China Stocks Fall for Second Day on Manufacturing Data, Probes

  • Police raid top-performing Chinese hedge fund Zexi Investment
  • Official factory gauge unchanged at 49.8 vs estimate of 50

China’s stocks fell for a second day after official data showed manufacturing contracted for a third month and authorities detained a top-performing hedge-fund manager in widening probes into market manipulation and insider trading.

The Shanghai Composite Index dropped 1.7 percent to 3,325.08 at the close, while the Hang Seng China Enterprises Index slid 1.5 percent in a fifth day of losses, the longest losing streak in almost two months. PetroChina Co. and Aluminum Corp. of China Ltd. led declines for commodity shares, sliding at least 2.5 percent. Police raided hedge fund Zexi Investment on Sunday, according to a person familiar with the matter. The 26 companies that Zexi disclosed as a shareholder in the past 12 months fell by an average of 4.5 percent on Monday.

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The two-day retreat for the Shanghai gauge has pared a rebound to 14 percent from this year’s low on Aug. 26 as the government took measures to stabilize the stock market and policy makers introduced more measures to boost growth amid the slowest economic expansion in a quarter of a century.

“There has been no fundamental improvement to drive equities higher,” said Michael Every, head of financial markets research at Rabobank Group in Hong Kong.

Manufacturing Weakens

The CSI 300 Index declined 1.6 percent. Hong Kong’s Hang Seng Index lost 1.2 percent. Trading volumes in Shanghai and Hong Kong were at least 9 percent below the 30-day average for this time of day. The Bloomberg China-US Equity Index added 2.3 percent in New York on Friday.

Gauges of energy, material and phones shares in the CSI 300 dropped more than 2 percent for the worst performances among 10 industry groups. Yanzhou Coal Mining Co. slid 2.5 percent, while China Shenhua Energy Co., the biggest producer of the fuel, lost 2.1 percent. Chalco slid 3.1 percent. Tongling Nonferrous Metals Group Co., the nation’s second-largest copper smelter, plunged 6.4 percent.

China’s factory gauges signaled that manufacturing still hasn’t bottomed out amid faltering global demand and deepening deflationary pressures.

Earnings Slump

The official purchasing managers index was unchanged at 49.8 in October, the National Bureau of Statistics said Sunday. That compared with a median estimate of 50, the line between expansion and contraction, in a Bloomberg survey of economists. The official non-manufacturing PMI, a barometer of services and construction, fell to 53.1 from 53.4 in September, the weakest since December 2008. A separate purchasing managers’ index from Caixin Media and Markit Economics was 48.3 in October.

China needs to have an average economic growth of above 6.5 percent in the next five years to meet the goal of achieving a “moderately prosperous” society by 2020, Premier Li Keqiang said in a speech in Seoul on Sunday, according to statement on the government website.

In Hong Kong, Air China Ltd. slid 4.7 percent after the carrier posted a 13 percent drop in third-quarter net income. New China Life Insurance Co. fell 2.6 percent after the insurer reported a 27 percent drop in net income in the third quarter. Around 69 percent of H-share companies that reported third-quarter results have trailed analysts’ forecasts, versus 55 percent for the MSCI Emerging Markets Index.

Zexi Probe

Chinese police detained officials from two brokerages for illegal trading of equity-index futures, the official Xinhua news agency reported Sunday, in the latest attempt to crack down on strategies blamed by authorities for exacerbating a recent stock-market rout.

Two executives at Jiangsu-based Yishihun International Trading and the technical director at Shanghai-based Huaxin Futures were arrested after a police investigation showed they made 2 billion yuan ($315 million) in “illegal profit,” according to the report, which cited the Ministry of Public Security. Yishihun and Huaxin had “foreign technological support" in developing high-frequency trading software, Xinhua said, without naming any firms.

The general manager of Zexi Investment was detained by the police on charges including insider trading and stock manipulation, Xinhua reported separately.

“For the short term, it’s quite negative on small-cap stocks as it will dampen investment sentiment on the sector and lots of Zexi’s major stock holdings need to be closed,” said Li Jingyuan, head of securities investment at Shanghai Zhaoyi Asset Management. “But in the long run, it’s a good thing as the move will eradicate market excesses and sets the stage for the healthy development of the market.”

Among stocks owned by Zexi, China Gezhouba Group Co. fell 2.3 percent, Shanghai Metersbonwe Fashion & Accessories Co. tumbled 7.4 percent and Tianjin Saixiang Technology Co. slumped by the 10 percent daily limit.

Margin traders reduced holdings of shares purchased with borrowed money on Friday, with the outstanding balance in Shanghai falling from a two-month high to 626.9 billion yuan.

— With assistance by Shidong Zhang, and Kyoungwha Kim

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