China Stocks Fall to Two-Month Low as Material Shares Lead Drop

  • Raw-material producers decline on concern about weak growth
  • Economic fundamentals pressuring market sentiment: strategist

China’s stocks fell to a two-month low, dragged down by material and technology stocks, amid signs of a slowing economy and rising odds of a Federal Reserve interest-rate increase.

The Shanghai Composite Index dropped 1.3 percent, paring losses in the last 30 minutes of trading to end the day above 2,800, a closing level that hasn’t been breached in the past two months. The ChiNext index of smaller companies retreated the most in a week on concern Chinese authorities are preparing to crack down on reverse mergers. Hainan Mining Co. led losses among material companies with a 5.5 percent tumble.

President Xi Jinping this week vowed to press ahead with plans to cut capacity at state-owned enterprises, even as data over the weekend showed industrial production, fixed-asset investment and retail sales all missed estimates. Strong consumer price data in the U.S. and statements from regional Fed presidents pushed up the odds of a June rate increase. A U.S. rate rise may exacerbate Chinese capital outflows, while signs of faster inflation in China may reduce the chances of stimulus.

“The weak market sentiment is still related to economic fundamentals,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. “The government is still pretty determined to reduce leverage and over-capacity, so growth may slide further.”

Backdoor Listings

The Shanghai equity gauge slid to 2,807.51, the lowest close since March 10. The ChiNext slumped 2.9 percent, while the CSI 300 Index lost 0.6 percent. Hong Kong’s Hang Seng China Enterprises Index dropped 1.5 percent to end at the lowest level since March 1, while the Hang Seng Index fell 1.5 percent.

The Shanghai Composite has slumped 21 percent this year, the worst performer among 93 benchmarks tracked by Bloomberg, on concern slowing economic growth will curb corporate earnings and trigger capital outflows.

Gauges of technology and material shares in the CSI 300 dropped at least 1.9 percent for the steepest declines among 10 industry groups. Beijing Shiji Information Technology Co. and Neusoft Corp. fell more than 4.8 percent each. Wuhan Iron & Steel Co. declined 3.1 percent, while Xiamen Tungsten Co. slumped 3.8 percent.

Several Chinese insurers surged simultaneously in onshore trading. China Life Insurance Co. reversed losses of as much as 2 percent to end the day 0.1 percent higher. Ping An Insurance Group Co., China Pacific Insurance Group Co. and New China Life Insurance Co. rebounded as well.

The China Securities Regulatory Commission told some brokerages during a recent meeting that reverse mergers will be strictly regulated, according to a Securities Times report that cited an investment banker it didn’t name. The CSRC is adopting the same requirement for reverse mergers as that for initial public offerings and banning backdoor listings through companies on the ChiNext, the report said. The agency said earlier this month that it is conducting “in-depth” analysis of how companies returning to Chinese exchanges via IPOs or mergers and acquisitions affect the stock market.

Shenzhen Link

Investors should position for a stock link between bourses in Hong Kong and Shenzhen because it’s a matter of when and not if the program will start, said Freeman Tsang, director of business development at Legg Mason Asset Management Hong Kong. He added that investors shouldn’t hold too high an expectation for a possible announcement of the Shenzhen link during Zhang Dejiang’s visit to Hong Kong.

Zhang, the Communist Party’s No. 3 official and the highest-ranking state leader to visit Hong Kong since 2012, urged greater integration with the mainland’s development plans.

The existing stock connect between Shanghai and Hong Kong enjoyed a bumper day on Tuesday, with southbound volume -- orders from the mainland into Hong Kong Exchanges & Clearing Ltd.’s market -- hitting a 13-month high. Chinese investors used up 2.6 billion yuan ($398 million) of their daily quota for buying Hong Kong shares, the most since April 2015, according to data compiled by Bloomberg.

— With assistance by Shidong Zhang

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