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Factory data drag down Chinese stocks

PUBLISHED : Monday, 01 February, 2016, 5:09pm
UPDATED : Monday, 01 February, 2016, 5:09pm

China and Hong Kong stocks closed on Monday lower as two closely watched gauges of China’s factory activity showed the economy is still in contraction territory.

The Shanghai Composite Index lost 1.78 per cent to close at 2,688.85 while the large-cap CSI 300 shed 1.53 per cent to end the day at 2,901.05.

The tech-heavy Shenzhen Composite Index dropped 1.04 per cent to 1,671.91 while the Nadaq-style ChiNext Index edged down 0.07 per cent to 1,992.69

“Chinese manufacturing is shrinking. The trend is consistent with the past two years,” said Francis Lun, chief executive of GEO Securities. “I think it will continue to shrink if the government is doing what it’s planning to do to reduce production, to reduce the capacity of industries with serious oversupply like iron and steel.”

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Shares in China’s mining and steel sectors plummeted after data from the National Bureau of Statistics showed the country’s Purchasing Managers’ Index (PMI) declined to 49.4 in January from 49.7 in December. The result fell short of market expectations. Analysts had forecast a reading of 49.6 in a survey by Reuters.

It was also the sixth straight month that the reading remained below 50, a level that separates expansion from contraction. The official non-manufacturing PMI fell to 53.3 in January from a 16-month high of 54.4 in December.

Meanwhile, the Chinese Caixin manufacturing PMI, a closely watched private gauge of factory activity, ticked up to 48.4 in January from 48.2 in December, but was still in contraction territory.

“Today’s China PMI numbers confirm that momentum in Chinese economic activity has continued to weaken into 2016,” Angus Nicholson, an analyst at IG Group, said in a research note on Monday. “It is quite concerning that the significant monetary and fiscal stimulus in 2015 has only managed to slow the rate of decline in China’s industrial activity.”

Angang Steel Company’s A shares plummeted throughout the day to close the afternoon session at 3.819 yuan, down 6.85 per cent from the previous close, although its H shares rose about 2.69 per cent to HK$3.44. The shares dropped after the company announced on Friday in a profit warning that it expects a significant drop of 4.376 billion yuan in 2015 profits due to the fall in steel prices. One of China’s largest steel manufacturers, the company made 928 million yuan in 2014.

“The external market factors squeezed the profit margin of the company. Although greater efforts were made by the company to reduce costs and improve efficiency internally, it was not sufficient to cover the loss caused by the slump of steel price,” the alert said.

Shenji Group Kunming Machine Tool Company also announced in a profit warning an expected 80 million yuan profit decline for 2015. It’s A Shares dropped 9.96 per cent to 11.3 yuan, while its H Shares fell about 4.43 per cent to HK$3.67.

Other A Shares that saw losses include Yanzhou Coal Mining Company, falling about 6.75 per cent to 8.56 yuan; China Coal Energy Company, losing about 4.78 per cent to 4.58 yuan; Chongqing Iron and Steel Company shedding about 5.32 per cent to 2.49 yuan; and industrial goods firm First Tractor Company that dropped about 6.63 per cent to 9.86 yuan.

“Lunar New Year is approaching. This is not the time (for Beijing) to announce major policy initiatives,” Lun said, adding that the government will likely provide enough liquidity in the market in the coming days.

In the Hong Kong Shanghai Stock Connect, northbound trading from global investors into China’s A-share market saw a turnover of HK$4,216.33 million, higher than the turnover of HK$1,603 million seen in southbound trading from Chinese investors into the H-share market.

Hong Kong’s benchmark Hang Seng Index closed the session down 0.45 per cent at 19,595.50 while the Hang Seng China Enterprises Index dropped 1.17 per cent to 8,144.85.

On Friday, US stocks rallied to close higher, after the Bank of Japan surprised markets by lowering a benchmark interest rate to minus 0.1 per cent, its first negative interest rate policy. The S&P 500 climbed 2.5 per cent to 1,940.24 while the Dow Jones Average also jumped 2.5 per cent to 16,466.30, and the Nasdaq Composite rose 2.4 per cent to 4,613.95.

With additional reporting by Laura He