Chinese small-cap stocks are suddenly getting hosed

Photo: Rodrigo Arangua / AFP / Getty Images

Chinese stocks are taking bath on Thursday, adding to heavy losses seen earlier in the week.

Here’s the scoreboard as at 4.30pm AEDT.

  • Shanghai Comp 3441.85 , -1.12%
  • Shenzhen Comp 1821.89 , -2.98%
  • CSI 300 4234.45 , -0.97%
  • CSI 500 6020.02 , -2.74%
  • ChiNext 1703.83 , -1.80%

It’s getting ugly, especially for smaller stocks.

The CSI 500, comprising small cap stocks listed in Shanghai and Shenzhen, is off by 2.74% while the tech-heavy ChiNext Index, known as China’s Nasdaq Index, has also fallen by 1.8%.

Reflecting the losses in tech stocks, the Shenzhen Composite is also down close to 3%.

According to Reuters, stocks were been dragged lower by a series of profit warnings which have sparked concern about the potential for large asset write-downs.

“The over 6% loss in ChiNext this week brings the gauge close to a three-year-low, as a growing list of small-caps, such as outdoor products maker Toread and Hunan China Sun Pharmaceutical Machinery flagged losses or sharp profit falls due to goodwill impairment,” Reuters reports.

Pan Jiang, CEO of money manager Shanghai V-invest, told Reuters that he sees the roughly $160 billion worth of goodwill sitting on the books of China’s listed companies as “the sword of Damocles” that will haunt investors for years to come, especially among small-caps whose growth was heavily reliant on M&As.

“Organic growth of these companies don’t support their lofty valuations. Only when the M&A tide goes out do you discover who has been swimming naked,” Pan told Reuters.

“The intangible assets on these companies’ books are landmines. Once they explode, damage can be stunning.”

In contrast to the performance of small cap stocks, large caps are fairing better.

The benchmark Shanghai Composite Index is down 1.12%, extending its decline from the multi-year peak struck on Monday to 4%.

All sectors aside from financials are sitting in the red with the worst of the declines coming from the technology, telecommunications and healthcare.

The SSE 50 — predominantly comprising large state-owned firms — is flat for the session.

Reuters has more here.

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