China brokerage shares surge on IPO reforms, penny stocks sold off

Clement Tan
Sunday, 1 Dec 2013 | 10:18 PM ET

* HSI +0.6 pct, H-shares +1.1 pct, CSI300 -0.5 pct

* Outperforming ChiNext Comp Index dives more than 7 pct

* CSRC announces IPO reforms, signals resumption of new listings

* Citic Securities H-shares 35 pct above a Nov 14 low

HONG KONG, Dec 2 (Reuters) - Mainland Chinese investors took profit on outperforming penny stocks listed in Shenzhen early, while brokerages jumped early Monday after China's securities regulator signalled the likely resumption of initial public offering approvals as soon as next month.

Large cap counters, particularly banks, outperformed, buoyed by new rules mandating cash dividends and another announcement from the State Council, or China's cabinet, on the start of a preferred share pilot.

Both announcements aimed at streamlining the IPO process came on the weekend, two weeks after Beijing unveiled an ambitious economic and social reform agenda.

At 0300 GMT, the CSI300 of the biggest Shanghai and Shenzhen A-share listings was down 0.5 percent, while the Shanghai Composite Index shed 1 percent. The ChiNext Composite Index of mostly technology start ups listed in Shenzhen dived more than 7 percent.

The Hang Seng Index rose 0.6 percent to 24,031 points, its highest since end-April 2011. The China Enterprises Index of the top Chinese listings in Hong Kong climbed 1.1 percent to its highest since February.

Volumes in the first hour of trade were markedly higher, particularly in Shanghai, as mainland investors rotated into large cap stocks from small ones. Before Monday, the ChiNext Composite was up more than 80 percent on the year, compared to the more than 3 percent loss for the CSI300.

"Most of the penny stocks that have outperformed this year are trading at ridiculous valuations right now, so investors are rotating into some of the larger cap names on the reform measures announced," said Zhang Qi, a Shanghai-based analyst with Haitong Securities.

"We are expecting more details over the next week or two. Clients are eager to know if non-institutional investors will also be eligible for preferred shares," Zhang added.

On Monday, Citic Securities , China's largest listed brokerage, soared 6.9 percent in Hong Kong and 4.2 percent in Shanghai. China Merchants Securities surged 10 percent in Shanghai.

Citic has bounced nearly 35 percent from a Nov. 14 trough in Hong Kong on hopes that it will benefit from moves to liberalise the mainland's financial sector. Beijing announced details of its reform agenda late on Nov. 15 after markets had surged after a version of the document was apparently leaked.

Chinese insurers were also big gainers. Ping An Insurance climbed 3.5 percent in Hong Kong and 2.4 percent in Shanghai, stretching the premium at which its H-shares trade over its A-shares to nearly 40 percent.

The broader H-shares outperformed the A-share market in November and are trading at about a 6 percent premium over mainland-listed Chinese shares - the biggest gap in more than three years.

Flows into China-focused equity funds in the week that ended Nov. 27 swelled to the highest since January, recording positive net inflows for the eighth time in the past nine weeks, according to a Macquarie report, citing EPFR data.

Markets were also buoyed on Monday by how China's official Purchasing Managers' Index (PMI) stood at 51.4 in November, unchanged from October and better than market expectations for a reading of 51.1.

A private survey of factory activity in the world's second-largest economy, seen more focused on small and medium enterprises, came in at 50.8 in November, down from 50.9 in October but improving from a preliminary reading of 50.4.