China’s benchmark stock index tumbled to a three-month low as another round of government support measures failed to allay concern that margin trades will keep unwinding at a record pace.
The Shanghai Composite Index slid 5.9 percent to 3,507.19 at the close. With at least 1,331 companies halted on mainland exchanges and another 747 falling by the 10 percent daily limit, sellers were locked out of 72 percent of the Chinese market. They turned to everything from government bonds to Hong Kong shares and commodity futures to raise cash, sending China’s one-year note yield up by the most on record and sparking a 5.8 percent loss in the Hang Seng Index.
The rout rippled across global markets, dragging down U.S. index futures and fueling gains in haven assets such as the yen. Policy makers’ latest attempts to stop the selling, including measures to prop up small-cap stocks, were overshadowed by data showing an unprecedented liquidation of margin trades on Tuesday. Foreign investors extended a record three-day exodus as some said government meddling is making matters worse.
“There’s really panic out there,” said Tony Chu, a Hong Kong-based money manager at RS Investment Management Co., which oversees more than $20 billion. “I wouldn’t suggest catching the falling knife.”
Traders unloaded 98.3 billion yuan ($15.8 billion) of shares purchased with borrowed money on the Shanghai exchange Tuesday, the 12th straight day of declines. A five-fold surge in margin debt over the 12 months through June 12 had helped propel the Shanghai index to a more than 150 percent gain.
While the median price-to-earnings ratio in China has dropped to 53 from 108 at the height of the rally, valuations are more than twice as high as those on the Standard & Poor’s 500 Index.
President Xi Jinping’s government is ramping up efforts to combat the rout as policy makers seek to maintain confidence in the nation’s leadership and prevent a crash from weighing on an the weakest economic expansion since 1990. China now has more than 90 million individual investors, a constituency that’s larger than the Communist Party.
“The market is now falling on the assumption that both China’s economy and financial markets face systemic risk,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co.
Among the latest support measures, the China Financial Futures Exchange raised margin requirements for shorting contracts on the small-cap CSI 500 Index. China Securities Finance Corp. said it will buy more shares of small- and mid-cap companies, while people familiar with the matter said the government agency is seeking at least 500 billion yuan in liquidity to support equities. The government also ordered state-owned firms not to cut holdings in their listed companies.
The trading suspensions, which cast doubt on authorities’ pledge to give markets a greater role in the world’s second-largest economy, mean that the Shanghai Composite’s drop was probably understated.
“It’s absurd, stopping trading just because they don’t want stocks to fall,” said Tsutomu Yamada, a market analyst at Kabu.com Securities Co. in Tokyo. “They’re going all out in trying to stop stocks from falling but it’s not working.”
On the Shanghai exchange, 365 companies suspended trading, equivalent to 33 percent of all listings. A further 992 were halted in Shenzhen, or 56 percent of the total.
Leshi Internet Information & Technology (Beijing) Co., the biggest company in the ChiNext index of small-cap stocks, was suspended after plunging 42 percent from a record high two months ago. The company, which soared five-fold in the year through May, said in a statement that it plans to invest in a smart terminal.
The CSI 300 Index of China’s largest companies dropped 6.8 percent. Hong Kong’s Hang Seng China Enterprises Index, which entered a bear market Tuesday, tumbled 5.9 percent. The Hang Seng Index fell the most since November 2008.
Gauges of financial and energy companies slid more than 7 percent for the biggest losses among 10 industry groups in the CSI 300. Industrial & Commercial Bank of China Ltd., the biggest lender, fell 4.7 percent. China Construction Bank Corp. dropped 8.4 percent. PetroChina Co., the largest energy producer, slumped 9.1 percent after rallying over the past four days on speculation of state-fund buying.
The rout has done nothing to erode the bullish outlook of Goldman Sachs Group Inc. Kinger Lau, the bank’s China strategist in Hong Kong, predicts the CSI 300 will rally 27 percent from Tuesday’s close over the next 12 months as government measures boost investor confidence and monetary easing spurs economic growth. Leveraged positions aren’t big enough to trigger a market collapse, Lau said.
“It’s not in a bubble yet,” Lau said in an interview. “China’s government has a lot of tools to support the market.”
The government’s measures are unlikely to succeed in the short term because investor psychology is still too fragile, Mark McFarland, the chief global economist at Coutts & Co. in Hong Kong, said in an interview on Bloomberg Television.
While Chinese investors are “relatively optimistic” about the future, they still want to reduce stakes, according to a poll by the Survey and Research Center for China Household Finance at Southwestern University of Finance and Economics. Only 40.5 percent of households still had gains in their stock accounts in the week starting June 27, down from 73.8 percent in the period June 15 to June 18.