China's Stocks Tumble Most in Seven Weeks to Break Trading Calm

  • Shanghai Composite Index falls below key 3,000 level
  • Gauge of price swings climbs from lowest level this year

Is China Reaching a Make-or-Break Moment?

China’s stocks sank the most in almost two months, pushing a gauge of volatility up from its lowest level this year as turnover surged.

The Shanghai Composite Index dropped as much as 4.5 percent, the biggest loss since Feb. 29, before paring declines to 2.3 percent at the close. Industrial and technology companies led losses, while 13 stocks fell for each that rose. The Hang Seng China Enterprises Index retreated from a three-month high in Hong Kong.

Traders struggled to explain the reason behind the sudden selloff, which isn’t an unusual occurrence in a market dominated by individual investors. Interest in mainland equities has been fading this month after March’s 12 percent surge amid concern that improving economic data will prevent the government from adding stimulus. Wei Wei, an analyst at Huaxi Securities Co. in Shanghai, says the slump is triggering concern that the panic seen at the start of the year, when the equity gauge sank 23 percent in the space of a month, could return.

"The fear of a January plunge is back," said Wei. "We haven’t heard anything particular for the decline and it’s strange and surprising that the market is dropping at such a fast and steep rate."

Until Wednesday’s tumble, the turmoil in Chinese stocks that roiled global markets at the start of the year and during last summer had faded from view. A gauge of 50-day price swings on the Shanghai Composite fell to its lowest level in 2016 on Tuesday as the benchmark equity gauge was little changed since the start of the month. Any return of the wild swings that marked the nation’s stocks during a $5 trillion rout would be unwelcome to global investors with world equities trading near a four-month high.

“We still haven’t heard any news or speculation yet,” said Jeff Lau, a Hong Kong-based trader at China Securities International Financial Holdings Co. “We’ve got some big orders from clients wanting to sell banks and financials. Some are taking profits but we are still checking what was the major trigger.”

The Shanghai Composite closed at 2972.58, falling below the key 3,000 level for the first time since April 8, and taking its loss this year to 16 percent. The ChiNext index for small caps plunged 5.6 percent. The Hang Seng China Enterprises slid 1.2 percent, while the Hang Seng Index dropped 0.9 percent as China Shenhua Energy Co. led declines.

Corporate Leverage

China’s central bank is signaling less of an appetite for adding monetary stimulus following evidence of an acceleration in growth. People’s Bank of China research bureau chief economist Ma Jun said late Tuesday that future policy operations, while observing the need to continue supporting growth, will also pay attention to heading off macroeconomic risks, especially an over-expansion of corporate leverage.

China’s aggregate financing -- a broad measure of credit that includes corporate bonds -- almost doubled from a year earlier to 2.34 trillion yuan, exceeding all 24 forecasts in a Bloomberg survey. Goldman Sachs Group Inc. joined other banks in boosting their gross domestic product forecasts for China, with the gain for 2016 now seen at 6.6 percent, compared with 6.4 percent previously.

"Most investors have acknowledged this round of mild economic recovery and what will happen subsequently is probably a restraint on policies," said Wang Chen, a partner with Xufunds Investment Management Co. in Shanghai. "It’s not possible to see a situation of both economic recovery and loose policies."

Signs of stabilization in the world’s second-largest economy and speculation of buying by state-backed funds helped send the Shanghai Composite up 12 percent since its low on Jan. 28. China reported the economy grew 6.7 percent in the first quarter, in line with estimates, while industrial output and retail sales in March beat expectations. China stepped up intervention in its financial markets after stocks extended last year’s $5 trillion selloff and the yuan fell to a five-year low.

— With assistance by Kyoungwha Kim, and Fox Hu

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