Photographer: Qilai Shen/Bloomberg

Shenzhen Stocks Sink Most in 10 Months in Sudden Afternoon Drop

  • Tumble follows increasing volatility in bond, currency markets
  • Traders attribute selloff to concern about increasing IPOs

Stocks in China’s second-largest equity market plunged the most in 10 months, underscoring the increasing fragility of the nation’s financial assets.

The Shenzhen Composite Index sank as much as 6.1 percent, the biggest loss since Feb. 29. Traders pointed to concern that regulators will accelerate the pace of initial public offerings, already at a 19-year high, diverting liquidity from existing shares. The Shanghai Composite Index dropped as much as 2.2 percent in minutes before paring losses amid speculated buying by state-backed funds.

The sudden afternoon tumble came at a volatile period for China’s financial markets, with the nation’s bonds going through a record rout in December and surging funding costs squeezing yuan bears in Hong Kong in January. There were 45 IPOs on China’s exchanges last month alone, the most since 1997. The official Xinhua News Agency said in a commentary over the weekend that a “normalization" of first-time share sales could help companies raise money more efficiently. 

“Xinhua’s comments on IPO normalization are leading to rising concerns over new share supplies, and that led to the selloff,” said Guo Feng, Shanghai-based general manager of Northeast Securities Co.’s wealth management department.

The Shenzhen gauge trimmed declines to 3.6 percent at the close. The measure has lost 11 percent since foreign investors were allowed to buy the city’s shares through an exchange link with Hong Kong last month. The ChiNext Index of mostly smaller companies also fell 3.6 percent, while the Shanghai Composite lost 0.3 percent in a fifth day of losses -- its longest losing streak since August 2015.

January Blues

The selloff is a reminder of a year ago, when the botched introduction of circuit breakers, a tumbling yuan and fears of an economic hard landing spurred a 23 percent plunge in the Shanghai Composite in January.

IPOs are a popular way to make money in China, even though the odds of partaking in one is one in 2,500. Mainland equities surged a median 392 percent in their first month after listing in 2016, the best return since Bloomberg began compiling such data in 1994. Still, their performance is faltering, with the cap-weighted Bloomberg China IPO Index slumping to its lowest since January 2015.

"Investors feel there isn’t enough liquidity for that many IPOs," said Wang Chen, partner with Xufunds Investment in Shanghai.

  • About 60 stocks fell by the daily 10% limit on the Shenzhen Composite Index, with turnover totaling 259.2 billion yuan ($37.6 billion), the highest in more than a month
  • Net selling of Shanghai shares via the Hong Kong stock link was 1.27 billion yuan, the most since Jan. 6
  • Sunac China Holdings Ltd. slumped 8.1% after it announced a plan to invest $2.2 billion in three companies affiliated with Chinese tech tycoon Jia Yueting’s LeEco empire
  • Wangsu Science & Technology Co. dropped by its daily limit after reporting preliminary 2016 results that may miss analyst estimates
  • HKT Trust and HKT Ltd. rose by as much as 10.3%, the most since 2013, after reporting 2016 net income that beat the highest of analyst estimates compiled by Bloomberg; the stock was raised to outperform from neutral at Credit Suisse Monday

— With assistance by Tian Chen, Amy Li, Kana Nishizawa, and Helen Sun

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