(Yicai) Jan. 28 -- Trading in broad-based exchange-traded funds tracking China’s mainland stock markets has been red hot this year, but money has also been quietly flowing out, with net outflows topping CNY700 billion (USD100.8 billion) so far, as regulators step in to cool an overheated market.

The average daily trading volume of stock ETFs from Jan. 1 to Jan. 26 doubled from a year earlier to CNY242.7 billion (USD35 billion), according to data from financial information provider Wind. Turnover of several broad-market ETFs has hit record highs, but at the same time, these ETFs have seen heavy redemptions, with cumulative net outflows reaching CNY738.2 billion (USD106.2 billion).

State-backed firms are leading the sell-off. Sovereign wealth fund Central Huijin Investment slashed its holdings of nine leading broad-based ETFs, including the China AMC CSI 300 ETF, by nearly 87 billion shares from the end of last year, according to Yicai’s calculations based on fund disclosures. Using average trading prices this year, the reduction could be worth close to CNY360 billion (USD51.8 billion).

While the withdrawal of funds by state-backed firms has been unprecedented, Central Huijin’s overall exposure to major broad-market indexes remains relatively high, which leaves room for further fine-turning and pace control, said Zhang Wenyu, a strategy analyst at Zhongtai Securities. From a sentiment and trading-behavior perspective, the ETF outflows have not triggered a clear rise in risk aversion.

This under-the-radar shuffling of capital is actually a regulatory move to cool an overheated market. From raising margin requirements for financing to the China Securities Regulatory Commission’s efforts to curb excessive speculation, a series of cooling measures has successfully shifted the market from a ‘fast bull,’ with turnover approaching CNY4 trillion (USD575.9 billion), to a more sustainable 'slow bull.'

“Regulators’ actions this time round are more about managing market tempo and creating a more stable environment for the rally to continue,” Jin Dalai, a macro strategy researcher at Golden Eagle Fund’s equity research department, told Yicai. As short-term speculative trading cools, the market may gradually move away from chasing popular ETFs and place more emphasis on industrial trends and earnings certainty.

The key trigger behind the sharp ETF outflows this time is the unusually large surge in trading volume, said Cao Liulong, an analyst at Western Securities’ research center. This can easily attract speculative capital and disrupt market conditions. In March 2007 and April 2015, a rapid rise in the trading of mainland stocks led to a big jump in new retail investor accounts.

Despite ongoing volatility, trading activity on the mainland markets remains strong. Average daily turnover of stock ETFs reached CNY242.7 billion (USD35 billion) as of Jan. 26, up more than 162 percent from the same period last year, according to Wind data.

Editor: Kim Taylor