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Intraday volumes on key onshore equity markets fell and stock futures turnover all but evaporated this week, after exchanges proposed a "circuit breaker" to limit index swings and China altered dividend taxes to favor long term investors.
The moves were welcomed by some, but the sharp drop in volumes also underlined how many investors have lost confidence in Beijing's ability to manage the turmoil that saw stocks slide over 40 percent since June.
Under the country's old economic model, that may not have mattered so much: bank lending for infrastructure projects and manufacturing was what kept the economic engine running.
Now China wants to modernize its economy, favoring nimbler, high-tech companies that need equally nimble, modern financial markets to finance them. Comatose stock and futures markets would represent a major blow to its ambitions.
Wang Feng, a fund manager and CEO of Alpha Squared Capital, is considering joining the mass exodus from Chinese equities.
He told Reuters he was looking into investing in commodities futures as an alternative to stock index futures. Some of his peers in the high-frequency trading community were cancelling plans to come to China altogether.
Wang blamed a series of attempts in recent weeks by regulators to curb excessive speculation for taking the life out of the market.
"The joke now is that the market is a vegetative patient."
Others are shifting their strategies to offshore futures contracts tracking China-based ETFs, like the iShares A50 , Wang added.
Qiu Zhi, a strategist at Huatai Securities Co, said he was seeing rising inquiries from Chinese investors to open accounts to trade index futures in Hong Kong.
"The rules of the game are more consistent in Hong Kong."
Rewriting the rules
China has busily rewritten the rules in recent weeks, and there has been no let up in policy changes and intervention aimed at shoring up markets and staving off full-blown panic.
Adding to authorities' crackdown on derivatives trade, focused mainly on sellers, the exchanges proposed this week to add a "circuit breaker" to the benchmark CSI300 index that would suspend trade if it moved up or down over 5 percent in a day.
While it appears to have convinced some investors to stop selling shares, it may also have convinced people not to buy.
Volumes on the Shanghai Composite Index are down more than 40 percent following Monday's announcement of the circuit breaker plan, and on Tuesday they were at their lowest since February, a month in which trade typically dives due to the Lunar New Year holiday week.
Traders suspect much of the remaining business comes from the government's so-called "national team" of investors who sweep in to push indexes up near the end of a day, resulting in sudden rises by the close that are hard to explain otherwise.
Once-active index futures markets have seen volumes vaporize; trade in the benchmark CSI300 index future contract collapsed this week, with transactions falling from around 600,000 on Friday to less than 23,000 on Tuesday.
That compares with a peak of 2.43 million in late August and comes after China raised margin requirements on some stock index futures trading.
The risk for China is a stable but illiquid stock market, meaning securities regulators will struggle to re-open the suspended IPO market.
As long as share issues remain suspended, the stock market will not serve as a viable fundraising alternative to bank loans for the rapidly expanding companies that Beijing wants to lead its economy in the long term.
Looking for the exit
Retail investors who dominate Chinese stock markets have consistently said they want to exit as soon as they can do so at minimal loss.
The sliding volumes highlight their retreat, in a blow to Beijing's vision of a society that can invest safely and profit from the country's expanding and increasingly dynamic economy.
Institutional investors say they have been put off by heavy-handed pressure from Beijing to buy and hold shares, and in an environment in which fund managers are being questioned by authorities about their strategies, it is increasingly seen as safer not to trade at all.
"We are staying out of shares at the moment," said a hedge fund manager focused on China consumer plays based in Hong Kong.
Declining investor interest in stocks was predicted by many analysts and economists, who warned that attempts to lure buyers into the market by suppressing sellers would backfire.
"Time and again, we have seen countries trying to introduce measures to support their stock markets, but the only thing that has worked in the long term is to let markets clear themselves," said Dominic Rossi, global chief investment officer of equities at Fidelity Worldwide Management, which manages $290 billion in assets globally.
"China should do the same." — Reuters
