China’s Shanghai Composite Index fell below the 4,000 level for the first time since April, as margin traders continued to unwind positions amid doubts over the effectiveness of government measures to support equities.
The benchmark stock index slumped 3.5 percent to 3,912.77 at the close. The gauge has tumbled 24 percent from its June 12 peak, helping wipe out at least US$2.4 trillion of value. Fifteen stocks dropped for each one that rose yesterday, with industrial, power and commodity shares leading losses.
The drop to below 4,000 is a blow to investors predicting authorities would intervene to support shares, a strategy employed near closely watched levels in the past.
While China’s securities regulator eased margin-trading rules and the nation’s exchanges announced fee cuts on Wednesday night, the moves failed to revive confidence in a market that has wiped out the equivalent of France’s entire equity capitalization in three weeks.
“Four thousand is the psychologically critical level that should not have been broken,” said Castor Pang (彭偉新), head of research at Core Pacific Yamaichi in Hong Kong. “The government will have to and need to come up with more measures otherwise the market is poised to drop further.”
Margin debt on the Shanghai Stock Exchange fell to 1.33 trillion yuan (US$214.29 billion) on Wednesday for an eighth day of losses, the longest stretch of declines since the city’s bourse began to compile the data in March 2010. A five-fold surge in leveraged wagers had helped propel the Shanghai index to a more than 150 percent gain in the 12 months through June 12.
Analysts from Macquarie Group Ltd, Partners Capital International and Guosen Securities Co this week predicited that authorities would intervene to keep the index above 4,000.
Evidence of government support stretches back to at least June 2005, when the Shanghai gauge fell below 1,000. The regulator responded by urging funds to stabilize the market and allowing companies to buy back their own shares.
The CSI 300 Index declined 3.4 percent yesterday as gauges of utility, technology and commodity companies sank more than 4 percent.
Hong Kong’s Hang Seng Chinese Enterprises Index had dropped 1.3 percent at 3:45pm, while the Hang Seng Index gained 0.3 percent.
Shares in Huaneng Power International Inc (華能國際電力), China Eastern Airlines Corp (中國東方航空) and Searainbow Holding Corp (海虹企業控股) tumbled by the 10 percent daily limit. Guotai Junan Securities Co (國泰君安證券) shares fell 9.8 percent.
Shares with the heaviest weightings in the Shanghai index surged in late trade yesterday, moves that Jun Yang Securities Co (君陽證券) said might have been driven by government-linked funds.
PetroChina Co (中國石油天然氣股份有限公司), the nation’s biggest company by market value, jumped 8.8 percent. Industrial & Commercial Bank of China Ltd (中國工商銀行) advanced 5.8 percent.
Hours after Wednesday’s tumble of 5.2 percent in the Shanghai Composite, the securities regulator eased collateral requirements for leveraged investors and allowed brokerages to securitize margin loans — a move that frees up room to extend credit. The same day, the Shanghai Stock Exchange said China’s two bourses would cut equity-trading fees by 30 percent starting on Aug. 1.
Continued declines in the Shanghai Composite risk sparking sporadic social unrest, BMI Research said in a statement on Tuesday. Individual investors account for about 80 percent of trading on mainland Chinese exchanges.
“When investors lose confidence and rush to sell, these short-term measures will be hardly sufficient to stop the rout,” BNP Paribas SA chief economist Chen Xingdong (陳興動) said in Beijing. “In the long term, regulators should let the market play a bigger role. Official media have been talking up the market and people have been chasing hot stocks.”
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