Shanghai’s index slump may have more to go as liquidity dries up in the world’s worst-performing stock market

The world-beating slump on Chinese equity markets may have more room to run, if the number of companies with stock prices below either their 200-day moving averages or book values is anything to go by.

Of the 1,478 stocks on the benchmark Shanghai Composite Index, 93.3 per cent have fallen below their average prices for the past 200 days, according to Bloomberg data.

That is not far from the 98.2 per cent recorded in January 2012 at the bottom of a slump that did not turn around until 2014. The number hit 99.9 per cent at the peak of the 2008 global financial crisis.

At the same time, the number of stocks with prices below book values indicates that there is more gloom to come.

As of Thursday, 173 companies on the Shanghai Composite had fallen to such levels, the Bloomberg data showed, although the figure was still below the 200 companies seen in November 2008.

“The market isn’t likely to turn around any time soon,” said Ken Chen, a strategist at KGI Securities in Shanghai. “A turnaround of China’s markets usually needs improving fundamentals and loose liquidity, and up till now, we’ve seen neither.”

The Shanghai Composite dropped 1.1 per cent to 2,737.74 on Thursday, trading close to levels seen after its big fall in 2015, when it lost US$5 trillion in market capitalisation. It is valued at 10 times estimated earnings for the following 12 months, not far from a record low of 7.2 in 2014, the data showed.

Trading of Chinese stocks on Shanghai Stock Exchange hits 4-year low as investors flee market

The factors that are weighing on stocks still persist, even though foreign buying is solid, dividend yields are rising and there have been a series of buy-backs from listed companies.

Daily trading values on the Shanghai exchange fell below the 100 billion yuan (US$14.6 billion) gateway for the first time in four years last week, indicating little buying interest from China’s 140 million investors.

Among the sources of concern is the ongoing US-China trade war, with the US soon to decide whether to levy tariffs on US$200 billion worth of imports of Chinese goods, while at home the central bank has made it clear that there will be no monetary stimulus to stabilise growth and has not cut interest rates since October 2015.

A liquidity squeeze has been felt through the markets, resulting in a slew of corporate bond defaults this year.

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Meanwhile, economic growth in the world’s second-largest economy may slow to 6.6 per cent this quarter and 6.5 per cent in the fourth quarter, from 6.7 per cent for the previous three-month period, according to Bloomberg data.

The regulator’s back-pedalling on a plan to introduce Chinese depositary receipts (CDRs) has also disappointed some domestic investors, as it means they are no longer able to buy into big Chinese tech firms that are listed overseas and which were the target of the CDR push. The failure of the initiative did not help confidence.

“It has not bottomed out,” said Hong Hao, Hong Kong-based managing director at Bocom International Holdings. “The true bottom comes when the US starts to correct.”