China Stocks Pull Back From Bear-Market Brink as Small Caps Jump

(Bloomberg) -- Chinese stocks rebounded from the brink of a bear market in a late-day swing as the lowest valuations in four months lured bargain hunters and a group of smaller companies pledged to support their share prices.

The Shanghai Composite Index gained 2 percent to 3,007.65 at the close, reversing a loss of as much as 2.8 percent and sending a gauge of volatility to the highest levels since September. The ChiNext small-caps index surged the most in two months after 28 listed companies vowed to take action to stabilize the market, with some pledging not to sell shares over the next six months. State funds may have entered to buy stocks after the Shanghai index fell below the lowest levels reached in last year’s rout, according to Galaxy Securities Co.

"On one hand, there’s need for a technical rebound given the steep losses, on the other the rebound also reflects related authorities’ market-preserving efforts with many small and medium companies saying holders pledge not to cut holdings,” Sun Jianbo, a Beijing-based strategist at Galaxy Securities, said by phone. “There might also be some buying by state funds, which might have propped up stocks."

The Shanghai gauge earlier dropped below the low of 2,927.29 set in August, when a summer rout wiped out $5 trillion and spurred the government to impose emergency rescue measures. The index, the worst performer among 93 global benchmark measures tracked by Bloomberg this year, fell as much as 20 percent from the December high before paring losses.

Oversold Shares

The CSI 300 rebounded 2.1 percent, with all the 10 industries up. Technology and smaller companies led gains. In Hong Kong, the Hang Seng China Enterprises Index slumped 0.4 percent, while the Hang Seng Index retreated 0.6 percent.

Stocks rebounded in the afternoon on signs of increased government efforts to stabilize the market. The China Securities Regulatory Commission assured investors that the forthcoming registration system for initial public offerings won’t lead to an oversupply of new shares, while the Shanghai and Shenzhen stock exchanges vowed to step up monitoring of share sales by companies’ major shareholders.

The Shanghai gauge’s 14-day relative strength measure, measuring how rapidly prices have advanced or dropped during a specified time period, was at 25.6 on Wednesday. Readings below 30 indicate it may be poised to rise. As of Wednesday’s close, 529 of the Shanghai index’s 1,122 member stocks have relative strength index values of less than 30, compared with 280 at the bottom of a rout that erased about $5 trillion in market value in August.

“The market has fallen too much and there are some investors looking for bargains,” said Dai Ming, who is keeping his stocks holdings unchanged as fund manager at Hengsheng Asset Management Co. in Shanghai. He said he would sell into rallies.

The ChiNext index surged 5.6 percent after lithium battery maker Eve Energy Co. said the C28 Club, comprising the first batch of listed companies, will "take real action to stabilize the capital market.”

Eve Energy surged 9.9 percent after saying that its controlling shareholder won’t sell stock for the next six months. Guangdong Wens Foodstuffs Group Co. and East Money Information Co., the ChiNext’s biggest weighted stocks, gained 3.8 percent and 8.8 percent respectively.

--With assistance from Kyoungwha Kim.

To contact Bloomberg News staff for this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net; Amanda Wang in Shanghai at twang234@bloomberg.net To contact the editors responsible for this story: Allen Wan at awan3@bloomberg.net Chan Tien Hin