Chinese Stock Traders Told Not to Disrupt Market Around Communist Party Meeting: Brokers, fund managers received unofficial guidance about trading activity, to reduce market volatility

It would be too bad if market volatility during the party congress triggered an investigation of that brokerage of yours...

By Rebecca Feng Oct. 21, 2022 8:17 am ET


TEXT Chinese stock exchange officials told brokers and fund managers in the country not to sell large blocks of shares around the Communist Party’s National Congress this week, according to people familiar with the matter.

The move was designed to reduce market volatility around the all-important political meeting, which began on Oct. 16. The Chinese Communist Party is nearing the end of its week-long gathering of senior officials, during which Chinese President Xi Jinping is widely expected to secure a convention-defying third term as party chief.

Stocks in mainland China have performed significantly better this month than Chinese stocks listed on international exchanges.

Hong Kong’s Hang Seng Index, which is dominated by Chinese companies, on Friday closed at its lowest level since April 2009, as investors lamented the lack of bold plans from Beijing that could provide a fillip to the country’s battered stocks.

The city’s benchmark has fallen 8.6% over the last two weeks, while the Shanghai Composite Index and the CSI 300 index of onshore stocks have slipped 0.5% and 1.6% over the same period.

Last Wednesday, after the benchmark CSI 300 had fallen 1.4% in morning trading, at least one stock exchange called a group of brokers and told them to limit selling in the days before the party congress, according to people familiar with the matter. In the afternoon, the index surged nearly 3%, ending the day with a 1.5% gain.

Stock exchange officials also called some fund houses in the last week of September. The exchange asked them to refrain from trades that would have a big impact on the market before and during the party congress, according to people familiar with the matter.

The Shanghai and Shenzhen stock exchanges didn’t reply to requests for comment.

The warnings contributed to a drop in activity in China’s domestic stock markets, according to investors. Stock-trading volumes in September were 44% down on the previous year, according to Wind data. Volumes in October are down about 25% year-on-year.

While this kind of “window guidance” from exchange officials or other regulators helps keep China’s stock markets relatively stable during key political events, it offers little assurance to investors about the transparency of the market, said Bo Zhuang, a senior analyst at Loomis, Sayles & Co.

“A market is where you can find the right price to reflect the level of risk. If the level of risk is not reflected in the price, then the market is not functioning,” Mr. Zhuang said.

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Such requests and phone calls aren’t unusual before politically important events. Foreign banks have received similar requests from Chinese regulators in the past, according to people familiar with the matter. In the run-up to the last party congress meeting in 2017, stock exchanges also clamped down on stock trading that could increase volatility.

Since the latest party congress kicked off on Sunday, there has been a vacuum of news for domestic stock market investors.

When China abruptly delayed the publication of its third-quarter gross domestic product data on Monday, none of the biggest domestic media outlets reported on the postponement. Chinese authorities also delayed the publishing of other important indicators of the economy’s health including monthly retail sales, property sales and fixed-asset investment. A monthly update on foreign investors’ holdings of yuan-denominated bonds has also not been released.

During the week-long meeting by the Chinese Communist Party, senior officials set the tone for China’s economic and foreign policies in the next five years, vote on the proposed changes to the party charter and elect a new Central Committee, an important body of senior party officials. The meeting ends on Oct. 22.

So far, the congress hasn’t produced catalysts for a sustained stock market rally. China’s currency, the yuan, on Friday traded at 7.27 to the dollar in the offshore market, hitting a fresh record low since a separate system for trading the yuan outside mainland China was launched more than a decade ago.

The yuan’s depreciation reflects bearish sentiment around China’s economic growth, and the stock market in turn reflects that, said Frank Benzimra, head of Asia equity strategy at Société Générale.

“I think expectations were lower ahead of the Congress, especially as far as the Covid policy,” Mr. Benzimra said. “The sentiment remains very negative,” he said of Chinese stocks.

“Investors are disappointed because we are not seeing a turnaround to the housing market situation, zero-Covid policy, or the weakening currency,” said Jack Siu, Credit Suisse’s chief investment officer for Greater China.

Rising U.S. interest rates, high inflation and Russia’s invasion of Ukraine have all led to turbulence in global markets this year. Chinese stocks in particular have taken a beating as the country continues its staunch zero-Covid policy that led to lockdowns of major cities for months at a time. Stocks in the Hang Seng have also suffered from China’s efforts to rein in technology giants, as well as the downturn in the country’s property market.

The CSI 300, which tracks the biggest stocks listed in Shanghai and Shenzhen, is down 24% this year, while the Hang Seng has dropped 31% in the year to date.

Dave Sebastian contributed to this article.