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- Shanghai Composite is heading for biggest loss since 2008
- Equity rout sparked an unprecedented state rescue effort
China’s stocks rose, paring the biggest quarterly loss since 2008, as the government struggled to halt a $5 trillion rout and the world’s second-largest economy showed signs of a sharper slowdown.
The Shanghai Composite Index has tumbled 28 percent since the end of June, the biggest loss among benchmark global gauges. The measure rose 0.7 percent to 3,059.36 at the 11:30 a.m. break on turnover 57 percent below the 30-day average for this time of day. China’s financial markets will be shut from Thursday for weeklong National Day holidays.
The value of shares traded on mainland bourses have plunged 87 percent from the June record as the equity boom turned to bust and the government took unprecedented measures to shore up stocks -- including banning major shareholders from selling and curbing index futures trading. Leveraged wagers, which helped fuel gains in the first half of the year, have tumbled by 60 percent since the peak, while the government has wiped out nearly 70 percent of unregulated margin lending. President Xi Jinping said last week equities have entered a phase of "self recovery," signaling policy makers will pare back support as volatility subsides.
“The government’s clampdown on non-compliant margin financing has hit the Chinese equity markets hard,” said Bernard Aw, a strategist at IG Asia Pte in Singapore. “We however may see some upside potential in the fourth quarter, as much of non-compliant margin trading accounts have been cleared. Further weakness in the Chinese economy may see investors keeping to the sidelines.”
Stock Valuations
Hong Kong’s Hang Seng China Enterprises Index rose 2.3 percent on Wednesday, paring its losses this quarter to 27 percent. The Hang Seng Index added 1.4 percent, trimming its three-month decline to 21 percent.
Gauges of technology, material and energy companies in the CSI 300 Index have slumped at least 34 percent this quarter for the worst performances among 10 industry groups. Hundsun Technologies Inc., which has a financial investment platform known as HOMS that allows trust firms and online lenders to provide leveraged trading facilities to clients, plunged 61 percent. China Coal Energy Co. tumbled 47 percent, while Yunnan Copper Co. slumped 59 percent.
Chinese shares remain expensive relative to global stocks after the rout. Equities on mainland bourses trade at a median 49 times reported earnings, the highest among the world’s 10 largest markets and almost three times the multiple of 18 for the Standard & Poor’s 500 Index. The Shanghai index, where low-priced banks have some of the biggest weightings, is valued at 15.3.
PMI Data
The statistics bureau is scheduled to release an official manufacturing index for September on Thursday. The reading will probably be 49.7, unchanged from a month earlier, according to the median estimate of economists surveyed by Bloomberg. A reading below 50 indicates contraction. Recent data have been week, with a preliminary factory gauge falling to the lowest level since the global financial crisis and industrial profits slumping the most in at least four years.
While HSBC Holdings Plc said last week further losses by Chinese shares are limited after leveraged traders cut more than $200 billion of positions, there are few signs individual investors -- who account for more than 80 of trading on Chinese shares -- are returning to stocks.
The number of new investors has tumbled more than 80 percent from the peak in late May. The richest traders have been quickest to bail out of the market. The number of accounts holding shares worth more than 10 million yuan ($1.6 million) almost halved in the past three months, the biggest decline among four categories of investor wealth tracked by the nation’s clearing agency.
Weaker Growth
A string of weak economic data is increasing concern about the outlook for corporate earnings, while Xi’s plan to overhaul the country’s $16 trillion state-run sector unveiled this month failed to reignite investor interest. Barclays Plc cut its forecast for the nation’s growth next year to 6 percent from 6.6 percent.
Another concern for investors is what happens when the state starts to step back and how long curbs on trading will remain. China’s securities regulator said Aug. 14 that the government agency tasked with supporting share prices will reduce purchases as volatility falls. Restrictions on trading futures and a probe into “malicious" short-selling are making it almost impossible for investors to hedge positions. State funds have spent $246 billion purchasing equities in the three months through August, according to Goldman Sachs Group Inc.
Margin Debt
Central bank Governor Zhou Xiaochuan said this month intervention in the equity market helped reduce the risk of the rout spilling over into the broader economy, and bring closer an end to the plunge. While the Shanghai Composite is only 3.8 percent above since its Aug. 26 low, declines of more than 5 percent -- which occurred almost daily during the depths of the rout -- have been absent in the past month.
“Over the past few months, the market has seen lots of negative factors such as margin-debt deleveraging, the economic slowdown and we’ve seen a weak performance for stocks,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. “Going forward, given most of these factors have been priced in.”
Margin traders reduced holdings of shares purchased with borrowed money for a fifth day on Tuesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to a nine-month low of 573.4 billion yuan. The nation had cleared up 69 percent of non-compliant margin lending accounts as of Sept. 23, China Securities Regulatory Commission spokesman Zhang Xiaojun said at a briefing last week.
Courtesy: Bloomberg Business 30 September
