SHANGHAI (BLOOMBERG) - It's days like Monday that reassure Tony Hann he was right to avoid stocks in mainland China.
The severity of an 8.5 per cent drop in the Shanghai Composite Index is bad enough, but what irks him the most is not knowing why it tumbled so much.
In a market where unprecedented intervention has made government money one of the biggest drivers of share prices, authorities aren't transparent enough for investors to make informed decisions, said Mr Hann, the head of emerging markets at Blackfriars Asset Management Ltd.
Monday's plunge was all the more surprising because it followed a government rescue package that had helped drive a 16 per cent rally since July 8. That support appeared to vanish without warning, leaving analysts guessing whether authorities shifted their policy stance or just got overwhelmed by a flood of sell orders. Whatever the answer, foreign investors didn't stick around to find out: they sold holdings of Shanghai shares for the 13th time in the past 16 days.
Investors "are concerned and lost," said Alex Wong, a Hong Kong-based asset-management director at Ample Capital Ltd., which oversees about US$155 million(S$212.5 million). "China's market is distorted, so you can't sell short very confidently and you can't buy up very confidently either."
Signs of government purchases that were prevalent in recent weeks went missing in Monday's rout. PetroChina Co., long considered a favorite holding of state-linked rescue funds, sank 9.6 per cent. The government-run oil producer had been one of the biggest sources of support for the Shanghai Composite on big down days in late June and early July.
The China 50 ETF, another target of government funds, dropped 9.1 per cent. The Shanghai Composite's one-day selloff was the broadest since at least 1997, with 959 more shares in the index falling than those that gained.
If state-run funds withdrew support to test whether shares could stabilize at current levels on their own, the resulting retreat may prompt the government to step back in immediately to prop up prices, said Mr Hann, who oversees about US$350 million.
On the other hand, if policy makers are starting to unwind support measures to let the market play a bigger role, shares may have further to fall, he said.
"It is impossible to say at this stage," said Mr Hann, who has exposure to China through businesses listed on Hong Kong's exchange instead of mainland bourses. Foreign investors have unloaded about US$7.6 billion of Shanghai shares through the city's Hong Kong exchange link since July 6.
So far, China's government hasn't made any official statements on Monday's retreat, nor have there been any commentaries in the official Xinhua News Agency. China Securities Finance Corp., a state-backed agency that provides support for the market, didn't immediately return two calls and a fax after business hours on Monday seeking comment.
Policy makers still have firepower to support equities and state-linked firms will probably start buying when the Shanghai Composite falls below 3,800, said Yang Delong, chief strategist at China Southern Fund Management. The gauge closed at 3,725.56 on Monday.
"China won't tolerate a worsening stock market, so those state-backed financial institutions may start buying," Mr Yang said.
For Ken Chen, a Shanghai-based analyst at KGI Securities, the more likely explanation for Monday's tumble is that the government is struggling to prop up overvalued shares. At 66, the median trailing price-to-earnings ratio on mainland bourses is higher than in any of the world's 10 largest markets. It was 68 at the peak of China's equity bubble in 2007.
"It's hard to start a new up move after a bubble bursts," said Mr Chen. "I don't think they are able to prevent it falling."