What was once a sure bet has now transformed into a speculative free for all on the Chinese stock market, thanks to the intervention of the state in an attempt to reverse the decline in its stock market.
The largest oil and gas producer and distributor in China, PetroChina, currently holds around 11 billion barrels in oil reserves, employs half a million workers, and has annual sales that are higher than the full economic output of many countries. This used to be enough to make stock in this oil giant a sure bet in the eyes of the investors, but today, the situation has changed dramatically.
Due to the state propping up the falling stocks of public companies, the $310 billion oil producer has turned into a speculative bet on how much the government is willing to inject into any given equity on a particular day. Thanks to its top weighting in the benchmark Shanghai Composite Index, PetroChina has become an ideal target for funds trying to influence the broader market.
No More Security
As a result, PetroChina’s stock has become so volatile that its fluctuations are higher than 95% of the stocks in the US small-cap Russell 2000 Index. Its stock moved by at least 4 percent on half of the trading days in July, with a record 9.6 percent drop on July 27.
This is just one example of how the stock market is no longer driven by fundamentals and instead dictated to by the Chinese government as it is largely deciding how each day is going to go. This meddling is blatantly obvious in other companies, as five of the most volatile equities within the 100 largest members of the Bloomberg World Index all come from China, with China Life Insurance and the Bank of China among them.
In addition, the complete absence of transparency in the Chinese government’s support measures adds fuel to the volatile fire. Several unexplained withdrawals of support have left analysts scratching their heads, not knowing if it means a change in policy, or if it is just a reaction to a flood of sell orders. Despite China’s assurances that these measures are temporary, there is no official word on when the interference will end.