SHANGHAI (BLOOMBERG) - China's stocks wiped out gains spurred by an unprecedented government campaign to prop up prices amid weakening economic data and signs of capital outflows.
The Shanghai measure sank as much as 4.7 per cent to erase a rebound of 18 per cent since July 8. The gauge traded down 3.9 per cent to 3,522.50 at 1:17 pm local time, poised to close below its 200-day moving average for the first time in a year.
The Hang Seng China Enterprises Index tumbled 3.1 per cent to 10,078.95 at 1:06 pm in Hong Kong, extending this week's slump to 8.8 per cent.
A private factory gauge unexpectedly fell to the lowest level in more than six years, data Friday showed.
A surprise yuan devaluation, the deepening economic slowdown and weak corporate earnings are souring investor sentiment toward equities in Asia's largest economy.
Chinese equity funds were the biggest contributors to more than US$4 billion (S$5.64 billion) of outflows in Asia excluding Japan in the week to Aug. 19, EPFR Global said. Margin traders cut holdings of shares bought with borrowed money for a third day on Thursday.
"The economy continues to be on a downward trend and it's not likely to pick up soon as there's no clear driver for growth," said Wei Wei, an analyst at Huaxi Securities Co. in Shanghai. "The stock market may drop further to seek a lower support. Short-term sentiment is pretty weak."
The Hang Seng Index dropped 2.3 per cent in Hong Kong, poised to enter a bear market after falling more than 20 per cent from this year's peak. The Shanghai gauge has lost 11 per cent this week.
Both the Hang Seng China Enterprises and the Shanghai Composite have tumbled more than 30 per cent from this year's highs, even as the government took unprecedented measures to shore up mainland equities. The slump threatens to undermine confidence in President Xi Jinping's ability to manage the economy.
Caixin Media and Markit Economics's preliminary manufacturing index for August was at 47.1, the lowest since March 2009, compared with the 48.2 estimate in a Bloomberg survey of analysts. A number less than 50 signals a contraction.
"The very weak private sector PMI shows that smaller Chinese enterprises are facing a challenging environment to expand activity," said Bernard Aw, a Singapore-based strategist at IG Asia Pte Ltd. "It points towards the narrative that we could see a further slowdown in China. That is worrying for global economy."
To counter the US$4 trillion equity rout, the government has armed a state agency with more than US$400 billion to bolster share prices, banned selling by major shareholders and told state-owned companies to buy stocks.
China Securities Finance Corp., the state agency tasked with supporting share prices, will remain in the stock market for years to come, the China Securities Regulatory Commission said last Friday, although the agency will no longer add to holdings unless there's unusual volatility and systemic risk.
As the state battles to prop up stock prices, investors with the most at stake are cashing out. The number of traders with more than 10 million yuan (S$2.2 million) of shares in their accounts shrank by 28 per cent in July, while those with between 1 million yuan and 10 million yuan declined by 22 per cent, according to data compiled by the nation's clearing house. International investors have sold more than US$7 billion of Shanghai shares through an exchange link with Hong Kong since July 3.
The outstanding balance of margin debt on the Shanghai Stock Exchange fell by 0.7 per cent to 869.2 billion yuan on Thursday.
A weaker yuan is also reducing the attractiveness of Chinese assets. The currency dropped 0.16 per cent to 6.3990 a US dollar on Friday, following last week's 2.9 per cent depreciation.
Even after the declines, Chinese shares remain expensive relative to global peers. The median stock on mainland bourses trades at 66 times reported earnings, higher than any of the 10 largest markets. It was 68 at the peak of China's equity bubble in 2007, according to data compiled by Bloomberg.
More than 62 per cent of companies in the Shanghai Composite trailed analysts' 2014 earnings estimates as the economy expanded at its weakest pace since 1990. Profits at Chinese industrial firms declined by 0.3 per cent in June, versus a 0.6 percent gain in the previous month.