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China stocks end off for third day as markets on track to record worst monthly loss since 1996

Shanghai shares close at 14-month low in month when botched circuit breaker causes trading to be suspended twice in first week of 2016

PUBLISHED : Thursday, 28 January, 2016, 9:04am
UPDATED : Thursday, 28 January, 2016, 6:12pm

Chinese stocks reeled in a volatile session to close down for the third day in a row on Thursday, with the major index in Shanghai ending at a 14-month low as the country’s equity markets are on track to post their worst monthly loss since 1996.

Worries for growing risks in Chinese banks’ bill-financing business overshadowed the central bank’s biggest cash injection in three years in a bid to ease the liquidity crunch.

The benchmark Shanghai Composite Index declined 2.9 per cent or 79.9 points to end at 2,655,66, the lowest closing level since late November 2014. The index had fallen for three days in a row.

So far, the Shanghai benchmark is down 25 per cent in January, seemingly a lock to post its worst monthly loss since records began in January 1996, according to data compiled by Reuters.

The large-cap CSI300 fell 2.6 per cent or 76.59 points to close at 2,853.76. The Shenzhen Composite slid 4.2 per cent or 71.09 points to 1,629.96, and the ChiNext Index dropped 4.6 per cent or 91 points to 1,906.46. In Hong Kong, the Hang Seng Index rose 0.8 per cent to close at 19,195.83 in choppy dealings.

Turnover for the Shanghai and Shenzhen markets shrank sharply to 399.4 billion yuan, down more than 20 per cent from the previous session.

“Markets seemed to have taken a direct hit from expectations that Chinese regulators could tighten rules on banks’ bill-financing business, which may exacerbate liquidity problems despite the PBOC’s recent open market operations to inject cash into the system,” said Xu Tongxun, an analyst for Caitong Securities.

“In essence, investors fear that stocks may be overpriced under current limited liquidity,” he added.

Looking ahead, Xu suggested investors be cautious on increasing positions in the stock market as sentiment remained poor in thin trading volume.

The sell-off in Chinese markets defied another aggressive cash injection by the People’s Bank of China’s (PBOC) on Thursday, as the central bank added 340 billion yuan to the banking system through reverse repurchase agreements, aiming to ease a liquidity squeeze ahead of China’s week-long Lunar New Year holiday in early February.

The move followed an injection of 440 billion yuan of funds on Tuesday, bringing the net cash injection this week to 590 billion yuan, the biggest in three years. A total of 190 billion yuan in reverse repos matured this week.

Banking stocks were hard hit, after media reports said China’s Citic Bank revealed a 1 billion yuan fraud case in its bill-financing business, with an employee of the bank allegedly faking documents to obtain a bill for investments in China’s stock markets, according to Bloomberg.

Last week, the Agricultural Bank of China also uncovered a similar bill fraud case, with two employees accused of embezzling 3.9 billion yuan to invest in the once-sizzling markets, which scaled 7-year highs in early June 2015.

On Thursday, Standard & Poor’s said in a report that Chinese banks are likely to face worse-than-expected credit losses and heightened market volatility in 2016, with the sector’s non-performing loan ratio expected to jump to 3 per cent by the end of this year.

In Shanghai, China Citic Bank declined 2.9 per cent to close at 5.44 yuan, and Agricultural Bank of China dropped 1.4 per cent to 2.91 yuan.

Elsewhere in Asia, Australia’s S&P/ASX 200 gained 0.6 per cent to 4,976.20, while Japan’s Nikkei Average lost 0.7 per cent to end at 17,041.45.

With additional reporting by Xie Yu

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