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Fund managers offload to retail investors in China's STAR Market

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The STAR Market's launch on Monday in Shanghai represents the Chinese government's boldest move yet towards a less-regulated market for initial public offerings and stock trading.

Shanghai

AS CHINA'S new Nasdaq-style tech board approaches the end of its first week of volatile trade, fund managers are offloading their holdings to hungry retail investors and locking in bumper profits.

Frothy valuations on Shanghai's STAR Market, which debuted on Monday, have also triggered short selling from Chinese traders betting that shares will fall.

The STAR Market's launch represents Beijing's boldest move yet towards a less-regulated market for initial public offerings (IPOs) and stock trading.

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But looser trading rules, China's highly speculative investor community, and severe supply-demand imbalances have sent shares skyward, setting the stage for a sharp selloff.

"The price gains exceeded our expectations," said Liam Zhou, founder of Shanghai-based hedge fund house Minority Asset Management (MAM). "Such pricing represents extreme optimism in the market."

Taking advantage of STAR Market fever that sent shares surging as much as 520 per cent on Monday's debut, MAM - which held IPO shares worth several million yuan - has "sold a good portion" to eager buyers, Mr Zhou said.

"We'll stand on the sidelines and wait for the market to cool down," said Mr Zhou, a contrarian investor who embraces behavioural finance - the study of investor psychology - in his investment strategy.

According to exchange data, trading in the 25 STAR Market companies that listed this week - ranging from chip-makers to healthcare firms - totalled 48.5 billion yuan (S$9.6 billion) on their debut, accounting for roughly 13 per cent of turnover in all of China's stock markets, which include nearly 4,000 listed companies.

Retail investors did most of the buying, accounting for more than 90 per cent of such transactions, while institutional investors, including fund houses and insurers, accounted for most of the sellers.

Mutual funds, which actively participated in STAR Market IPOs, appeared to be big winners. Scores of them saw their net value surge more than 5 per cent on Monday. A fund managed by JX Asset Management led the gains, jumping 9.4 per cent.

More than 80 per cent of the IPO shares that have no lock-up period have changed hands on the STAR Market so far, said Peng Hai, an analyst at Lianxun Securities.

The scene has stirred memories of the frenzied launch of Shenzhen's now sluggish ChiNext tech board a decade ago. On Monday, STAR stocks surged an average of 140 per cent, much higher than ChiNext's 106 per cent debut pop.

Short-selling demand and the limited supply of STAR Market shares available for lending has pushed borrowing costs up by as much as 20 per cent on an annualised basis, compared with 8 per cent for stocks elsewhere, traders said. Fuelling this are rules that allow investors to borrow newly-listed shares to sell for the first time.

Shen Shikang, a veteran trader who has been borrowing STAR stocks to sell, said that current prices of many companies on the board have no basis in fundamentals.

On the STAR Market, short-selling transactions accounted for roughly 67 per cent of margin buying, compared with 1.7 per cent in the whole Shanghai market, according to calculations based on official data.

Many long-only institutions have sold the IPO shares that they hold. And with such investors departing, investors are now bracing for a wild ride. Roughly 150 listing candidates are queuing up, potentially boosting supply.

"If the authorities take the new board's price swings in their stride, it will bode well for the long term liberalisation of China's stock markets," Thomas Gatley, analyst at Gavekal Dragonomics, wrote. "If, however, the regulators move to damp down the market's volatility, it will indicate that Beijing's paternalistic, interventionist attitude to China's stock markets lives on." REUTERS