China's STAR Market stocks trim massive gains on second wild day of trade

SHANGHAI (Reuters) – Companies on China’s new Nasdaq-style bourse retreated on Tuesday, shedding some of the massive gains made on their volatile debut in the previous session, although all remained well above their listing prices.

While 24 out of 25 companies on the Shanghai Stock Exchange’s STAR Market opened lower, by the midday break four companies managed to post gains, led by Espressif Systems (Shanghai) Co., a maker of wireless communication chips, which jumped 15.1%.

China Railway Signal & Communication Corp posted the sharpest decline of the morning session, falling 16.1% by the midday break, having earlier fallen nearly 22%. The company’s shares remain 76% higher than their initial public offer price.

Yuan Yuwei, fund manager at Olympus Hedge Fund Investments Co, said that STAR Market valuations could remain frothy in the short term, but that he expected to see declines over the next two to four weeks. On Monday, stocks posted average gains of 140%.

“This is a serious bubble,” he said. “Valuations don’t support fundamentals. Frothy valuations benefit big shareholders but retail investors will be burnt.”

Yuan said he hoped regulators would not overly interfere with trading and let market forces play their role.

The STAR Market’s debut on Monday saw some shares climb as much as 520%, and more than doubled the board’s combined market capitalization, exceeding even the expectations of veteran traders.

Data from the Shanghai Stock Exchange showed margin loans turbocharged trading on Monday, with investors borrowing a total of 1.51 billion yuan ($219.38 million) to boost their buying power.