China's Stocks Fall as Capital Outflows Hit Record in August

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China’s stocks capped a weekly loss after capital outflows hit a record and concern grew the nation’s economic slowdown is worsening and the government is scaling back support for equities.

The Shanghai Composite Index dropped 1.6 percent to 3,092.35 at the close, wiping out this week’s gain. About eight stocks slid for every one that advanced as trading volumes tumbled 33 percent from the 30-day average. An estimated $141.66 billion left China in August, exceeding the previous record of $124.62 billion in July, data compiled by Bloomberg show. Technology stocks, the best performers this week, slumped the most among industry groups.

Trading on China’s stock market is waning before a week-long holiday shutdown that starts on Oct. 1. A private report showed this week that a preliminary manufacturing gauge unexpectedly fell to a six-year low, while margin debt in Shanghai slid to about 40 percent of its peak recorded in June. President Xi Jinping said this week that equities have entered a phase of “self-recovery.”

“The market is a bit into holiday mode and there’s not much interest in trading stocks,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. “There’s no good news for the market with the economy being weak. The market is now in a recovery stage without state intervention and that will take time.”

The CSI 300 Index retreated 1.6 percent. The Hang Seng China Enterprises Index added 0.5 percent in Hong Kong, while the Hang Seng Index rose 0.4 percent. Hong Kong’s stock market is closed on Monday for a holiday.

Stock Valuations

The Shanghai Composite has tumbled 40 percent from its June high as leveraged investors fled the stock market amid concerns valuations weren’t justified amid a weakening economy.

Equities on mainland bourses trade at a median 51 times reported earnings. That’s the highest among the world’s 10 largest markets and more than twice the multiple of 18 for the Standard & Poor’s 500 Index. The Shanghai Composite, where low-priced banks have some of the biggest weightings, is valued at 15.4.

Margin traders reduced holdings of shares purchased with borrowed money for a second day on Thursday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to 588.1 billion yuan ($92.2 billion). That compared with the peak of 1.48 trillion yuan in June.

“Investors’ confidence is unstable, in a tug of war between bulls and bears, so the market is very volatile,” Sun Jianbo, chief strategist at China Galaxy Securities Co., said by phone. The Shanghai gauge’s 100-day volatility has been hovering near 18-year highs.

Capital Outflows

Capital outflows accelerated after the People’s Bank of China shocked markets by devaluing the yuan on Aug. 11. The offshore yuan rose the most in a week on Friday amid speculation the central bank is propping up the currency as Xi and President Barack Obama prepare to meet at a formal summit in Washington.

Gauges of technology and industrial stocks in the CSI 300 fell at least 2.7 percent for the biggest declines among industry groups. Goertek Inc. tumbled 7.6 percent, while China First Heavy Industries Co., a maker of equipment used in the mining and energy industries, lost 6.5 percent.

Technology and industrial companies rallied earlier this week amid speculation Xi’s U.S. visit will help boost exports and lead to increased cooperation. The Chinese president has met with the heads of companies including Honeywell International Inc. and Apple Inc.

IPO Speculation

China is unlikely to resume initial shares offerings this year given the government’s aim to stabilize the stock market, said Huang Cendong, an analyst at Sinolink Securities Co. in Shanghai. Huang responded to market speculation the government may soon complete revision of IPO-related rules.

The Securities Association of China denied speculation that it issued a circular saying preparations are underway for IPO resumption, reported, citing an unidentified person from the association.

In Hong Kong, Galaxy Entertainment Group Ltd. halted a four-day, 15 percent slide, rising 3.9 percent. Morgan Stanley upgraded the stock to overweight, citing valuations and improving earnings prospects.

— With assistance by Shidong Zhang

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