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Business News/ Market / Stock-market-news/  China stocks sink in worst weekly rout since 2011 amid outflows
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China stocks sink in worst weekly rout since 2011 amid outflows

The Shanghai Composite Index slid 3% to 3,552.82, poised to close below its 200-day moving average for the first time in a year

The Hang Seng China Enterprises Index tumbled 3% to 10,094.77 at the noon-time break in Hong Kong, extending this week’s slump to 8.7%. Photo: Premium
The Hang Seng China Enterprises Index tumbled 3% to 10,094.77 at the noon-time break in Hong Kong, extending this week’s slump to 8.7%. Photo:

Shanghai: China’s stocks slumped, with a gauge of shares in Hong Kong heading for its worst weekly loss in four years, after the nation’s manufacturing contracted and outflows accelerated.

The Hang Seng China Enterprises Index tumbled 3% to 10,094.77 at the noon-time break in Hong Kong, extending this week’s slump to 8.7%. A private factory gauge unexpectedly fell to the lowest level in more than six years, data Friday showed. The Shanghai Composite Index slid 3% to 3,552.82, poised to close below its 200-day moving average for the first time in a year. The yuan and benchmark interest- rate swaps fell the most in more than a week.

A surprise yuan devaluation, the deepening economic slowdown and weak corporate earnings are souring investor sentiment toward equities in Asia’s largest economy. Chinese equity funds were the biggest contributors to more than $4 billion of outflows in Asia excluding Japan in the week to 19 August, EPFR Global said. Margin traders cut holdings of shares bought with borrowed money for a third day on Thursday.

“The economy continues to be on a downward trend and it’s not likely to pick up soon as there’s no clear driver for growth," said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. “The stock market may drop further to seek a lower support. Short-term sentiment is pretty weak."

The Hang Seng Index dropped 2.3% in Hong Kong, poised to enter a bear market after falling more than 20% from this year’s peak. The Shanghai gauge has lost 10% this week.

Factory data

Both the Hang Seng China Enterprises and the Shanghai Composite have tumbled more than 30% from this year’s highs, even as the government took unprecedented measures to shore up mainland equities. The slump threatens to undermine confidence in President Xi Jinping’s ability to manage the economy.

Caixin Media and Markit Economics’s preliminary manufacturing index for August was at 47.1, the lowest since March 2009, compared with the 48.2 estimate in a Bloomberg survey of analysts. A number less than 50 signals a contraction.

“The very weak private sector PMI shows that smaller Chinese enterprises are facing a challenging environment to expand activity," said Bernard Aw, a Singapore-based strategist at IG Asia Pte Ltd. “It points towards the narrative that we could see a further slowdown in China. That is worrying for global economy."

Technology and consumer shares were the biggest decliners on the CSI 300 Index, which slumped 3.1%. Air China Ltd., the nation’s largest international carrier, declined 4.8% in Hong Kong, heading for a 15% loss this week. BYD Co. tumbled 6.5%, while Dongfeng Motor Group Co. slumped 5.8%.

Rescue fund

To counter the $4 trillion equity rout, the government has armed a state agency with more than $400 billion to bolster share prices, banned selling by major shareholders and told state-owned companies to buy stocks.

China Securities Finance Corp., the state agency tasked with supporting share prices, will remain in the stock market for years to come, the China Securities Regulatory Commission said last Friday, although the agency will no longer add to holdings unless there’s unusual volatility and systemic risk.

As the state battles to prop up stock prices, investors with the most at stake are cashing out. The number of traders with more than 10 million yuan ($1.6 million) of shares in their accounts shrank by 28% in July, while those with between 1 million yuan and 10 million yuan declined by 22%, according to data compiled by the nation’s clearing house. International investors have sold more than $7 billion of Shanghai shares through an exchange link with Hong Kong since 3 July.

Currency devaluation

The outstanding balance of margin debt on the Shanghai Stock Exchange fell by 0.7% to 869.2 billion yuan on Thursday.

A weaker yuan is also reducing the attractiveness of Chinese assets. The currency dropped 0.16% to 6.3990 a dollar on Friday, following last week’s 2.9% depreciation. The cost of one-year interest-rate swaps, the fixed payment to receive the floating seven-day repo rate, slipped three basis points on Friday to 2.58%.

Even after the declines, Chinese shares remain expensive relative to global peers. The median stock on mainland bourses trades at 66 times reported earnings, higher than any of the 10 largest markets. It was 68 at the peak of China’s equity bubble in 2007, according to data compiled by Bloomberg.

Corporate earnings

More than 62% of companies in the Shanghai Composite trailed analysts’ 2014 earnings estimates as the economy expanded at its weakest pace since 1990. Profits at Chinese industrial firms declined by 0.3% in June, versus a 0.6% gain in the previous month.

President Xi is considering shifting his priority to population growth, according to a person familiar with the discussions. Xi’s economic planners may for the first time emphasize “population policies" over gross domestic product in the country’s next development blueprint, said the person, who asked not to be identified because the talks are private.

The focus sets the stage for a host of rule changes regarding health, pensions, social welfare and possibly lifting the caps on the number of children some families can have, the person said. Bloomberg

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Published: 21 Aug 2015, 10:01 AM IST
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