China’s Stocks Extend Rout Amid IPO Concerns as Industrials Drop

China’s stocks fell, capping the benchmark index’s biggest two-day slide in three months, as investors sold the best-performing equities to obtain funds for initial public offering shares.

Utilities and industrial shares, which posted the biggest gains in Shanghai in the past three months, led declines. Datang International Power Generation Co. and Huadian Power International Corp. slid at least 5 percent after jumping more than 30 percent since February. China Railway Group Ltd. and China Railway Construction Corp. lost more than 5 percent. The ChiNext small-company index hit a record before paring gains.

The Shanghai Composite Index dropped 1.6 percent to 4,229.27 at the close, adding to a 4.1 percent loss on Tuesday. Twenty-five companies are scheduled to sell new shares from Tuesday through May 11, which may freeze 2.34 trillion yuan ($376 billion), according to data compiled by Bloomberg. IPO shares have jumped 44 percent on average on the first day of trading this year.

“Investors tend to sell stocks in afternoon trade to free up funds for new issues after their holdings post gains,” Qian Qimin, an analyst at Shenwan Hongyuan Group Co., said by phone in Shanghai. “Market liquidity is pressured as new share offerings divert funds.”

The Shanghai gauge swung between gains of as much as 1.8 percent and losses of 2.6 percent as 100-day volatility jumped to five-year highs amid concern China’s longest bull market may not be sustainable with new stock account openings falling and economic growth slowing. The official Xinhua News Agency said in a commentary that Tuesday’s decline wasn’t the end of the bull market and could instead help the market enter a “slow bull” mode advocated by regulators.

Bull Market

“Volatility is very likely going to increase as there remains some uncertainty in the market, with domestic investors realizing that the stock market has rallied substantially,” said Gerry Alfonso, a Shanghai-based sales trader at Shenwan Hongyuan.

The CSI 300 Index slid 1 percent. Hong Kong’s Hang Seng China Enterprises Index retreated 0.6 percent, while the Hang Seng Index lost 0.4 percent. The Bloomberg China-US Equity Index retreated 2.4 percent in New York on Tuesday.

The Shanghai Composite has rallied 109 percent over the past year, the most among major global indexes, amid speculation the government will extend interest-rate cuts and speed up mergers of state-owned firms to boost the economy.

For Chinese investors with a sense of history, the nation’s equity rally is looking long overdue for a reversal.

Challenges Ahead

The bull market turned 883 days old on Tuesday, topping China’s previous record by 56 days, after a 119 percent surge in the Shanghai Composite since December 2012. Even if the advance is measured from June 2013 -- when the gauge narrowly avoided a bear-market drop of 20 percent -- it’s still the second longest since Chinese bourses opened for trading in 1990.

Expensive stock valuations, euphoric sentiment and slowing liquidity from margin lending expansion will challenge the market in the near term, Bocom International Holdings Co. head of China research Hao Hong wrote in a report. IPOs will drain market liquidity temporarily, Hong said.

Margin traders increased holdings of shares purchased with borrowed money on Tuesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising by 0.2 percent to a record 1.24 trillion yuan.

Trading volumes in the Shanghai index were 17 percent lower than 30-day average. The gauge is valued at 16.4 times 12-month projected profit, compared with the five-year average of 10.2, according to data compiled by Bloomberg.

Best Performers

Sub-indexes of industrial and utility stocks in the CSI 300 have climbed 71 percent and 46 percent respectively over the past three months. Datang Power slumped 5 percent. Huadian Power lost 5.2 percent. China Railway Group fell 5.8 percent while China Railway Construction dropped 5.7 percent.

A gauge of financial shares in the CSI 300 rose 0.7 percent. China Life Insurance Co., the nation’s biggest insurer, jumped 6 percent, while New China Life Insurance Co. surged 10 percent. Chinese life insurers’ consensus price targets climbed by an average 9.5 percent last month, beating an average 4.2 percent increase for the BI Asia Pacific life insurance valuation peer group.

— With assistance by Shidong Zhang, and Amanda Wang

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