China's stocks extend bear-market rout as margin trading drops

A stock investor checks prices in a brokerage house in Shanghai, China on June 29, 2015.
A stock investor checks prices in a brokerage house in Shanghai, China on June 29, 2015.PHOTO: EPA

HONG KONG (Bloomberg) - Chinese stocks tumbled to the lowest levels in almost three months as traders unwound margin positions and technology companies slumped.

The Shanghai Composite Index sank 3.8 per cent to 3,900.65 at 11:09 a.m. The measure has plunged 24 per cent from its June 12 peak, ending the nation's longest-ever bull market, amid concern valuations were unsustainable. A weekend interest-rate cut and speculation that regulators will halt initial public offerings has failed to stem the rout.

"Investors lost confidence in the stock market as a decline in margin positions meant the selling pressure will intensify," said Castor Pang, head of research at Core Pacific- Yamaichi in Hong Kong. "No one can tell for sure where the market's bottom is. The government will need to take more measures to stop the market's freefall."

Margin debt on the Shanghai Stock Exchange fell for a sixth day on Monday to 1.36 trillion yuan (S$295 billion), the longest stretch of declines since June 2014, while the benchmark gauge's 10-day volatility reading jumped to the highest since 2008. A five-fold surge in leveraged wagers had helped propel the Shanghai index to a more than 150 per cent gain in the 12 months through June 12.

The CSI 300 Index slid 2.6 per cent, while the ChiNext index of small companies in Shenzhen slumped 6.8 per cent. Hong Kong's Hang Seng Index rose 0.5 per cent. The Hang Seng China Enterprises Index advanced 1 per cent.

It's panic selling as some margin traders are forced to liquidate their positions to meet the margin call," Li Jingyuan, general manager of the securities investment department at Shanghai Zhaoyi Asset Management, said by phone. "The process of de-leveraging is still going on."

Speculation is growing policy makers are preparing measures to prop up the world's second-largest stock market. The Economic Observer reported the government is considering steps to stabilize equities including a reduction in the stamp tax, while the finance ministry said it will allow the pension fund to invest in shares.

"Any support the government can provide would be short lived," Chad Padowitz, the Melbourne-based chief investment officer at Wingate Asset Management Ltd., said by phone. "The only real support they can provide over time is providing a reasonably balanced, growing economy."

Eleven of 21 surveyed expect the People's Bank of China will cut lending rates at least once more by year end, according to a June 27-29 poll after the weekend's stimulus announcement. Thirteen expect rates will be held steady in the third quarter, while the median estimate is for a required reserve ratio of 17.5 per cent by year end.