rally that has pushed the Shanghai Composite Index up nearly 17 percent year-to-date, outperforming the Dow Jones Industrial Average and the S&P 500, after spending years in the basement.

    Far from a change in retail sentiment toward blue chips, analysts said small investors were just front running the foreign money that will flow into Shanghai equities. They will then flip the shares to the foreigners for a quick profit.

    “The funds, which have recently poured into the market, are mostly short-term hot money chasing quick profits,” said Chen Huiqin, senior analyst at Huatai Securities.

    “Shares in blue-chip firms have changed hands very rapidly, suggesting a lack of interest by long-term institutional investors and a lack of confidence in broader market prospects.”

    Indeed, major Chinese indices saw record trading volumes Tuesday as traders adjusted their portfolios to get in front of the foreign money expected to start flooding in Monday next week.

    Small investors remain wary of blue chips, believing both economic and business fundamentals to be poor.

    Retail investors prefer small-cap tickers that are mostly listed on the ChiNext growth board in Shenzhen. This board has risen 141 percent in the last two years, versus the blue-chip heavy CSI300 index’s 14 percent gain.

    Even some foreign investors have said they wish they could buy Shenzhen-listed shares because they are often companies in sectors expected to grow in the long term such as technology, consumer goods and pharmaceutical startups.

    However, foreign investors will only be allowed to buy Shanghai shares, and specifically dual-listed State-owned giants and other large firms.

    That has caused the ChiNext index to slide even as the Shanghai financial index has gained.

    Xiao Shijun, stock analyst at Guodu Securities, said the rally had little to do with China’s economic fundamentals, which show weak domestic demand and deflationary pressures, both of which are bad for stock prices. (SD-Agencies)

    Shares rise to 3-year high

    CHINA’S benchmark stock index yesterday rose to a three-year high as brokerages extended gains before the start of a stock trading link between Shanghai and Hong Kong stock exchanges and Shanghai-based firms rallied on prospects for State-owned enterprise reform.

    The Shanghai Composite Index rose 1 percent to 2,494.48, extending gains this year to 18 percent. The Shenzhen Composite Index was 1.48 percent higher at 1,345,41.

    The market’s surge reflects optimism over the government’s reform agenda and the exchange link’s prospects, according to Aviate Global LLP. The link between the bourses in Hong Kong and Shanghai will start Nov. 17. (SD-Agencies)