Chinese stocks hammered again, 8.5% drop wipes out all gains of 2015 bubble

When there’s a reversal in a stock market boom, best to get out of the way. That’s a lesson professional investors have learnt from experience – but one which punters drawn late to the action always battle to heed. In China, the stock market is crashing as professionals dump over-priced stocks to anyone prepared to buy. Fortunately for them, the Chinese Government has provided an underpin, buying aggressively in the mandarins’ attempts to stem the tide. Unfortunately for punters, many interpreted the State support as an excuse to jump back in, picking up stocks which the smart money keeps offloading. The Shanghai market’s fall continued this morning with the latest 8.5% drop now having wiped out all of the gains generated during the 2015 part of the price bubble. History suggests the pain is not over. – Alec Hogg
China Stock Market crash
Bloomberg News

(Bloomberg) — China’s stocks plunged, with the benchmark index erasing its gains for the year, as government support measures failed to allay investor concerns that a slowdown in the world’s second-largest economy is deepening.

The Shanghai Composite Index sank 8.45 percent to 3,211.20 at the noon-time break, dropping below the key 3,500 level that previously spurred state buying. The Hang Seng China Enterprises Index lost 6.7 percent, poised for its biggest decline since 2009. Taiwan’s Taiex index slid as much as 7.5 percent.

Worsening economic data and signs of capital outflows are undermining unprecedented government attempts to shore up the country’s $6 trillion stock market. While China said over the weekend it will allow pension funds to buy shares for the first time, a speculated cut in bank reserve ratios failed to materialize.

“This is a real disaster and it seems nothing can stop it,” Chen Gang, Shanghai-based chief investment officer at Heqitongyi Asset Management Co. “If we don’t cut holdings ourselves, the fund faces risk of forced closure. Many newly started private funds suffered that recently. I hope we can survive.”

More than 750 stocks fell by the daily 10 percent limit on the Shanghai Composite, including ChinaShenhua Energy Co. and China Shipbuilding Industry Co. The gauge has tumbled 38 percent from its June 12 peak to wipe out more than $4 trillion of value.

The Hang Seng Index sank 4.6 percent in Hong Kong. The gauge’s relative strength index declined to 15.4, the lowest since the aftermath of the October 1987 stock market crash.

Economic growth slowed to 6.6 percent in July, according to Bloomberg’s monthly GDP tracker. China’s first major economic indicator for August signaled a further deterioration as a private manufacturing index fell to the lowest level in six years.

Stock Valuations

“China’s economy is pretty ugly and some sectors have bubbles,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co., who’s keeping his holdings unchanged. “Selling pressure around global markets is also weighing on local sentiment. The Shanghai Composite may fall to around the 3,000- point level.”

Stocks on mainland bourses traded at a median 61 times reported earnings on Friday, according to data compiled by Bloomberg. That’s the most among the 10 largest markets and more than three times the 19 multiple for the Standard & Poor’s 500 Index.

Yuan positions at the central bank and financial institutions fell by the most on record last month, a sign capital outflows have picked up. Chinese equity funds were the biggest contributors to more than $4 billion of outflows in Asia excluding Japan in the week to Aug. 19, EPFR Global said. Margin traders reduced holdings of shares purchased with borrowed money for a fourth day on Aug. 21.

Pension Funds

PetroChina Co., the nation’s biggest company by market value, plummeted 8.4 percent. Industrial and Commercial Bank of China Ltd., the second largest, headed for its biggest loss since Jan. 19 with a 7.7 percent slump.

The State Council, or cabinet, on Sunday announced it will allow pension funds to invest as much as 30 percent of their total net assets in stocks. Pension funds had net assets of 3.5 trillion yuan ($547 billion) by the end of 2014, Xinhua News Agency reported.

The move is the latest attempt by the government to support the equity market, after arming a state agency with more than $400 billion, banning selling by major shareholders and telling state-owned companies to buy stocks.

“The news on pension funds over the weekend was positive, but not having the expected required-reserve ratio cut or any other larger measure seems to have disappointed investors,” said Gerry Alfonso, a Shanghai-based trader at Shenwan Hongyuan Group Co. “But it is questionable whether even with one the market would have rebounded.”

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