China Large-Caps Drop in Sign State Funds Absent; ChiNext Gains

China’s biggest companies plunged in Shanghai on speculation state-backed funds had stopped buying. Smaller-cap shares rose after the central bank governor said the $5 trillion rout in the nation’s equities is close to ending.

The Shanghai Composite Index declined 2.5 percent to 3,080.42 at the close in a fourth day of declines. Industrial & Commercial Bank of China Ltd. led losses on the SSE 50 Index, which sank 4.9 percent. Large-company shares had rallied in late trade for six straight days on speculation government funds intervened to stabilize the market before a World War II victory parade. The ChiNext gauge of smaller companies climbed 2.1 percent from a seven-month low.

China worked to soothe concern over its economy at the Group of 20 gathering in Turkey at the weekend, with officials predicting stabilization in the currency and stock markets in the coming weeks. People’s Bank of China Governor Zhou Xiaochuan said state intervention prevented systemic risk and stopped a free-fall.

"We are not seeing much support for large-cap stocks, and market participants are keener to buy small-cap counters," said Bernard Aw, a strategist at IG Asia Pte. in Singapore. "This suggests that the ‘National Team’ is sitting on the sidelines today."

Bad Debts

The SSE 50 index of the biggest companies snapped a six-day, 17 percent advance. ICBC, the nation’s most valuable bank, slid 8.7 percent, after jumping 18 percent in the previous two trading sessions. China Minsheng Banking Corp. retreated 9.3 percent.

China’s banks are failing to include some debts that have been overdue for at least 90 days, Moody’s Investors Service said in a statement Monday. The ratings company cited its analysis of the first-half results of 11 listed banks including ICBC and China Construction Bank Corp.

The China Financial Futures Exchange on Wednesday moved to limit trading of stock-index futures by lowering the bar for “abnormal trading” and increasing margin requirements and settlement fees. China is also considering imposing circuit-breakers to temporarily shut down stock trading in the event of “abnormal” fluctuations, Xinhua News Agency reported, citing an unidentified official from the China Securities Regulatory Commission.

Beijing Enlight Media Co. led gains on the ChiNext gauge. The CSI 300 Index tumbled 3.4 percent. The Hang Seng Index slumped 1.2 percent in Hong Kong as Galaxy Entertainment Group Ltd slid 5.1 percent. The Hang Seng China Enterprises Index dropped 0.7 percent to a two-year low. The value of shares traded on the Shanghai Composite was 27 percent below the 30-day average, while a gauge of 100-day volatility was near its highest level since 1997.

Intervention Futile

Mark Mobius, Tom DeMark and George Magnus -- world-renowned forecasters who view markets through three very different lenses -- are all finding common ground with their predictions that Chinese shares have further to drop. They say government efforts to prop up the $5.1 trillion market are futile, a view that’s gaining traction among analysts after an unprecedented two-month rescue effort failed to spark a sustained rally.

“I’d expect the government to be reducing intervention,” Mobius, the Franklin Resources Inc. money manager who’s been investing in emerging markets for more than four decades, said in an interview in Hong Kong on Friday. “They realize it’s not working.”

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