By Zhang Shidong & Richard Frost
(Bloomberg) – China’s stocks headed for their biggest three-day loss in a month on concern a world-beating rally has gone too far, too fast.
The Shanghai Composite Index slumped 1.3 percent to 4,823.98 at 1:06 p.m. local time, extending a two-day, 5.4 percent decline. Consumer, industrial and health-care companies led losses Wednesday. Shanghai Electric Group Co. tumbled 6.7 percent, the second-biggest contributor to declines and paring its gain this year to 134 percent.
A growing number of analysts are predicting the stock market is a bubble that will burst as valuations reached levels that by some measures exceed the peak of China’s last equity mania in 2007. Equities also declined on concern investors were pulling funds to partake in new share sales. Guotai Junan Securities Co. plans to raise as much as $4.85 billion this week in the mainland’s biggest initial share sale since 2010.
“Shares have risen to pretty expensive levels and some investors are choosing to sell,” said Dai Ming, a Shanghai- based fund manager at Hengsheng Asset Management Co. “The speed of new share sales is fast and accelerating now. The market needs a correction at this level.”
The CSI 300 Index declined 1.2 percent. Hong Kong’s Hang Seng China Enterprises Index added 0.3 percent, led by a rally for Bank of Communications Ltd. The Hang Seng Index rose 0.4 percent.
The Shanghai Composite has jumped 134 percent in the past 12 months through Tuesday, the most among benchmark global indexes tracked by Bloomberg, as novice investors piled into stocks on bets gains will continue. Record margin debt has fueled the advance.
Turning Bearish
A market crash may come within six months, Bocom International Holdings Co. said Tuesday, citing an analysis of global bubbles over 800 years that shows the speed of gains in China mirroring past market peaks.
Macquarie Investment Management, whose Asian stock fund is outperforming 97 percent of peers in 2015, has already eliminated exposure to mainland shares after turning bearish for the first time in seven years. The government may engineer a correction if valuations rise much further, according to CLSA Ltd.
The median stock on Chinese exchanges trades at about 55 times projected earnings for the next 12 months, almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and three times pricier than any of the world’s top 10 markets.
Gauges of consumer, industrial and health-care stocks in the CSI 300 fell at least 1.8 percent, the worst performers among 10 industry groups. Shenzhen Agricultural Products Co. slumped 6.3 percent, while China First Heavy Industries Co. tumbled 8.3 percent.
Bocom Rallies
Bank of Communications, part-owned by HSBC Holdings Plc, gained 4.3 percent in Shanghai and climbed 2.9 percent in Hong Kong. The State Council approved the bank’s plan to introduce private capital, according to a statement to the Hong Kong and Shanghai stock exchanges on Tuesday. The government will remain Bocom’s controlling shareholder and the bank will explore employee share ownership and deepen salary reforms, it said.
Subscriptions for 25 upcoming initial public offerings including Guotai Junan may tie up 6.68 trillion yuan ($1.08 trillion) of liquidity starting Wednesday, according to the median estimate of six analysts surveyed by Bloomberg. The funds lock-up may be the highest since January 2014 when China resumed IPO approvals, according to China International Capital Corp. and Guotai Junan.
Margin traders increased holdings of shares purchased with borrowed money on Tuesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising by 0.2 percent to a record 1.46 trillion yuan.
