China markets rout resumes with 8.5% Shanghai sell-off

The Shanghai stock market saw the second-biggest fall in its history yesterday

, posing a dilemma for the Chinese authorities which have taken unprecedented steps over the past month to try to stop the equity rout.

The Shanghai Composite sank 8.5 per cent, its sharpest slide since February 2007, while the Shenzhen Composite fell 7 per cent and the ChiNext start-up board dropped 7.4 per cent.

The declines came as a blow to Beijing, which has embarked on a month-long campaign to prop up the domestic share market. Authorities first stepped in a month ago after a share collapse wiped more than $3 trillion off the value of Chinese listings.

Yesterday’s turbulence will increase the pressure on the ruling Communist party to take more action to boost growth, amid calls for a further reduction in interest rates and a cut in the amount banks must hold in reserve.

Rush to exit

More than 1,700 stocks fell by the maximum daily limit of 10 per cent, while only 78 rose, as retail investors rushed to exit highly leveraged bets on the market. In

China

, stocks are only allowed to fall or rise by up to 10 per cent on any given day before they are automatically suspended from trading.

Large-cap financial and raw materials stocks tumbled with China Life Insurance, Bank of Communications and China Shenhua Energy each down by 10 per cent.

PetroChina, the country's largest company by index weighting, lost 9.6 per cent while ICBC, the biggest mainland bank, shed 5.3 per cent.

Analysts struggled to identify an immediate trigger for the decline, with guesses ranging from expectations of an increase in US interest rates to a rise in Chinese pork prices. Others simply pointed to underlying weakness in sentiment towards both the market and the economy.

Zhu Zhenxin, strategist at Minsheng Securities, said Chinese investors were acting like "birds startled by the sound of a plucked bowstring".

“The huge drop shows that the market is really sensitive now,” he said. “I think it’s panic behaviour. People’s confidence has been shaken.”

Erwin Sanft, China equity strategist at Macquarie, said stocks were likely to remain under pressure as investors continued to unwind positions bought with borrowed money. "Our view is that the level of margin finance still needs to come down further," he said.

Central bank

The policy response has included a ban on short selling, barring sales by big shareholders, and the extension of loans to brokerages from China’s central bank. Initial public offerings have been frozen, while state investment funds have been ploughing money into shares and tracker funds to boost index levels.

Those efforts had appeared to bear fruit as the market steadied and began to regain ground over the past few weeks. Up to yesterday, the Shanghai index had risen 16 per cent from its early July low.

However, international investors have criticised Beijing’s intervention, especially the decision to allow more than half of all listed companies to halt trading in their shares. At one point, more than 1,400 companies had requested share suspensions, although that number has since fallen to about 500.

In spite of reporting 7 per cent growth in the second quarter, concerns about the outlook for the Chinese economy have been mounting. Yesterday official figures showed that industrial profits fell last month, following a manufacturing survey released on Friday that signalled continued contraction in the sector.

In Hong Kong, the Hang Seng dropped 3.1 per cent, while the China Enterprises index lost 3.8 per cent. Chinese shares in Hong Kong are now down 5.1 per cent for the year while the Shanghai index is still up about 15 per cent.

– (Copyright The Financial Times Limited 2015)