China Stocks Enter Bear Market as State-Fueled Rally Evaporates

Chinese stocks fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue campaign as investors lose confidence in government efforts to manage the country’s markets and economy.

The Shanghai Composite Index sank 3.5 percent to 2,900.97 at the close, falling 21 percent from its December high and sinking below its nadir during a $5 trillion rout in August. Friday’s decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans.

“The market entered a disaster mode at the start of the year and it’s still in that pattern now,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “The market has completely no confidence and the basic reason is that stocks are expensive, particularly those small caps,” he said, adding that he plans to swap large-cap shares for small caps.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990.

While China’s high concentration of individual investors makes the nation’s stock market notoriously volatile, losses in the Shanghai Composite have become one of the most visible symbols of waning investor confidence in the world’s second-largest economy.

After cheerleading by state media helped fuel an unprecedented boom in mainland shares last summer, the market crashed as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a 25 percent rally in the Shanghai Composite through December, but those gains were wiped out on Friday as the index closed at its lowest level since late 2014. Losses this year were fueled by the controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days.

“The bottom has fallen out of the market in the last two weeks,” said Francis Lun, chief executive officer at Geo Securities Ltd. in Hong Kong “Investors have lost confidence after two weeks of meddling by government officials.”
The Shanghai Composite is valued at 11.5 times 12-month projected earnings, compared with 10.4 for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.

Investors aren’t likely to move back to the market unless the Shanghai Composite breaches the intraday low of 2,850 set in the August rout, and selling pressure still exists after last week’s halt to the new circuit-breaker system, said Zhang Gang, a Shanghai-based strategist at Central China Securities Co.

Stocks extended losses on Friday afternoon after International Finance News, a publication managed by the People’s Daily, reported banks will only accept shares of CSI 300 constituents for pledges while cutting the collateral ratio to 35-40 percent from 50 percent. The slump for equities is a reversal from Thursday, when equities jumped amid speculation government-backed funds had stepped in to buy shares.

“It’s a bad news for the stock market and that means it’s becoming more difficult to get cash or raise funds through equities,” said Luo Wenbo, chief strategist at Zhongtai Securities Co.

Guangdong Wens Foodstuffs Group Co. led declines in the ChiNext with a 6.5 percent slide. The small-caps gauge retreated 2.9 percent.

The CSI 300 sank 3.2 percent, led by energy, material and industrial companies. In Hong Kong, the Hang Seng China Enterprises Index lost 2.6 percent, while the Hang Seng Index slipped 1.5 percent.

Datong Coal Industry Co. paced declines for energy shares, tumbling 4.4 percent, while Yanzhou Coal Mining Co. slumped 6.2 percent. Jiangxi Copper Co., the nation’s biggest producer of the metal, sank 5.1 percent.

Aggregate financing rose to 1.82 trillion yuan ($276 billion) in December, according to a report from the People’s Bank of China on Friday, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey. New yuan loans slowed to 597.8 billion yuan in December, trailing the 700 billion yuan median forecast. M2 money supply growth was 13.3 percent from a year earlier, compared to the median estimate for 13.6 percent.

Bloomberg

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell