China stocks drop for second day as traders test state support

An investor at a brokerage house in Fuyang on Aug 5.
An investor at a brokerage house in Fuyang on Aug 5.PHOTO: REUTERS

SHANGHAI (BLOOMBERG) - China's stocks fell for a second day amid growing concern unprecedented government intervention will fail to stop a US$4 trillion (S$5.54 trillion)rout.

The Shanghai Composite Index dropped 0.7 per cent to 3,699.01 at 9:55 a.m. local time after slumping as much as 2.1 per cent. Energy and telecom companies led losses. Trading volume in the index was 50 per cent lower than the 30-day average for this time of day.

The Shanghai Composite has tumbled 29 per cent from this year's peak on June 12 as traders cut leveraged bets and economic data signaled a deepening slowdown in the world's second-biggest economy. The government has restricted short sales, suspended initial public offerings and allowed hundreds of companies to halt trading to stem losses.

"The market needs its own strength to recover," said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai, who said he's keeping his holdings unchanged. "The coming economic data don't seem to be good and will add additional pressure."

China will release economic data for July starting at the weekend. Exports probably fell 1.5 per cent from a year earlier, compared with a 2.8 per cent growth in June, according to the median estimate of a Bloomberg survey. Trade data are due Saturday.

The CSI 300 Index declined 1 per cent. Hong Kong's Hang Seng China Enterprises Index lost 1.1 per cent. The Hang Seng Index fell 0.7 per cent.

The median stock on mainland bourses trades at 65 times reported earnings, higher than any of the world's 10 largest markets, Bloomberg data show.

Margin traders increased holdings of shares purchased with borrowed money for a second day on Wednesday, with the outstanding balance of margin debt on the Shanghai Stock Exchange rising to 842.3 billion yuan (S$187.8 billion).

The strategist who called the top of the China market in April is bearish again. Thomas Schroeder, founder and managing director at Chart Partners Group Ltd., a provider of trading strategies linked to technical analysis, said the Shanghai Composite will decline to as low as 3,100 in two months, 16 per cent below Wednesday's close. The Hang Seng China Enterprises Index will drop about 10 per cent, he said.

Slowing Chinese economic growth and collapsing commodity prices are heightening the chance that indexes will fall below key equity-market support levels, Schroeder said.