China's stocks slump as rate cut fails to stop $5-trillion rout

China's stocks extended the steepest five-day drop since 1996 in volatile trading as lower interest rates failed to halt a $5 trillion rout.

The Shanghai Composite Index fell 1.3 per cent to 2,927.29 at the close, after rising as much as 4.3 per cent and declining 3.9 per cent. The cuts in borrowing costs and lenders' reserve ratios were announced hours after the benchmark measure closed with a 7.6 per cent drop on Tuesday.

Chinese equities have lost half their value since mid-June, as margin traders closed out bullish bets and concern deepened that valuations are unjustified by the weak economic outlook. The government has halted intervention in the equity market this week as policy makers debate the merits of an unprecedented rescue, according to people familiar with the situation.

"The prevailing sentiment is still that investors want to cash out, whatever the government does," said Ronald Wan, chief executive at Partners Capital International in Hong Kong. "Confidence is already damaged. Doubts over the effectiveness of policies are getting bigger. The market will remain under selling pressure for a while."

The People's Bank of China said it will cut the one-year lending rate by 25 basis points to 4.6 per cent and lower the required reserve ratio by 50 basis points for all banks. The move, which follows the biggest devaluation of the yuan in two decades earlier this month, comes amid signs of decelerating growth for the world's second-biggest economy. A rate cut failed to boost the market for a second time as stocks ended lower after the last reduction in June.

  Intervention cost
"The PBOC's reserve-requirement ratio cut cannot make up for the loss of liquidity resulting from the yuan's depreciation," Chia Woon Khien, Singapore-based portfolio manager at Nikko Asset Management Asia, said in an interview in Bloomberg's office in Shanghai. "If we're lucky, China's economy will start to recover from the fourth quarter."

The Hang Seng China Enterprises Index dropped 0.6 per cent at 3:16 pm in Hong Kong, while the Hang Seng Index lost 0.9 per cent.