China stocks resume rout as GDP fails to lift investor sentiment

Stock investors keep watch as an electronic screen shows market movement information at a securities brokerage house in Beijing, China, 14 July 2015. PHOTO: EPA

SHANGHAI (BLOOMBERG) - China's stocks fell for a second day after better-than-expected economic data failed to boost investor confidence in the world's worst-performing equity market over the past month.

The Shanghai Composite Index tumbled 4.2 per cent to 3,758.50 at 1:36 p.m. local time. With 689 stocks halted on mainland exchanges and another 790 falling by the 10 per cent daily limit, sellers were locked out of about 50 per cent of the the Chinese market. The two-day losses pared the gauge's rebound from its July 8 low to 7.7 per cent.

Stock market gains sparked by unprecedented government intervention are reversing as hundreds of companies resume trading after suspending their shares during the recent market turmoil. The benchmark equity index has declined 26 per cent in four weeks, the biggest loss among global gauges, as investors bet valuations are unsustainable. Gross domestic product rose 7 per cent in the second quarter, compared with economist estimates of 6.8 per cent in a Bloomberg survey.

"There's a lack of confidence in the market's sustainable rally after a big rout," said Jimmy Zuo, a Shenzhen-based trader at Guosen Securities Co. "There should be a visible improvement in the economy and corporate earnings to bring back solid investor confidence to the market."

The CSI 300 Index lost 4.8 per cent as gauges of utilities, drugmakers and industrial companies tumbled more than 6 per cent. Hong Kong's Hang Seng China Enterprises Index slid 2 per cent, while the Hang Seng Index dropped 0.9 per cent.

Concern that valuations are still too expensive has helped fuel a record stretch of foreign outflows through the Shanghai- Hong Kong exchange link over seven days.

Even after the rout, the median price-to-earnings ratio on China's bourses is 63, higher than in any of the world's 10 largest markets. The ratio was 68 at the peak of the bubble in 2007, according to data compiled by Bloomberg.

Garry Laurence, the Sydney-based money manager, who helps oversee about US$25 billion at Perpetual Ltd., has been unloading all the yuan-denominated A shares in his global equity fund over the past two months. He says Chinese stocks are more attractive in New York and in Hong Kong, where the average dual-listed company trades at half its price on the mainland.

The GDP data was unchanged from the first quarter and was in line with the government's annual target. Industrial output in June rose 6.8 per cent, while fixed-asset investment increased 11.4 per cent in the first half, beating estimates, the National Bureau of Statistics data also showed. Retail sales increased 10.6 per cent in June, topping a median forecast of 10.2 per cent.

The data point to a "clear acceleration of momentum," said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. The frenzied pace of stocks trading in the second quarter would have helped GDP, posing "downside risks in the third quarter as stock trading is bound to slow," he said.

Policy makers have banned large shareholders from selling stakes, ordered state-run institutions to buy equities, allowed the central bank to finance stock purchases and let more than half of companies on mainland exchanges halt trading. The nation's police force is also investigating short sellers.

The rout which erased almost US$4 trillion in less than a month was spurred by margin traders unwinding bullish bets. Holdings of shares purchased with borrowed money on the nation's two bourses has plunged by US$134 billion to US$231 billion through Monday from the June 18 peak.

A five-fold surge in leverage had helped propel the Shanghai gauge to a 150 per cent advance in the 12 months through June 12.

Losses on the Shanghai Composite Wednesday were limited by gains by the nation's largest companies. PetroChina Co. jumped 5.7 per cent, while Bank of China Ltd. advanced 1.5 per cent. Large-cap shares climbed over the past two weeks on speculation of buying by government state-linked funds.

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