China Stocks Enter Bear Market, Erasing Gains From State Rescue

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Shanghai Composite Enters Bear Market
  • Shanghai Composite drops more than 20% from December high
  • Some banks won't accept small-cap stocks as collateral

Chinese shares fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue amid waning confidence in the government’s ability to manage the country’s markets and economy.

QuickTake China’s Managed Markets

The Shanghai Composite Index sank 3.5 percent to 2,900.97, falling 21 percent from its December high and sinking below its closing low during a $5 trillion rout in August. Friday’s decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans.

The selloff is a setback for President Xi Jinping’s government, which has been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has heightened concern that the deepest economic slowdown since 1990 will worsen.

Shares “entered a disaster mode at the start of the year and it’s still in that pattern now,” said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. “The market has no confidence.”

While China’s high concentration of individual investors makes the $5.7 trillion market notoriously volatile, losses in the Shanghai Composite have become one of the most visible symbols of investor concerns over the health of the world’s second-largest economy. The turbulence has rippled through global markets this year, contributing to a 7.3 percent drop in the MSCI All-Country World Index and sending a gauge of commodity prices to the lowest level since 1991.

It’s been a wild ride for Chinese investors over the past 12 months. After cheerleading by state media helped fuel an unprecedented boom in mainland shares in the first half of last year, the market crashed over the summer as regulators failed to manage a surge in leveraged bets by individual investors. A state-sponsored market rescue campaign sparked a 25 percent rally in the Shanghai Composite through December, but those gains were wiped out on Friday as the index closed at its lowest level since late 2014.

Losses this year were fueled by a controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days. The Shanghai Composite has dropped for three straight weeks, the longest losing streak since October, and is down 18 percent this year.

High Valuations

“The bottom has fallen out of the market,” said Francis Lun, chief executive officer at Geo Securities Ltd. in Hong Kong.  “Investors have lost confidence after two weeks of meddling by government officials.”

Even after this year’s rout, the median Chinese company on mainland exchanges is valued at 55 times reported earnings, the highest level among the world’s largest markets. The Shanghai Composite, which has its biggest weightings in low-priced banks and commodity companies, trades at a multiple of 15.

Energy shares led declines on Friday, with Datong Coal Industry Co. tumbling 4.4 percent and Yanzhou Coal Mining Co. slumping 6.2 percent. In Hong Kong, the Hang Seng China Enterprises Index lost 2.6 percent, while the Hang Seng Index slipped 1.5 percent.

Investors will probably refrain from buying mainland shares until the Shanghai Composite breaches its intraday low of 2,850 during the August rout, said Zhang Gang, a Shanghai-based strategist at Central China Securities Co.

Yuan Gains

Stocks extended losses on Friday afternoon after International Finance News, a publication managed by the People’s Daily, reported that some banks will only accept shares in the large-cap CSI 300 Index for loan pledges. Lenders also reduced the amount of money they will extend against a given level of share collateral, IFN reported.

“It’s bad news for the stock market,” said Luo Wenbo, the chief strategist at Zhongtai Securities Co. “It’s becoming more difficult to get cash or raise funds through equities.”

Shares sank this week despite a rally in the yuan. The Chinese currency posted the biggest weekly gain since October in Hong Kong’s offshore market as the central bank limited supply of the currency and forced a narrowing of its discount to the mainland rate. Evidence of the People’s Bank of China’s intervention was seen on Friday in data showing yuan positions at the central bank dropped the most on record in December.

Equity investors largely ignored separate figures from the PBOC on Friday that suggested the economy could be stabilizing. Aggregate financing, China’s broadest measure of new credit, rose to 1.82 trillion yuan ($276 billion) in December, compared with the median forecast of 1.15 trillion yuan in a Bloomberg survey.

The government will probably report fourth-quarter economic growth of 6.9 percent on Jan. 19, according to economist estimates. They project that the final 2015 report will bring the full-year expansion to 6.9 percent, the slowest annual pace since 1990, and that gross domestic product growth will further slow to 6.5 percent this year.

— With assistance by Shidong Zhang

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