China stock market

Market woe continues as Hang Seng Index closes below 20,000 for first time since 2013 - and more doom could lie ahead

Shanghai benchmark thuds more than 5 per cent lower to end at a four-month low

PUBLISHED : Monday, 11 January, 2016, 9:21am
UPDATED : Monday, 11 January, 2016, 8:21pm

Confusing policy stances, weak economic fundamentals, and fears over a new financial crisis fuelled an equity sell-off on Monday, dragging major benchmark Indexes in Hong Kong and mainland China lower, while analysts mused about likely further declines ahead.

The Hong Kong benchmark tumbled 2.76 per cent, or 565.21 points to 19,888.50. The closing level represents the first sub-20,000 point level finish for the Hang Seng since 2013. The Hang Seng China Enterprises Index, tracking mainland-based companies, dropped 3.85 per cent, or 340.73 points to 8,505.16, its lowest closing level since October 2011.

The Shanghai Composite Index plunged 5.33 per cent, or 169.71 points, to 3,016.70 , the lowest level since mid September.

Investors are concerned about China risks spilling over, said Hong Hao, chief strategist with Bocom International.

“The circuit breaker imposed last week triggered a trading suspension when the aggressive selling and accompanying plunge in stock prices took place. But the bearish sentiments were not fully released in that way. And now that it is scrapped, we are seeing the continuing bearishness (in stock prices).”

Mild inflation data released Monday morning added to risk aversion, and suppressed regional markets from Malaysia to Australia, adding to last week’s sell-off in stocks and currencies.

Michael Every, head of financial markets research at Rabobank and a noted bear on China’s markets said stocks are “still overvalued and it’s ridiculous that anyone thinks there is value (in the overall market). The (Shanghai Composite) needs to go all the way back to 2500 points,” for prices to make sense, he added.

He also said Beijing decided to prop up the currency and not the equity markets on Monday.

The offshore yuan rebounded, as mainland authorities aggressively pushed up its price on the Hong Kong market and lifted the interbank rate by 10 percentage points to 13.396 per cent, the highest on record.

The yuan traded by international investors in Hong Kong bounced 0.66 per cent to trade at 6.6373 against the US dollar at 4:30pm, paring some of its 1.75 per cent decline last week. Onshore yuan exchanged by mainland traders in Shanghai stood at 6.5807 at 4:30pm, stronger by 0.19 per cent from Friday’s close.

“The currency now looks like it used to be where it is not moving the entire day,” even though it is still overvalued, Rabobank’s Every said.

“Ultimately they will have to give up (intervening in the markets) or give up on the idea of the internationalization of the yuan…and go back into being a hermit crab.”

Adam Xu, a mutual fund manager based in Shanghai, said he was concerned about the recent action in the stock market, saying that he was sensing something more ominous.

“(It) is not a bear market approaching. It is something worse,” Xu said.

“We have strategies to make money during a bear market. But we don’t now. The market is not logical.”

The CSI 300 Index fell by 5.03 per cent, or 169.11 points, to end at 3,192.45. The Shenzhen Composite Index plummeted by 6.6 per cent, or 130.62 points to end at 1,848.10. The Nasdaq-style ChiNext lost 6.34 per cent, or 142.63 points to 2,106.36.

The Shanghai B-share Index, composed by US-dollar denominated mainland stocks, tumbled 8.06 per cent to 356.23.

Mainland based property giant China Vanke plunged 10.65 per cent in Hong Kong to HK$17.62. Its share price tumbled by 23 per cent since trading resumed last Wednesday, as investors worry about the company’s restructuring plan

There remains a crisis of confidence in the markets at the moment said Louis Tse Ming-kwong, director of VC Brokerage, as traders continued to test the bottom amid widespread concerns that Chinese regulators did not know what they were doing. Last week’s sudden U-turn to withdrawal the newly-launched circuit breaker, after four days, damaged investor confidence, Tse said.

The circuit breakers were supposed to reduce volatility by calling time outs at key points. However, the reverse happened with investors becoming more edgy the closer the markets fell towards key trigger points.

China’s benchmark Shanghai Composite Index plunged 10 per cent last week, its worst weekly performance since August, wiping out all the remaining stock market gains for 2015. The sell-off started last Monday when the CSI 300 Index fell 7 per cent triggering a trading suspension under the new circuit breaker system.

The Hang Seng Index finished the week 6.52 per cent weaker at 20,435.91.

China’s consumer price index rose 1.4 per cent last year on a full-year basis, well below the government’s target of around 3 per cent, new data released at the weekend showed. Key food prices including pork and vegetables rose 9.5 per cent and 7.4 per cent year on year respectively, with a fall in global oil prices weighing on the index. Producer prices contracted 5.2 per cent last year.

In New York, the two biggest index trackers of mainland stocks also fell sharply last week. The Deutsche X-trackers Harvest CSI 300 China A-Shares ETF rose 0.5 per cent on Friday, paring the weekly decline to 13 per cent. The Market Vectors ChinaAMC A-Share ETF added 0.6 per cent and closed the week down by 13 per cent at US$38.50.

A raft of mainland Chinese data in the coming weeks, starting with export and import figures on Wednesday, is likely to show activity in the world’s second-largest economy continuing to slow, polls by Reuters showed.

Exports were expected to have dropped 8 per cent in December after sliding 6.8 per cent in November, and imports may have declined 11.5 per cent in December from a year earlier, following an 8.7 per cent drop in November, the median forecast of 25 analysts polled by Reuters showed.

The trade data will set the stage for the release of fourth-quarter and full-year gross domestic product data on January 19 along with industrial output, retail sales and fixed asset investment data.