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China stock market

Chinese stocks slammed as margin call selling overshadows latest government-led efforts to alleviate liquidity squeeze

  • The benchmark Shanghai Composite Index declined 1.4 per cent at the midday break
  • Eleven securities brokerages have agreed to form an asset management scheme worth 100 billion yuan to inject funds into troubled companies
PUBLISHED : Tuesday, 23 October, 2018, 10:49am
UPDATED : Tuesday, 23 October, 2018, 1:14pm

Chinese and Hong Kong stocks slumped on Tuesday after two winning sessions, even as another action to rescue mainland listed companies caught in a liquidity squeeze was announced late Monday night.

The benchmark Shanghai Composite Index declined 1.4 per cent, or 36.46 points to 2,618.42 at the midday lunch break on Tuesday. The Shenzhen Composite Index, comprised mostly of smaller companies, dropped 1.2 per cent, or 16.29 points, to 1,309.44.

For now the market is not convinced the policies will actually help the economy, and investors are rushing to take profits and leave
Castor Pang Wai-sun, Core Pacific-Yamaichi Financial Group

In Hong Kong, the Hang Seng Index sank 2 per cent, or 530.32 points, to 25,622.83, while the Hang Seng China Enterprises Index was down 1.8 per cent, or 184.21 points, at 10,306.46.

The decline reversed the 4.1 per cent gain in the Shanghai gauge on Monday, the largest one-day advance in two and a half years, which was a result of a spate of government moves and officials’ speeches to bolster confidence since Friday.

“For now the market is not convinced the policies will actually help the economy, and investors are rushing to take profits and leave,” said Castor Pang Wai-sun, head of research at Core Pacific-Yamaichi Financial Group.

“We knew the gains on Monday were temporary, but nobody expected the policy effect to fade out so soon,” Pang added.

“Last two weeks of steep correction indicates that the A-share market is in panic mode,” CLSA analysts Alexious Lee and Cara Liu wrote in a note emailed on Tuesday, referring to yuan-denominated stocks.

Investors are cutting positions because they expect the ongoing margin calls from pledged shares in small companies to spill over to larger firms on the main board, they wrote.

Around 40 to 45 per cent of private companies’ shares in the Nasdaq-style ChiNext Index are pledged as collateral, and the ratio could rise to 40 to 50 per cent in 2019, according to the report.

In Hong Kong, Macau casino operators tumbled broadly, after the gambling hub on Tuesday reported a 2.3 per cent quarter-over quarter fall in revenue of “VIP baccarat” The high-stakes segment of the gambling market that accounted for over half the casinos’ overall gambling revenues.

Sands China fell 4.3 per cent to HK$33.65, Wynn Macau declined 6.4 per cent to HK$16.64, and Galaxy Entertainment Group was down 6.3 per cent at HK$44.25.

The Securities Association of China announced on Monday that 11 securities brokerages have agreed to form an asset management scheme worth 100 billion yuan (US$14 billion), specifically to inject funds into companies facing the risk of forced sales of shares.

A number of high-level officials have voiced support since Friday for the stock market after it tumbled to a four-year low last week. Various financial regulators as well as the central bank have also promised to roll out measures to stabilise the market.

Chinese companies have pledged shares worth 4.5 trillion yuan in market value, or around a quarter of all free float shares on China’s markets, as collateral for loans, according to Essence Securities data.

The 11 brokerages will contribute 21 billion yuan to the scheme, which aims to attract investment from banks, insurers, state-owned companies and governments, according to the announcement.

Chinese liquor makers led the decline on the back of a proposed public health legislation to strengthen education by the government to prevent overdrinking. Jiangsu Yanghe Brewery tumbled 7.8 per cent to 112.06 yuan, and Anhui Kouzi Distillery fell 7.9 per cent to 42.34 yuan.

Shares of securities brokerages bucked the downward trend and traded higher, extending the rally from Monday. Nanjing Securities surged 8.8 per cent to 8.44 yuan, Industrial Securities climbed 8.1 per cent to 4.78 yuan, and China Securities went up 10 per cent to reach the daily limit.

President Xi Jinping declares Hong Kong-Zhuhai-Macau Bridge open

Separately, President Xi Jinping is expected to visit the Qianhai pilot economic zone in Shenzhen, a technology and manufacturing hub in southern China, later this week to signal support for economic reforms and bolster confidence in the slowing economy.

On Tuesday morning Xi attended the opening ceremony of the Hong Kong-Zhuhai-Macau Bridge, the world’s longest sea crossing.

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