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Chinese stocks tumbled, sending the benchmark index into a bear market, as signs of an exodus by leveraged investors overshadowed the central bank's effort to revive confidence with an interest rate cut.
The Shanghai Composite Index dropped 3.3 per cent to 4,053.03 at the close, taking declines from its June 12 peak to more than 20 per cent. The gauge swung between a loss of 7.6 per cent and a gain of 2.5 per cent in Monday trading, recording the biggest intra-day point move since 1992. A measure of technology stocks sank 7.3 per cent to lead declines among industry groups.
The retreat marks an end to the nation's longest-ever bull market, a rally that's lured record numbers of individual investors and convinced traders to bet an unprecedented amount of borrowed money on further gains. China's interest rate cut, along with assurances from the securities regulator that risks from margin trading are controllable, failed to ease concern that speculators are unwinding their positions.
"Nobody knows when the market will bottom," said Paul Chan, the Hong Kong-based chief investment officer for Asia ex-Japan at Invesco Ltd. "The unwinding of margin financing makes it very difficult to forecast what the fair valuation is." The losses spread to Hong Kong, with the benchmark Hang Seng Index sinking 2.7 per cent by 3:26 pm, while Hong Kong's Hang Seng China Enterprises Index slid 3.5 per cent.
'Panic selling'
Zhang Gang, a strategist at Central China Securities strategist in Shanghai, called Monday's losses "panic selling" that will likely continue as margin investors are forced to liquidate their holdings and the recent selloff spurs more mutual fund redemptions.
Margin debt on the Shanghai Stock Exchange fell for a fifth day on Friday, the longest stretch of declines since June 2014. Margin calls this morning on the off-market HOMS pooling system were only about 2.2 billion yuan, a "fraction" of total transaction value, the China Securities Regulatory Commission said in a statement Monday.
Chinese stocks pared losses in the afternoon amid speculation the government may suspend initial public offerings or slow their pace, Jimmy Zuo, Shenzhen-based trader at Guosen Securities Co, said by phone. A flood of new share sales has weighed down the stock market and boosted money-market rates on concern traders will divert funds from existing equity holdings.
The Shanghai gauge tumbled 7.4 per cent on Friday, capping the biggest two-week rout since 1996 and spurring state media and the government to make supportive comments.
Indexes slump
The CSI 300 Index fell 3.3 per cent Monday. The Shenzhen Composite Index tumbled 6.1 per cent to its lowest level since May 8. The ChiNext gauge of small companies plunged 7.9 per cent, extending losses this month to 24 per cent.
Hundsun Technologies and Shenzhen O-film Tech Co slid by the 10 per cent daily limit Monday. Technology stocks remain the best performing industry group in the CSI 300 over the past six months even with a 25 per cent slide in June.
CRRC Corp paced declines for industrial shares, slumping 8.6 per cent and taking its decline from an April peak to more than 50 per cent.
Brokerages led declines for financial shares, with Citic Securities Co and Haitong Securities Co. dropping more than five per cent. Bank of Beijing Co erased a 3.1 per cent gain, falling one per cent, while Ping An Bank slid 1.5 per cent.
Rate cuts
The Shanghai gauge had surged more than 150 per cent in the 12 months prior to its June 12 peak as investors speculated monetary stimulus would revive the weakest economic expansion in more than two decades. The PBOC cut the one-year lending rate to 4.85 per cent and lowered reserve ratios for some lenders including city commercial and rural commercial banks by 50 basis points, according to Saturday's statement.
"We expect the cuts to temporarily halt a possible crash in the market - had the government not acted, a stampede might soon develop as margin calls force leveraged positions to unwind," David Cui, head of China equity strategy at Bank of America Corp, wrote in a report dated June 28.
The doubling in China's main indexes in the past year coincided with the weakest economic growth in a quarter century. A majority of nine among 17 economists surveyed June 18-24 judged that a 30 per cent drop in major equity benchmarks within 30 days would have only a "negligible" effect on growth. Asked about the implications of the surge in shares over the past year, five said it was a "net positive" for the economy, five said a "net negative" and eight were neutral.
Bubble warnings
Strategists at BlackRock Inc, Credit Suisse Group AG and Bank of America this month warned the nation's equities were in a bubble. The median stock on mainland exchanges is valued at about 82 times earnings - higher than when the market peaked in October 2007 and compared with a multiple of 21 for the US.
China's bull market, which turned 935 days old Friday, had been the longest since bourses opened for trading in 1990 and more than five times the average lifespan of the nation's previous bull markets.
