More Govt intervention flops; Chinese market falls again, Crash now 25%

The latest Crash in Shanghai-listed shares expanded to a loss of more than 25% in just five days as yet another intervention by Beijing failed to stem the selling. After the Chinese Government blew $400bn mopping up stocks that were being dumped and trying to protecting its currency, it stopped providing direct support on Monday. The authorities tried another approach yesterday, cutting interest rates half a percentage point. Initial optimism soon dissipated as the Shanghai share index swung from a 1.2% gain to a 3.8% decline in a couple hours, signalling there could be some way to the bottom of a market whose market capitalisation has fallen an astonishing $5 trillion since the peak. For context, that is the equivalent of ten times the combined value of all shares listed on the Johannesburg Stock Exchange. – Alec Hogg

An investor chats in front of an electronic board showing stock information at a brokerage house in Beijing, August 26, 2015. Asian shares struggled on Wednesday as investors feared fresh rate cuts in China would not be enough to stabilise its slowing economy or halt a stock collapse that is wreaking havoc in global markets. REUTERS/Jason Lee
An investor chats in front of an electronic board showing stock information at a brokerage house in Beijing, August 26, 2015. Asian shares struggled on Wednesday as investors feared fresh rate cuts in China would not be enough to stabilise its slowing economy or halt a stock collapse that is wreaking havoc in global markets. REUTERS/Jason Lee
By Kyoungwha Kim

(Bloomberg) — China’s stocks extended the steepest five-day drop since 1996 as an interest-rate cut by the central bank failed to stop a $5 trillion rout.

The Shanghai Composite Index sank 3.8 percent to 2,852.21 at 10:42 a.m. local time, rising as much as 1.2 percent earlier. About eight stocks fell more each that rose on the gauge. The fifth interest-rate cut since November was announced hours after the benchmark measure closed with a 7.6 percent drop on Tuesday.

Chinese equities have lost at least $5 trillion, or half their value, since mid-June as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. The government has halted intervention in the equity market this week as policy makers debate the merits of an unprecedented rescue, according to people familiar with the situation.

“The prevailing sentiment is still that investors want to cash out, whatever the government does,” said Ronald Wan, chief executive at Partners Capital International in Hong Kong. “Confidence is already damaged. Doubts over the effectiveness of policies are getting bigger. The market will remain under selling pressure for a while.”

The PBOC said it will cut the one-year lending rate by 25 basis points to 4.6 percent and lower the required reserve ratio by 50 basis points for all banks.

The Hang Seng China Enterprises Index dropped 0.7 percent. Hong Kong’s Hang Seng Index fell 1.2 percent as the value of shares traded reached double the 30-day average for this time of day.

Technical Indicators

Some Chinese officials argue that falling stocks will have a limited economic impact and the costs of supporting the market are too high, said one of the people, who asked not to be identified because deliberations are private. Officials who back intervention say tumbling shares pose a risk to the banking system, the people said.

Tom DeMark, who predicted this month’s selloff in Chinese stocks, said the Shanghai Composite Index may extend its decline by 13 percent should it stay below a critical technical level on Wednesday.

A failure to close above 3,200, or almost 8 percent higher than Tuesday’s level, may open the way for a move to 2,590, which would be the lowest since November, according to DeMark, founder of DeMark Analytics. An advance above that level, however, would signal the stock rout may be over, he said.

Gauges of technology, industrial and commodities companies plunged more than 5 percent on the CSI 300 Tuesday, with all 10 industry groups declining.

Growth Support

Deutsche Bank AG recommended investors buy so-called H- shares on attractive valuations and an improving economic outlook. The Hang Seng China Enterprises gauge of mainland companies listed in Hong Kong will rally 37 percent by year-end, according to the analysts’ forecast.

The central bank’s move “reaffirmed that the leadership’s policy priority is growth support,” strategists led by Yuliang Chang at Deutsche Bank wrote in a note on Tuesday. An above- average risk premium in H shares suggests “investors may have priced in some pretty bad scenarios. The market dipped and appeared oversold amid jittery sentiment.”

The four-day, 22 percent drop in the Shanghai composite narrowed a premium in yuan-denominated A shares versus their Hong Kong-listed peers to 21 percent from 40 percent three weeks ago, according to the Hang Seng China AH Premium index.

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