The tough times continue. Chinese stocks took another big hit this morning as the reality of the evaporated State support worked through the system. After losing an astonishing $400bn trying to ward off market forces knocking the renminbi and Shanghai-listed stocks, China’s central Government finally called enough, realising that even possessing the biggest reserves was no match against economic fundamentals. When the dust finally clears, many lessons will be absorbed from one of history’s most spectacular stock market booms and bust. Not least that hubris is never a match for reality. – Alec HoggÂ
(Bloomberg) — Chinese shares slumped, extending the steepest four-day rout since 1996, on concern the government is paring back market support.
The Shanghai Composite Index tumbled 4.3 percent to 3,071.06 at the midday break, taking its decline since Aug. 19 to 19 percent. About 14 stocks fell for each that rose on Tuesday. Stocks slumped even as equities rallied around Asia.
Speculation around the government’s intentions has escalated since Aug. 14, after China’s securities regulator signaled authorities will pare back the campaign to prop up share prices as volatility falls. The China Securities Regulatory Commission made no attempt to reassure investors after Monday’s plunge, unlike a month ago when officials issued two statements shortly after an 8.5 percent drop.
“It’s panic selling and an issue of confidence,” said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “The government won’t step in to rescue the market again as it’s a global sell-off and it’s spreading everywhere now. It’s not going to work this time.”
The CSI 300 Index dropped 3.9 percent, led by technology, industrial and material companies. The Hang Seng Index advanced 1.6 percent after a gauge of price momentum dropped to the lowest since the October 1987 stock-market crash. The Hang Seng China Enterprises Index rose 0.5 percent from its lowest level since March 2014.
Unprecedented government intervention has failed to stop a more than $4.5 trillion rout since June 12 amid concern the slowdown in the world’s second-largest economy is deepening. Officials have armed a state agency with more than $400 billion to purchase stocks, banned selling by major shareholders and told state-owned companies to buy equities.
Controllable Situation
When the Shanghai Composite tumbled 8.5 percent on July 27, the regulator issued statements shortly after the market closed saying it would probe the sell-off and underlining the government’s commitment to supporting equities. The CSRC hasn’t made any statements since Monday’s tumble.
“The regulator probably thinks the market slump this time hasn’t impacted the broader financial system, or they think the situation still controllable,” said Xue Hexiang, senior strategist of Huatai Securities Co.
On Aug. 14, the regulator said China Securities Finance Corp., the state agency tasked with supporting share prices, would no longer add to holdings unless there’s unusual volatility and systemic risk, although it would remain in the stock market for years to come.
Officials should wind down the stock market support program even if prices continue to decline, according to a front-page commentary in the state-run Economic Information Daily on Tuesday.
Stock Valuations
About 17 percent of listed shares traded on mainland bourses were halted from trading Tuesday, little changed from Monday.
The intervention sparked concern among Chinese traders that the government was trying to shore up the market at levels unjustified by weaker economic outlook. 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.
China’s economic growth slowed to 6.6 percent in July, according to Bloomberg’s monthly GDP tracker. The nation’s first major economic indicator for August signaled a further deterioration as a private manufacturing index fell to the lowest level in six years.
The central bank added the most funds to the financial system in open-market operations since February on Tuesday as currency-market intervention to prop up the yuan strained the supply of cash.
The People’s Bank of China auctioned 150 billion yuan ($23.4 billion) of seven-day reverse-repurchase agreements, according to traders at primary dealers required to bid at the auctions. That compares with 120 billion yuan maturing Tuesday, which leaves a net injection of 30 billion yuan.
