China Stocks Suffer Sharpest Daily Fall Since 2007

(WSJ) China stocks suffered their sharpest daily percentage decline since 2007, as worries mount that authorities are pulling back on measures to prop up the market.

The Shanghai Composite Index ended down 8.5% at 3725.56, its second-straight day of losses and worst daily percentage fall since February 27, 2007. China’s main index is up 6% from its recent low on July 8, but still off 28% from its high in June.

The smaller Shenzhen Composite fell 7% to 2160.09 and the small-cap ChiNext Closed 7.4% Lower at 2683.45.

Analysts say investors fearful the government would curb its purchases of blue-chip stocks sparked Monday’s selling. Others said officials could be testing whether the market can support itself.

Authorities may want to “test whether the market has recovered its resilience,” said Fu Xuejun, a strategist at Huarong Securities. “The government wants to use state funds to stabilize the market, not to prop it back to 5000 points overnight.”

Earlier this month, 21 brokerages pledged to support the Shanghai index as long as it stayed below the 4500 level. Before Monday, China’s main stock market had rallied for three-straight weeks.

Local brokerages estimate that a state-owned fund called China Securities Financial Corp. has spent hundreds of billions of yuan in supporting the market, although authorities haven’t disclosed a total figure.

“The selling of blue chips would be consistent with concerns that the government is withdrawing support from blue chips,” said Gerry Alfonso, director of trading at Shenwan Hongyuan Securities. 

But “there hasn’t been any official announcement regarding a slowing down of purchases” by authorities, he added.

Monday’s swift fall came as a surprise to many analysts, prompting speculation that officials might step in with fresh rescue measures.

“I am positive that we will see state support emerging again in the next two days,” said Mr. Zhang.

Meanwhile, sharply lower liquidity has exacerbated the volatility. Turnover on the mainland-listed market has hovered about 1.2 trillion yuan ($193.28 billion) in recent days, compared with more than 2 trillion yuan before the market slump, according to Qian Qimin from Shenyin Wanguo Securities.

More than half of the stocks in the Shanghai Composite hit their down limit on Monday. While limits on sharp stock movements prevented hundreds of stocks from logging sharper declines, they also can make it harder for investors to exit positions. China’s market rules prevent share prices from moving freely once they rise or fall by 10%.

Meanwhile, hundreds of stocks that were halted during the throes of the rout have returned to trade. 

Still, investors spooked that suspensions would lock up capital have been pulling out of Chinese stocks for the past few weeks. Investors sold stocks during 13 of the past 16 trading sessions via the Shanghai-Hong Kong Stock Connect, a trading link connecting the two cities that launched in November. Cumulative outflows now total 39.9 billion yuan.

Disappointing economic data also could be adding to the gloom. Earlier, data showed industrial profits in China falling 0.3% in June from a year ago, after rising the previous two months.

Elsewhere, other Asian markets declined more modestly, pressured by disappointing earnings results overseas.

Hong Kong’s Hang Seng Index fell 3.1%. Australia’s S&P ASX 200 rose 0.4%, Japan’s Nikkei Stock Average fell 1% and South Korea’s Kospi was off 0.4%.

Asian currencies continued to feel the pressure of a strong U.S. dollar amid expectations for U.S. interest rates to rise later this year, with some hitting fresh multiyear lows.

The Malaysian ringgit touched 3.8160 against the U.S. dollar, the weakest level since 1998. It was last at 3.8140. The Philippine peso fell to its weakest level since 2010.

A strong dollar and interest-rate expectations also have pushed commodities to multiyear lows, as many are priced in the U.S. currency and some investors might be tempted to move to higher-yielding assets.

Gold was last up 1.2% at $1098.90 an ounce. Brent crude was down 0.9% at $54.15 a barrel.

In Hong Kong, brokerage house Central China Securities Co. is raising 2.53 billion Hong Kong dollars ($326 million) via a share placement in a bid to expand its businesses.

Some 75% of the net proceeds are expected to expand the firm’s margin financing and securities lending business. Margin debt was a key factor underpinning the strength of the China rally until mid-June, and exacerbated the market’s decline thereafter. Shares slid 8.5%.

Source: Wall Street Journal by Chao Deng