China's Willingness to Defend Its Stock Markets Put to Test

Updated on
  • Hang Seng China gauge records biggest loss since July 2015
  • Speculated state support lifted Shanghai equities on Monday
Bloomberg’s Mark Cranfield reports on the plunge in Asian stocks and the slide in U.S. stock futures.

The plunge in U.S. equities is challenging China’s resolve to keep its equity markets stable.

While signs of state support helped the Shanghai Composite Index be the only advancer in Asia on Monday, the severity of bearish sentiment dragged the gauge down 3.4 percent Tuesday. The Hang Seng China Enterprises Index in Hong Kong plunged 5.9 percent, its biggest loss since July 2015, even as mainland funds pumped a net $1.3 billion into the city’s shares.

“The performance of big caps on the mainland is highly correlated with their Hong Kong-listed peers,” said Shen Zhengyang, Shanghai-based strategist with Northeast Securities Co. “With Hong Kong falling off the cliff, onshore big caps won’t be immune to that. So there’s great uncertainty over whether market rescuing measures will be successful.”

China’s stock market was already looking shaky after tighter scrutiny of the asset management industry sparked the biggest loss since 2016 last week. To mitigate the risk of steep declines, China Securities Regulatory Commission urged brokerages to ask investors with stock pledges to add to their collateral when share prices drop below critical levels, instead of closing out the positions, according to people familiar with the matter. Policy makers have intervened regularly to support stocks since the nation’s equity bubble burst in 2015.

Hong Kong’s $5.9 trillion stock market is more vulnerable due to the city’s status as a global financial center with open capital borders. Previous rallies have been punctured by everything from the European debt crisis, the 2013 taper tantrum and the bursting of China’s stock bubble in 2015. Equities in the former British colony had surged this year -- the China H-share gauge was still up 15 percent through Monday -- as the global economy showed signs of acceleration and inflows poured in from north of the border.

Such flows were too insignificant to stem panic selling on a day like today, according to Bocom International Holdings Co.

“Fear overrules everything in the near term,” said Hao Hong, chief strategist at Bocom. “The buying is very small. If there is willing taker in a market plunge such as this, experienced traders will be happy to offload positions to the newcomers.”

— With assistance by Xiaoqing Pi, Amanda Wang, and Sofia Horta E Costa

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