Tomohiro Ohsumi/Bloomberg

Chinese Stocks Resume Rout on Economy, Capital Outflow Concerns

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China’s stocks slumped to a two-week low as concern a slowing economy and weaker currency will spur capital outflows outweighed prospects for more state support.

The Shanghai Composite Index dropped 3.4 percent to 3,664.29 at the close, the lowest level since Aug. 6. About 17 percent of mainland-listed shares remain halted. The Hang Seng China Enterprises Index sank 2.3 percent to a 10-month low, while the Hang Seng Index closed within three points of entering a bear market.

“The market will trade between 3,500 to 3,900 in the short term as market sentiment is still weak,” said Zhang Yanbing, a Shanghai-based analyst at Zheshang Securities Co. “Whether China’s stock market stabilizes will depend on future economic data and further easing policies.”

Speculation about the degree of government intervention in stocks has increased since the securities regulator indicated Friday that the state will reduce buying and data showed the richest traders were cashing out. China’s central bank injected the most funds in open-market operations since February as intervention to prop up the yuan strained the supply of cash and drove a key money-market rate to a four-month high.

The 3,500 level has emerged as the latest make-or-break line for traders trying to gauge the staying power of state support. Signs of government buying have appeared at that price on the Shanghai Composite at least four times over the past six weeks. The latest example came on Wednesday, when the gauge posted an intraday rally of 6.6 percent after falling to as low as 3,558.38.

Capital Outflows

The CSI 300 Index lost 3.2 percent, closing at a six-week low. Gauges of health-care, industrial and consumer companies fell more than 3 percent.

Guangzhou Baiyunshan Pharmaceutical Holdings Co. retreated 10 percent and China Shipbuilding Industry Co. lost 9 percent. Hithink Flush Information Network Co. tumbled 10 percent. The company is facing a probe by the securities regulator and said it may be temporary delisted.

July economic data from China showed industrial output, retail sales and fixed-asset investment all trailed analyst estimates. Yuan positions at the central bank and financial institutions fell by the most on record last month, a sign capital outflows have picked up.

The government has armed a state agency with more than $400 billion to bolster share prices and told state-owned companies to buy stocks. It’s seeking to prop up the market after a drop of more than 30 percent in the Shanghai gauge threatened to undermine confidence in President Xi Jinping’s ability to manage the economy.

Lacking Confidence

“The market is still lacking in confidence. It’s back to the downtrend after yesterday’s mild rebound,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. “We cannot rule out the possibility that the market will test the earlier low level of around 3,300” set on July 9, he said.

The People’s Bank of China pumped a net 150 billion yuan ($23 billion) into the financial system this week, data compiled by Bloomberg show. That’s the most since before the Chinese New Year holiday, when seasonal demand for cash spikes. The authorities are providing another 170 billion yuan through loans and an auction of deposits.

The injections come after China surprised investors by devaluing the yuan last week and shifting to a more market-oriented exchange rate.

Chinese equity valuations are still among the most expensive in the world. The median stock on mainland bourses trades at 67 times reported earnings, higher than any of the 10 largest markets. It was 68 at the peak of China’s equity bubble in 2007, according to data compiled by Bloomberg.

Bear Market

Margin traders reduced holdings of shares purchased with borrowed money for a second day on Wednesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling by 0.5 percent to 875.4 billion yuan.

Hong Kong’s Hang Seng Index dropped 2 percent, taking its decline from an April 28 high to 19.6 percent, approaching the 20 percent level that signifies the start of a bear market.

Cathay Pacific Airways Ltd. fell 3.4 percent, headed for its biggest two-day decline since 2011. The carrier tumbled 7.7 percent on Wednesday after reporting lower-than-estimated first-half profit.

Galaxy Entertainment Group Ltd. slid 6.1 percent, taking a nine-day plunge to 21 percent. The company said Wednesday first-half net income decreased 66 percent from a year earlier. Sands China Ltd. fell for a fourth day, dropping 3.6 percent.

— With assistance by Shidong Zhang

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