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Chinese Stocks Fall to Four-Year Low as Financial Shares Retreat

China’s stocks fell, sending the Shanghai Composite Index to a four-year low, as the central bank’s pledge to stabilize money markets failed to ease concern that elevated funding costs will curb economic growth.

China Minsheng Banking Corp. and China Merchants Bank Co. led a gauge of financial shares to its lowest level in six months. China United Network Communications Ltd., which controls the nation’s second-largest cellphone operator, tumbled 2.2 percent. China Shenhua Energy Co., the nation’s biggest coal producer, sank 3 percent to the lowest level since October 2008.

The Shanghai Composite Index fell 0.4 percent to 1,951.50 at the close, the lowest level since January 2009 and the sixth day of declines. While money-market rates dropped today after the People’s Bank of China said tight liquidity is poised to ease, a gauge of seven-day interbank funding costs is still nearly double this year’s average.

“The concern about the impact of the cash crunch on the real economy still lingers among investors and the government’s deleveraging among the financial system isn’t likely to come to an end after the capital injection,” said Wu Kan, a Shanghai-based fund manager at Dazhong Insurance Co., which oversees $285 million. “The capital injection simply eases the market sentiment.”

The Shanghai index has fallen 19.8 percent from this year’s high on Feb. 6. The losses dragged valuations to 7.9 times projected 12-month earnings, the lowest since Bloomberg began compiling the data in 2006. The CSI 300, which entered a bear market on June 24, has slumped 22 percent from the February peak.

Providing Liquidity

The People’s Bank of China has provided liquidity to some financial institutions to stabilize money-market rates and will use short-term liquidity operations and standing lending-facility tools to ensure steady markets, according to a statement posted to its website yesterday. It also called on commercial banks to improve their liquidity management.

The statement is the first public confirmation of central bank action to ease a crunch that sent the overnight repurchase rate to a record last week and came hours after Ling Tao, deputy head of the PBOC’s Shanghai branch, said liquidity risks were controllable.

The seven-day repurchase rate, a gauge of interbank funding availability, fell 14 basis points to 7.3 percent in Shanghai, according to a weighted average compiled by the National Interbank Funding Center. The rate, which touched a record high of 12.45 percent on June 20, is still nearly double this year’s average of 3.82 percent. The overnight rate dropped 28 basis points to 5.55 percent, less than half the record 13.91 percent reached last week.

Cash Crunch

The Hang Seng China Enterprises Index of Chinese companies traded in Hong Kong rose 3.1 percent today after valuations fell to the lowest level since 2008. The Bloomberg China-US 55 Index, the measure of the most-traded U.S.-listed Chinese companies, added 1.9 percent in New York yesterday.

“The market still doubts whether the decline in money-market rates is temporary and the problem of the cash crunch has really been resolved,” said Wang Weijun, a strategist at Zheshang Securities Co. in Shanghai. “Mainland markets are much more volatile in terms of sentiment as it’s mostly driven by retail investors. That’s why Hong Kong is performing better today.”

A measure tracking the price gap of mainland shares over Hong Kong-listed shares dropped 4.5 percent today, the most since December 2011, according to data compiled by Bloomberg.

Trading volumes in the index were 0.7 percent higher than the 30-day average today while 30-day volatility was at 22.6, close to the highest level since April 2, according to data compiled by Bloomberg.

Financial Stocks

The CSI 300 Financials Index of banks and developers sank for a third day, losing 0.7 percent. Minsheng Banking, the nation’s first privately owned bank, fell 1.7 percent to 8.30 yuan, its third day of declines. Merchants Bank lost 2.4 percent to 10.66 yuan. Haitong Securities Co., the country’s second-largest listed brokerage by market value, retreated 1.8 percent to 9.21 yuan.

A measure of energy stocks in the CSI 300 sank 1.3 percent today, the most among the 10 industry groups. Shenhua slid 3 percent to 16.99 yuan. China Coal Energy Co., the nation’s second-largest coal producer, fell 2.4 percent to 4.94 yuan.

China United lost 2.2 percent to 3.08 yuan.

The Shanghai Composite’s 14-day relative strength index, measuring how rapidly prices have advanced or dropped during a specified time period, fell to 15.3 today. Readings below 30 indicate it may be poised to rise.

Implied Volatility

China’s stocks are “heavily oversold” based on the seven-day and 14-day RSI, Alex Mathews, a technical analyst and head of research at Geojit BNP Paribas Financial Services Ltd., said by phone yesterday.

The cost to protect against swings in Chinese stocks for a month is surging to the highest level since 2011 versus longer-dated options as policy makers sacrifice growth to make the economy less reliant on credit.

Implied volatility for one-month contracts on the iShares FTSE China 25 Index exchange-traded fund has climbed 41 percent in the past two weeks to 32.6 yesterday, according to data compiled by Bloomberg on options that can be exercised near the ETF’s current level. That compares with a 9.8 percent gain to 26 for 12-month contracts, the widest gap since November 2011.

Investors are “pessimistic about the short-term outlook as there’s lots of uncertainty, such as the growth outlook and rising capital costs,” Dai Ming, a money manager who helps oversee $19 million at Hengsheng Hongding Asset Management Co. in Shanghai, said by phone yesterday. “Over the long term, they might be optimistic that sustained growth can be achieved.”

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