China Has Biggest One-Day Stock Crash Since 2007

China Rout Leads Global Stocks Lower

China’s stocks tumbled, with the benchmark index falling the most since February 2007, amid concern a three-week rally sparked by unprecedented government intervention is unsustainable.

July 27 shcomp

The Shanghai Composite Index plunged 8.5 percent to 3,725.56 at the close, with 75 stocks dropping for each one that rose. PetroChina Co., long considered a target of state-linked market support funds, tumbled by a record 9.6 percent. China Securities Finance Corp., a state-backed agency that provides margin financing and liquidity, hasn’t exited the stock market, China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement after the close of trading.

Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up share prices as the economy slows. China’s industrial profits fell 0.3 percent in June from a year earlier, the statistics bureau reported on Monday. The International Monetary Fund has urged China to eventually unwind its support measures, according to a person familiar with the matter.

“Investors are afraid the Chinese government will withdraw supporting measures from the market,” said Sam Chi Yung, a strategist at Delta Asia Securities Ltd. in Hong Kong. “Once those disappear, the market cannot support itself.”

The Shanghai gauge had rebounded 16 percent from its July 8 low through Friday as officials went to extreme lengths to halt a rout that erased $4 trillion from the nation’s equities. Officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes and armed a state-run financing vehicle with more than $480 billion to support the market.

Dented Confidence

The rout dented investor confidence from Hong Kong to Taiwan and Indonesia, helping send the MSCI Emerging Markets Index to a two-year low.

There’s no truth to media reports that the government has withdrawn its support for the stock market, Zhang said in the statement on the regulator’s website. The commission will “continue efforts to stabilize market and investor sentiment, and prevent systemic risk,” he said.

The China Securities Finance Corp. will increase stock holdings “at appropriate time,” he said. The commission doesn’t “rule out possibility” of recent short-selling activity as malicious and will investigate and “severely punish” offenders, according to the statement.

Brokerages Tumble

A measure of 30-day volatility in the Shanghai Composite jumped to its highest level since 1997, as more than 1,700 stocks fell by the daily 10 percent limit on the Shanghai and Shenzhen exchanges. The Hang Seng China Enterprises Index sank 3.8 percent, extending the world’s worst decline in the past month. The Hang Seng Index fell 3.1 percent.

Brokerages led declines in Hong Kong, with Citic Securities Co. and Haitong Securities Co. tumbling more than 9 percent. China’s overnight money-market rate climbed to the highest level since early May amid rising demand for funds as the end of the month approaches.

A gauge of industrial companies plunged by a record 9 percent, the most among the 10 groups on China’s large-cap CSI 300 Index, which sank 8.6 percent. The slump in industrial profits last month compared with a 0.6 percent gain in May, according to data from the statistics bureau. For the first six months, earnings slid 0.7 percent.

Support Measures

June’s equity market slump was very likely a contributor to the fall in industrial profits, according to Bloomberg Intelligence economists Tom Orlik and Fielding Chen. Chinese firms are major investors in the stock market. Back in May, when the National Bureau of Statistics was reporting rebounding profits, they acknowledged that investment gains were a big contributor.

Data Friday showed a private gauge of Chinese manufacturing unexpectedly fell in July to the lowest level in 15 months.

Monday’s drop by the Shanghai Composite was the biggest since Feb. 27, 2007, when the gauge tumbled 8.8 percent as the government cracked down on the use of borrowed money to buy stocks. Prior to that, the last time the index fell so much was on Feb. 18, 1997, when the index plunged 8.9 percent amid concern about Deng Xiaoping’s health. China’s paramount leader died the following day.

The IMF has told the Chinese government that while interventions in general are appropriate to prevent major disorder, prices should be allowed to settle through market forces, said a person familiar with IMF discussions on the issue and who asked not to be identified because the talks are private. Chinese officials assured the lender that the measures should be considered temporary, the person said last week.

“Today’s rout in China poured cold water on investor sentiment,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc. “This also revealed the market is still too fragile without government support.”

(An earlier version of this story corrected the size and scope of the Shanghai Composite’s decline.)

Related News and Information: IMF Said to Urge China to Exit

Before it's here, it's on the Bloomberg Terminal.