- Investors shrug off biggest cash injection since 2013
- UBS has warning for those seeing China stock respite at 2,500
Chinese stocks fell for a third day as concern slumping commodity prices and a weakening economy will reduce corporate profits overshadowed the biggest cash injection into the financial markets in three years.
The Shanghai Composite Index slumped 2.9 percent to 2,655.66 at the close. Shippers led declines among industrial shares. China Shipbuilding Industry Co. and China CSSC Holdings Ltd. dropped by the maximum daily limit after a measure of commodity shipping costs slid to a 30-year low. China Southern Airlines Co. extended losses to 17 percent in a four-day rout as Daiwa Capital Markets Hong Kong Ltd. said the carrier likely swung to a fourth-quarter loss because of a weaker yuan.
Chinese stocks capped their longest losing streak in three weeks amid concern slowing growth and yuan volatility will spur capital outflows. The world’s second-largest economy will absolutely not see a “hard landing” as it has adequate macro-control policy tools, according to commentary in the People’s Daily.
“The correction isn’t over and stocks will fall to an even lower level as pressure for yuan depreciation, capital outflows and slowing growth is still quite big,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai, who’s now on the sidelines after cutting his stock holdings to less than 50 percent of total assets. All these factors “will weigh on the market,” he said.
Strategists and technical analysts surveyed by Bloomberg this week are targeting a bottom of 2,500 for the Shanghai Composite after the index plunged 48 percent from the June high. With thousands of companies pledging their own shares to get loans as stocks soared through mid-2015, the equity rout is forcing more of them to either provide extra collateral or sell holdings to pay back debts, according to UBS Group AG.
Firms at risk of having to dump shares in the market following Tuesday’s 6.4 percent selloff for the Shanghai index comprise about 8 percent of Chinese market capitalization, rising to almost 13 percent if equities decline by a further 10 percent, Gao Ting, the head of China strategy at UBS in Shanghai, wrote in an e-mail on Wednesday.
"If China’s stock market continues to fall, equity pledging-related selling pressure could increase significantly, putting further pressure on the stock market," he said.
Chinese stocks have been the world’s worst performers this year among 93 global benchmark indexes tracked by Bloomberg, with the Hang Seng China index and Shanghai Composite losing at least 17 percent. The H-shares index rose 0.9 percent on Thursday, while the Hang Seng Index advanced 0.8 percent.
This week’s net injection of 590 billion yuan ($90 billion) into the money markets before the start of the Chinese new year was the biggest since February 2013, data compiled by Bloomberg show. Short-term lending tools are being used in preference to a more permanent loosening of monetary policy as the People’s Bank of China seeks to avoid exacerbating an exodus of funds that’s led to costly intervention in support of the exchange rate.
The yuan has retreated 2.7 percent against the dollar since the International Monetary Fund gave the currency reserve status at the end of November, even as intervention to support the currency led to an unprecedented $108 billion drop in China’s foreign-exchange reserves last month. Policy makers are increasingly resorting to administrative measures to curb capital outflows and calls are mounting for further restrictions as the defense of the yuan burns through reserves.
Ample forex reserves are helping to stabilize the currency market, while the real estate market is rallying and local debt risks are controllable, the People’s Daily said.
The CSI 300 dropped 2.6 percent, with sub-indexes of material and industrial stocks falling at least 4.7 percent for the biggest losses. China Minmetals Rare Earth Co. dropped by the daily limit of 10 percent, while Angang Steel Co. slid 9.9 percent. China Shipbuilding and China CSSC Holdings both plunged 10 percent as the Baltic Dry Index dropped to the lowest level since January 1985.
Traders reduced holdings of shares purchased with borrowed money for a record 19th day on Wednesday, with the margin debt balance in Shanghai falling to 546.3 billion yuan for the lowest level since December 2014.
— With assistance by Shidong Zhang