China’s stocks fell, capping the benchmark index’s biggest two-day loss this month, on concern valuations are outstripping earnings growth and a flood of share sales will lure funds from existing equities.
Industrial, telecom and technology companies, the best performers over the past year, led declines in Shanghai, while a gauge of mainland shares in Hong Kong entered a correction. Trainmaker CRRC Corp. and Shenzhen InfoTech Technologies Co. plunged by the 10 percent daily limit, while phone-equipment maker ZTE Corp. slid 5.4 percent. Automaker BYD Co. and Anhui Conch Cement Co. tumbled more than 5 percent in Hong Kong.
The Shanghai Composite Index fell 3.5 percent to 4,887.43 at the close, extending losses to 5.4 percent in the past two days. The gauge trades near a five-year high of 19 times estimated earnings, below the level of 36 reached during the 2007 bubble, and in the same ballpark as the Standard & Poor’s 500 Index’s multiple of 17. Benchmark money-market rates surged to a five-week high before 25 initial public offerings that may lock up the most funds since IPOs resumed in January 2014.
“It’s really to the point where valuations are a concern,” Sam Le Cornu, who oversees about $3 billion in Asian equities at Macquarie in Hong Kong, said in an interview with Bloomberg Television. “If you look at some of the stocks now in the Shanghai market, I think they are heading toward the territory” of bubbles, he said.
The CSI 300 Index declined 3 percent. Hong Kong’s Hang Seng China Enterprises Index fell 2.7 percent, taking losses to 10 percent since the May 26 peak. The Hang Seng Index lost 1.1 percent. The Bloomberg China-US Equity Index retreated 1.8 percent in New York on Monday after weekend negotiations between Greece and its creditors broke down.
Subscriptions for the 25 IPOs may tie up 6.68 trillion yuan ($1.08 trillion) of liquidity starting Wednesday, according to the median estimate of six analysts surveyed by Bloomberg. The funds lock-up may be the highest since January 2014 when China resumed IPO approvals, according to China International Capital Corp. and Guotai Junan.
Trading volumes on the Shanghai Composite were 5.3 percent lower than the 30-day average. The measure has surged the most among 93 global indexes tracked by Bloomberg over the past year on a record jump in margin debt and bets the government will lower borrowing costs. It’s valued at 25 times reported earnings, compared with 13.9 for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
Measures of phone, telecommunication and technology stocks in the CSI 300 slid at least 3.5 percent. CRRC, formed by merging CSR Corp. and China CNR Corp, plunged for a sixth day, falling by the 10 percent daily limit. ZTE, China’s second-biggest phone-equipment maker, lost 5.4 percent. Shenzhen O-Film slumped 7.2 percent.
The Shenzhen Composite Index slid 3.5 percent, while the ChiNext index dropped 2.9 percent for a 9.8 percent retreat since hitting a record high on June 3. Chongqing Lummy Pharmaceutical Co. plunged 10 percent.
Reuters reported technical issues are preventing regulators from announcing a start date for the Hong Kong-Shenzhen exchange link. China’s currency and stock-market watchdogs haven’t agreed on what shares investors will be allowed to trade through the link, nor how to allocate investment quotas, Reuters said, citing unnamed sources that are said to have been in talks with the regulator.
Citic Securities Co. paced gains for brokerages, adding 0.3 percent. Citic said it will raise as much as HK$27.1 billion selling new shares to 10 investors, including the Kuwaiti, Singaporean and Malaysian sovereign wealth funds. Huatai Securities Co. gained 1.4 percent after saying it raised its ceiling for margin lending and short selling businesses to a combined 200 billion yuan from 150 billion yuan.
Margin traders increased holdings of shares purchased with borrowed money on Monday, with the outstanding balance of margin debt on the Shanghai and Shenzhen exchange rising by 0.5 percent to a record 1.46 trillion yuan.
Ninety-four percent of Chinese stocks trade at higher valuations than the Shanghai index, a consequence of its heavy weighting toward low-priced banks. Use average or median multiples instead and a different picture emerges: Chinese shares are almost twice as expensive as they were when the Shanghai Composite peaked in October 2007 and more than three times pricier than any of the world’s top 10 markets.
“The market rally is more fragile than in 2007,” Francis Cheung, a strategist at CLSA Ltd. in Hong Kong, wrote in a June 12 report. “With the de-rating of banks and other large SOEs that make up the largest part of the index, it is likely more accurate to compare valuation with median PE.”
— With assistance by Shidong Zhang