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Chinese investors continue to be nervous. Photo: Reuters

Beijing’s support measures fail to arrest China’s stock market slide

Mainland and Hong Kong indices fall to new recent lows as central government rescue measures fail to restore investor confidence

Mainland shares traded lower yesterday, raising the risk of wider economic fallout and testing Beijing's resolve to pull all available policy levers to stop the slide.

The government's rescue measures failed to restore confidence. The Shanghai Composite Index fell again, shedding 1.3 per cent, or 48.8 points, to 3,727.1. The Shenzhen Component Index dropped 5.8 per cent, or 700.2 points, to a nearly five-month low of 11,375.6.

Hong Kong's Hang Seng Index slid below the 25,000 mark, falling for three straight sessions, to hit its lowest level since March 31. Losing 1.03 per cent, or 260.97 points, the index yesterday closed at 24,975.31. The Hang Seng China Enterprises Index, which tracks Hong Kong-listed mainland shares, shed 3.30 per cent, or 404.13 points, to 11,827.30.

"The key level that Beijing is striving to protect for the Shanghai benchmark is 3,600, though we are not optimistic given that most measures to arrest the slide are already on the table," said Linus Yip, chief strategist at First Shanghai Securities.

Some blue chips, in particular banks, managed to climb thanks to reports that 21 mainland brokerages had shifted over 128 billion yuan (HK$162 billion) into a stabilisation fund to buy index trackers.

Yet the sell-off in other shares, in particular small and medium-sized companies, continued unabated. The ChiNext Price Index, China's version of the tech-heavy Nasdaq board, fell 5.7 per cent to 2,352.01, the lowest in nearly four months.

A total of 745 stocks, or 26 per cent of the companies listed on the mainland, suspended trading yesterday.

The Shanghai Composite Index has now fallen 28 per cent since the peak on June 12, compared with a 117 per cent jump over the previous eight months.

Leveraged bets, blamed for inflating stock prices, are yet to be unwound. According to Bank of America Merrill Lynch, 2.1 trillion yuan of stocks have been bought with borrowed money, or margin finance.

Nearly 30 per cent of shares listed on the mainland markets are trading at above 50 times projected earnings, while another 20 per cent are trading at a price-earnings ratio of 30 times, according to Citibank. In comparison, Hong Kong stocks are valued at 11.4 times their projected earnings, underscoring the lofty levels of mainland stock prices.

"They [regulators] are doing everything now, barring the central bank buying shares, and you could even make an argument that they are doing that by backdoor," said Michael Every, head of financial markets research at Rabobank. His big concern now is the "real economy".

Shrinking wealth as a result of the stocks rout, it is feared, could dampen consumption while investment losses of companies could hit wages. Some economists, however, feel the damage is still manageable given that mainland households' exposure to equities is still relatively small.

"A stock market crash would be undoubtedly painful, shaving 0.5 to 1 percentage point off the real [GDP] growth in the following 12 months," said Societe Generale China economist Wei Yao.

According to HSBC, mainland households had invested around 13 per cent of their assets in the equity markets as of May, compared with 10 per cent in 2014.

Watch: As Chinese stocks plunge, $32 billion of U.S. deals at risk

 

This article appeared in the South China Morning Post print edition as: Beijing support fails to arrest market slide
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