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China stock market rout deepens

WT24 Desk

Shares on China’s benchmark index slid again on Tuesday, defying attempts by policy makers to halt the worst month-long fall in more than two decades. Since Monday’s close, more than 200 companies have halted trading in their shares, joining a growing number of businesses trying to shield themselves from the market tumble. According to the Securities Times, a paper published by the Shenzhen Stock Exchange, 760 companies — more than a quarter of all A-share listed companies on the Shanghai and Shenzhen exchanges — had suspended trading in the past week. That has frozen $1.4tn worth of equity, according to Bloomberg calculations — about a fifth of China’s stock market value.

The sell-off that began on June 12 has wiped roughly $3tn off the market, in the country’s steepest decline since 1992, according to data from Bloomberg. China’s benchmark stock index fell for its fourth session of the past five on Tuesday. The Shanghai Composite shed as much as 5.1 per cent before ending down 1.3 per cent. The tech-heavy Shenzhen Composite lost 5.3 per cent. The Shenzhen index is now up 36.6 per cent for the year, having been up 122 per cent less than a month ago.

Beijing has taken multiple steps to try to keep stocks on China’s two main indices afloat, including beginning what one economist described as quantitative easing with Chinese characteristics. Yet shares have shed some 30 per cent of their value since mid-June, punishing small investors, some of whom have borrowed heavily to jump on board what had been a spectacular bull run.

“There is a panic but no matter how they [the authorities] jump in, this thing just doesn’t stop falling,” said Dong Tao, regional economist at Credit Suisse in Hong Kong. He said there was a risk of the stock market declines spilling over into the real economy, either through financial market contagion or via the suppression of consumption by those who had lost some or all of their savings.

Offshore markets with links to China were experiencing knock-on effects. The Hang Seng China Enterprises index, comprising large Chinese companies listed in Hong Kong, fell 3.3 per cent, erasing all its 2015 gains and entering a bear market — down more than 20 per cent since May 26. On Monday in New York, Bloomberg’s 74-member China-US Equity Index fell 5.1 per cent, its worst session since September 2011.

Eight of the 10 sectors in Shanghai declined on Tuesday. The exceptions were energy and financials as blue-chips rallied on speculation of direct buying from government-directed funds — or as a result of it. The top gainers were all state-owned, possibly reflecting price-keeping operations directed by the Chinese authorities. Only 54 stocks in Shanghai gained on Tuesday, while 865 fell.

PetroChina rose 4.2 per cent, a fourth straight climb, while Agricultural Bank of China rose 6.7 per cent and Bank of China gained 10 per cent, the maximum daily allowed. In a renewed effort to stabilise the market, the China Association for Public Companies, a Beijing-based organisation, called for “listed companies and their major shareholders and senior executives to buy back, increase their shares and other measures to stabilise the companies’ share price”.

In recent days, the central bank has pledged its own balance sheet to support stocks, in what Mr Dong of Credit Suisse described as Chinese QE — or “unconventional central bank measures to prop up the market”. In addition, 21 securities brokerages have pledged to use their own funds to buy and hold shares, and initial public offerings have been suspended to avoid new listings diverting appetite for the secondary market.

Analysts said the more Beijing does the more it risks creating a perception of desperation, particularly if its efforts have no discernible effect. “All this activity has supported a view that policy makers are in a state of panic,” wrote Mark Williams at Capital Economics. “But it is too late — and probably counter-productive — to intervene [now]. The damage was done when the bubble was allowed to inflate.”

“The financial system is about trust and transparency, but we’re not getting either from the government,” said Dee Sum, a 35-year-old banker in Hong Kong, whose family has sustained heavy losses on the stock market in recent weeks. One domestic journalist, who did not want to be named, said the government had banned local media from using the terms “equity disaster” and “rescue the market” in their reports on the stock market.

According to Bloomberg, margin traders reduced holdings of shares for a record 11th day on Monday. Citigroup analysts have warned that this trend was likely to continue, as only a quarter of margin buys have been forced out so far. Borrowed money helped fuel the rally, giving markets stratospheric gains; deleveraging — the unwinding of those positions — could fuel the return to earth, Financial Times reports.

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