BEIJING • Chinese stocks fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue campaign as investors lose confidence in government efforts to manage the country's markets and economy.
The Shanghai Composite Index sank 3.5 per cent to 2,900.97 at the close, falling 21 per cent from its December high and sinking below its nadir during a US$5 trillion (S$7.2 trillion) rout in August.
Yesterday's decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans.
Fund manager Wu Kan of JK Life Insurance said: "The market entered a disaster mode at the start of the year and it's still in that pattern. The market has completely no confidence and the basic reason is that stocks are expensive, particularly those small caps."
The sell-off is a setback for the Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to the year for China markets in at least two decades.
As policymakers in Beijing fight to prevent a vicious circle of capital outflows and a weakening currency, the resulting market volatility has undermined confidence in their ability to manage the worst slowdown since 1990.
While China's high concentration of individual investors makes its stock market notoriously volatile, losses in the Shanghai Composite have become one of the most visible symbols of waning investor confidence in the world's second- largest economy.
After cheerleading by the state media helped fuel a boom in mainland shares last summer, the market crashed as regulators failed to manage a surge in leveraged bets by individual investors.
A state-sponsored market rescue campaign sparked a 25 per cent rally in the Shanghai Composite through December, but those gains were wiped out yesterday as the index closed at its lowest level since late 2014.
Losses this year were fuelled by the controversial circuit-breaker system, which the authorities scrapped in the first week of this month after finding that it spurred investors to rush for the exit on big down days.
Said Mr Francis Lun, chief executive of Geo Securities in Hong Kong: "The bottom has fallen out of the market in the last two weeks.
"Investors have lost confidence after two weeks of meddling by government officials."
Central China Securities strategist Zhang Gang said investors are not likely to move back to the market unless the Shanghai Composite breaches the intra-day low of 2,850 set in the August rout, and selling pressure still exists after last week's halt to the circuit-breaker system.
The slump for equities is a reversal from Thursday, when equities jumped amid speculation that government-backed funds had stepped in to buy shares.
Said Zhongtai Securities chief strategist Luo Wenbo: "It's bad news for the stock market and that means it's becoming more difficult to get cash or raise funds through equities."