China stocks plunge on ‘Black Monday’, with nearly 500 stocks falling by daily limit of 10pc

The widespread decline was triggered by fears of a prolonged scrutiny on the financial sector, analysts said

PUBLISHED : Monday, 17 July, 2017, 6:41pm
UPDATED : Tuesday, 18 July, 2017, 6:37am

More than 2,800 stocks fell across Chinese markets on “Black Monday”, with nearly 500 dropping by their daily limit of 10 per cent, as a financial work conference of the Chinese top leadership sparked fears that the financial sector will face a prolonged period of increased scrutiny.

The sentiment also took a further blow as a flurry of listed companies on the start-up board had warned of significant losses in the first half, including the troubled Leshi Internet Information & Technology.

Over 1,200 stocks declined by more than 7 per cent on the Shanghai and Shenzhen stock exchanges on what analysts dubbed as “Black Monday”.

Combined daily turnover for Shanghai and Shenzhen soared 48 per cent to 570 billion yuan from the previous session.

Stocks listed on the Shenzhen exchange, which feature more smaller-cap companies from the technology and consumption sector, suffered the most.

The ChiNext Index closed down 5.1 per cent at 1,656.43, the worst level in two and half years. The Shenzhen Composite Index sank 4.3 per cent to end at 1,800.54. The Shenzhen Component Index declined 3.6 per cent to 10,055.8.

The benchmark Shanghai Composite Index also fell 1.4 per cent to 3,176.46, the steepest daily percentage drop in more than seven months.

“This is a Black Monday,” said Wang Haijun, an analyst for Shanghai-based Zhongshan Securities. “The panic is sweeping across the markets, sparked by a plunge in the start-up board.”

The panic is sweeping across the markets, sparked by a plunge in the start-up board
Wang Haijun, Zhongshan Securities

A financial work conference chaired by President Xi Jinping over the weekend has stoked concerns that top policy makerswill tighten the scrutiny of the financial system.

“The conference has set the tone that financial deleveraging and strengthened financial supervision will exist for quite a long period of time in the future,” said Wu Kan, a fund manager at Shanshan Finance in Shanghai.

“Financial develeraging and tightening regulation are not totally surprising news. But the reason the new has dealt such a blow was because it sent a message about the time frame. The financial work conference is held every five years, so markets expect the tightening to last for the next five years,” said Cui Xuetong, a manager for Beijing-based Zhongtou Tiancheng Asset Management.

On top of that, a number of listed companies on the start-up board have recently warned of significant losses in the first half, further dampening market sentiments.

As of Monday, more than 180 companies on the start-up board have issued warnings about a decrease in first-half earnings, according to data from Wind Financial.

“There’s a concern that the bubble of small-cap stocks has yet to burst and high earnings risks could emerge from it,” said Wu.

Guangdong Wens Foodstuff Group, the most heavily-weighted stock in the ChiNext, lost 8.1 per cent to 19.98 yuan on Monday, after the pork producer forecast first-half earnings may have dropped by as much as 78 per cent on falling pork prices.

The financial work conference is held every five years, so markets expect the tightening to last for the next five years
Cui Xuetong, Zhongtou Tiancheng Asset Management

Leshi Internet Information & Technology, the second-biggest weighting on the ChiNext, said it probably had posted a loss of more than 600 million yuan in the first half due to a cash squeeze, decreased revenues and provisions for impaired asset losses.

Leshi’s stock has been suspended from trading since April.

Henan Yicheng New Energy projected a profit loss of as much as 227 million yuan in the first half, and DAF Technology estimated its loss could amount to 93 million yuan during the same period.

“A more fundamental problem for the start-up board is the slowdown in corporate earnings growth,” Cui said.

“In particular, Leshi is still in trading suspension. Its earnings performance is not priced in the stock yet. We can probably expect four days of 10 per cent drops for the stock after it resumes trading.”

With additional reporting by Karen Yeung