China’s Stocks Fall to Cap Worst Monthly Decline in Six Years

China H-Share Banks, Insurers Favored, UBS's Tay Says

China’s stocks fell, capping the benchmark index’s biggest monthly drop since August 2009, as the government struggles to rekindle investor interest amid a $3.5 trillion rout.

The Shanghai Composite Index slid 1.1 percent to 3,663.73 at the close, dragged down by energy and industrial companies. The gauge tumbled 15 percent this month, the biggest loss among 93 global benchmark gauges tracked by Bloomberg, as margin traders cashed out and new equity-account openings tumbled amid concern valuations are unsustainable.

While unprecedented state intervention spurred a 18 percent rebound by the Shanghai Composite from its July 8 low, volatility returned on Monday when the gauge plunged 8.5 percent. Outstanding margin debt on mainland bourses has fallen about 40 percent since mid-June, while the number of new stock investors shrank last week to the smallest since the government started releasing figures in May. Individuals account for more than 80 percent of stock trading in China.

“The support measures may have been less effective than what Beijing imagined,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore.

The Hang Seng China Enterprises Index of mainland shares in Hong Kong tumbled 14 percent this month, its worst loss since September 2011. The gauge lost 0.1 percent Friday, while the Hang Seng Index advanced 0.6 percent. The CSI 300 Index was little changed.

Rising Volatility

Industrial & Commercial Bank of China Ltd. was the biggest drag on the Shanghai Composite this month, sinking 8.5 percent. China Petroleum & Chemical Corp. tumbled 15 percent, while Ping An Insurance Co. plunged 19 percent.

Turnover has fallen as volatility surged. The value of shares traded on the Shanghai exchange on Thursday was 53 percent below the June 8 peak, while a 100-day measure of price swings on the Shanghai Composite climbed to its highest level in six years on Friday.

Valuations remain elevated after a 29 percent drop by the benchmark equity gauge. The median stock on mainland bourses trades at 66 times reported earnings, higher than in any of the world’s 10 largest markets, according to data compiled by Bloomberg. That compares with a multiple of 13 in Hong Kong.

“The volatility in A-share markets, which was boosted by the surge in margin financing, has made share price performance deviate from the value of stocks in unpredictable ways,” said June Lui, portfolio manager at LGM Investments. “We have been cautious on investing in A shares.”

Margin Debt

At the market’s peak in June, investors were opening more than 1 million accounts a week. Margin debt surged fivefold over the preceding 12 months, propelling the Shanghai Composite to a 150 percent advance.

The outstanding balance of loans backed by share purchases fell to 881.6 billion yuan ($142 billion) on the Shanghai Stock Exchange Tuesday, the lowest level since March 16. The combined margin debt on Shanghai and Shenzhen bourses has fallen by $144 billion to $221 billion from the June 18 peak through Wednesday.

Spoofing has become the latest target in China’s campaign against stock-market manipulation, following a probe of “malicious” short selling. Spoofing, which involves placing then canceling orders to move prices, is suspected in 24 accounts on the Shanghai and Shenzhen stock exchanges, the China Securities Regulatory Commission said on its microblog.

To shore up markets, the government has armed a state-run financing agency with more than $480 billion to bolster the market, allowed hundreds of companies to suspend share trading and banned major shareholders from selling stocks.

Friday Trading

The Shanghai Composite extended losses on Friday afternoon after Reuters reported that Chinese regulators had asked financial institutions in Singapore and Hong Kong for stock-trading records as part of efforts to track down investors betting against shares in China.

The CSRC asked for the records to try to identify investors who took net short positions against China’s stock markets, Reuters said, citing sources that it didn’t identify. Hong Kong’s securities commission and Singapore’s monetary authority declined to comment, while the CSRC didn’t answer calls, Reuters reported.

Some 505 companies were halted on the Shanghai and Shenzhen exchanges on Friday, or equivalent to 18 percent of all listings. Energy and industrial stocks dropped before Saturday’s manufacturing data. PetroChina Co., the biggest oil producer, slid 5.3 percent. Air China Ltd. dropped 10 percent.

The official Purchasing Managers’ Index compiled by China’s National Bureau of Statistics and the China Federation of Logistics probably slipped to 50.1 in July from the previous month’s 50.2, according to the median estimate of 24 economists surveyed by Bloomberg. A reading above 50 signals expansion.

Economic Data

Recent data show signs of a weakening economy. A private gauge of manufacturing unexpectedly fell to the lowest level in 15 months, while industrial profits slumped in June. China will step up targeted macro policy control to support the economy and counter downward pressure, the Xinhua News Agency reported Thursday following a Politburo meeting chaired by President Xi Jinping.

Trading this week has been marked by unexplained late-day swings on equity indexes. On Thursday, the Shanghai Composite tumbled 2.2 percent in the last hour of trading to erase a 1.5 percent gain. The move was almost a reverse image of the previous day, when the Shanghai gauge surged in the last 60 minutes to close 3.4 percent higher.

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