China Stocks Fall to 13-Month Low After Industrial Profits Slide

  • Industrial companies' profits retreat 4.7% in December
  • Strategists, technical analysts point to 2,500 as bottom

China’s stocks fell to a 13-month low as slumping industrial companies’ profits increased concern the economic slowdown is deepening.

The Shanghai Composite Index dropped 0.5 percent to 2,735.56 at the close, extending Tuesday’s 6.4 percent plunge. Airlines and power producers led declines after industrial profits slumped 4.7 percent last month and analysts said a weaker yuan could further hurt earnings of companies with dollar debt. The benchmark gauge pared a loss of as much as 4.1 percent after PetroChina Co., long considered a favorite holding of state-linked rescue funds, jumped the most in three weeks. Net buying of Shanghai shares through the Hong Kong exchange link was poised for the highest daily total since September.

Slowing Chinese economic growth is hurting the earnings of domestic companies as well as global firms, with Apple Inc. forecasting a sales decline for the first time in more than a decade. Data on Wednesday showed industrial profits fell for a seventh month in December, extending a record streak of declines. Strategists and technical analysts point to the growth slowdown as the reason why the Shanghai Composite may keep falling until it levels off around the 2,500 level.

“The market is still in the process of finding a bottom,” said Wang Zheng, Shanghai-based chief investment officer at Jingxi Investment Management Co. “To reverse the current situation, we’ll need more powerful measures from the government.”

Government Support

Government-led funds may come in to bolster the market at 2,500 as that level is is “psychologically important” to investors, according to Shanghai Bingsheng Asset Management. China should adopt a large stimulus policy though it should be more cautious than the last one in 2008, Yu Yongding, a former academic member of the People’s Bank of China’s monetary policy committee, said Wednesday.

The Shanghai Composite has slumped 23 percent this year, making it the world’s worst performer out of 93 global benchmark measures tracked by Bloomberg, amid concern capital outflows will accelerate as the economy slows and support for the yuan eats into the nation’s foreign reserves. Data on Tuesday showed outflows hitting an estimated $1 trillion last year, while the offshore yuan rebounded in Hong Kong amid speculation that China’s central bank propped up the currency.

Last summer’s selloff erased $5 trillion during a rout, as the government took measures to clamp down on margin trading and valuations of small-company stocks soared to bubble levels.

Most emerging markets in Asia bucked China’s downward trend, with benchmark indexes in South Korea, Thailand and Indonesia rising more than 1 percent. In Hong Kong, the Hang Seng China Enterprises Index advanced 0.8 percent, while the Hang Seng Index gained 1 percent.

Oh Hyun Seok, head of investment strategy at Samsung Securities Co. in Seoul, said investors believe the selloff in Chinese stocks is mainly due to panic selling rather than concerns about the fundamentals of the economy. Korean stocks are being affected more by oil prices and the U.S. dollar, he said.

The CSI 300 Index slid 0.4 percent, dragged down by industrial, telecom and utility shares. China Southern Airlines Co. tumbled 4.4 percent to a 10-month low after Daiwa Capital Markets Hong Kong Ltd. estimated a fourth-quarter loss. The carrier’s shares will be de-rated further given faster yuan devaluation and its higher exposure to U.S. dollar-denominated debt, Daiwa analyst Kelvin Lau wrote in a note. China Eastern Airlines Corp.slid 5.4 percent.

Profits at industrial companies dropped 2.3 percent in 2015, the National Bureau of Statistics said. The December drop compared with the previous month’s 1.4 percent slide and was the third-biggest decline in more than three years, based on previously reported NBS data since 2011.

Energy Rally

PetroChina paced gains for energy stocks, rising 2.8 percent. Shanxi Lu’an Environmental Energy Development Co. jumped 9.2 percent, while Yanzhou Coal Mining Co. gained 7 percent. The nation must reduce excessive capacity while expanding aggregate demand, China Central Television cited President Xi Jinping as saying at a meeting on Tuesday with the office of the central leading group for financial and economic affairs.

“Northbound investors are increasing their purchases with battered coal and steel companies leading,” said William Wong, head of sales trading at Shenwan Hongyuan Group Co. in Hong Kong. “The broader market is still under pressure as the recent selloff leads to forced closures of margin-trading positions.”

Margin traders reduced holdings of shares purchased with borrowed money for a record 18th day on Tuesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to 559 billion yuan ($84.9 billion) for the lowest level since December 2014.

— With assistance by Shidong Zhang

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