- Shanghai Composite capped biggest quarterly loss since 2008
- Equity rout sparked an unprecedented state rescue effort
China’s stocks rose, paring the biggest quarterly loss since 2008, as the government struggled to halt a $5 trillion rout and the world’s second-largest economy showed signs of a sharper slowdown.
The Shanghai Composite Index tumbled 29 percent since the end of June, the biggest slump among benchmark global gauges. The measure rose 0.5 percent to 3,052.78 at Wednesday’s close on turnover 55 percent below the 30-day average. Automakers led gains after the government cut a tax on vehicle purchases. China’s financial markets will be shut from Thursday for weeklong National Day holidays.
The value of shares traded on mainland bourses plunged 87 percent from the June record as the equity boom turned to bust and the government took unprecedented measures to shore up stocks -- including banning major shareholders from selling and curbing index futures trading. Leveraged wagers, which helped fuel gains in the first half of the year, have tumbled by 60 percent since the peak, while the government has wiped out nearly 70 percent of unregulated margin lending. President Xi Jinping said last week equities have entered a phase of "self recovery," signaling policy makers will pare back support as volatility subsides.
“The government’s clampdown on non-compliant margin financing has hit the Chinese equity markets hard,” said Bernard Aw, a strategist at IG Asia Pte in Singapore. “We however may see some upside potential in the fourth quarter, as much of non-compliant margin trading accounts have been cleared. Further weakness in the Chinese economy may see investors keeping to the sidelines.”
Hong Kong’s Hang Seng China Enterprises Index rose 1.9 percent, paring its losses this quarter to 28 percent. The Hang Seng Index added 1.4 percent, trimming its three-month decline to 21 percent.
Stocks rebounded Wednesday as the government took measures to support the auto industry and the property market. China cut the purchase tax on vehicles with engines 1.6 liters or smaller by half to 5 percent effective Oct. 1 through the end of next year, according to the State Council. SAIC Motor Corp., China’s largest carmaker, advanced 4 percent in Shanghai. Great Wall Motor Co. and Chongqing Changan Automobile Co. both jumped 10 percent.
After the market close, the government announced it had cut the minimum down payment requirement for first-time homebuyers. The reduction to 25 percent applies to people buying homes in cities that don’t have home-purchase restrictions, the People’s Bank of China said in a statement on its website. The previous down payment requirement was 30 percent.
Gauges of technology, material and energy companies in the CSI 300 Index slumped at least 34 percent this quarter for the worst performances among 10 industry groups. Hundsun Technologies Inc., which has a financial investment platform known as HOMS that allows trust firms and online lenders to provide leveraged trading facilities to clients, plunged 61 percent. China Coal Energy Co. fell 48 percent. Yunnan Copper Co. slid 60 percent.
Chinese shares remain expensive relative to global stocks after the rout. Equities on mainland bourses trade at a median 49 times reported earnings, the highest among the world’s 10 largest markets and almost three times the multiple of 18 for the Standard & Poor’s 500 Index. The Shanghai index, where low-priced banks have some of the biggest weightings, is valued at 15.
The statistics bureau is scheduled to release an official manufacturing index for September on Thursday. The reading will probably be 49.7, unchanged from a month earlier, according to the median estimate of economists. A reading below 50 indicates contraction. Recent data have been week, with a preliminary factory gauge falling to the lowest level since the global financial crisis and industrial profits slumping the most in at least four years.
While HSBC Holdings Plc said last week further losses by Chinese shares are limited after leveraged traders cut more than $200 billion of positions, there are few signs individual investors -- who account for more than 80 of trading on Chinese shares -- are returning to stocks.
The number of new investors has tumbled more than 80 percent from the peak in late May. The richest traders have been quickest to bail out of the market. The number of accounts holding shares worth more than 10 million yuan ($1.6 million) almost halved in the past three months, the biggest decline among four categories of investor wealth tracked by the nation’s clearing agency.
A string of weak economic data is increasing concern about the outlook for corporate earnings, while Xi’s plan to overhaul the country’s $16 trillion state-run sector unveiled this month failed to reignite investor interest. Barclays Plc cut its forecast for the nation’s growth next year to 6 percent from 6.6 percent.
Another concern for investors is what happens when the state starts to step back and how long curbs on trading will remain. China’s securities regulator said Aug. 14 that the government agency tasked with supporting share prices will reduce purchases as volatility falls. Restrictions on trading futures and a probe into “malicious" short-selling are making it almost impossible for investors to hedge positions. State funds have spent $246 billion purchasing equities in the three months through August, according to Goldman Sachs Group Inc.
Central bank Governor Zhou Xiaochuan said this month intervention in the equity market helped reduce the risk of the rout spilling over into the broader economy, and bring closer an end to the plunge. While the Shanghai Composite is only 3.8 percent above since its Aug. 26 low, declines of more than 5 percent -- which occurred almost daily during the depths of the rout -- have been absent in the past month.
“Over the past few months, the market has seen lots of negative factors such as margin-debt deleveraging, the economic slowdown and we’ve seen a weak performance for stocks,” said Wu Kan, a Shanghai-based fund manager at JK Life Insurance Co. “Going forward, given most of these factors have been priced in.”
Margin traders cut holdings of shares purchased with borrowed money for a fifth day on Tuesday, with the outstanding balance of margin debt in Shanghai falling to a nine-month low of 573.4 billion yuan. The nation had cleared up 69 percent of non-compliant margin lending accounts as of Sept. 23, the securities regulator said at a briefing last week.
— With assistance by Shidong Zhang