Shanghai index closes at lowest since Dec 2014, breaks key support level

An investor holding onto prayer beads as he watches a board showing stock prices in Beijing.
An investor holding onto prayer beads as he watches a board showing stock prices in Beijing.PHOTO: REUTERS

SHANGHAI (BLOOMBERG) Chinese stocks fell into a bear market for the second time in seven months, wiping out gains from an unprecedented state rescue campaign as investors lose confidence in government efforts to manage the country's markets and economy.

The Shanghai Composite Index sank 3.5 per cent to 2,900.97 at the close, falling 21 per cent from its December high and sinking below its nadir during a US$5 trillion (S$7.1 trillion) rout in August. Friday's decline was attributed to persistent investor concerns over volatility in the yuan and a report that some banks in Shanghai have halted accepting shares of smaller listed companies as collateral for loans.

"The market entered a disaster mode at the start of the year and it's still in that pattern now," said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai. "The market has completely no confidence and the basic reason is that stocks are expensive, particularly those small caps," he said, adding that he plans to swap large-cap shares for small caps.

The selloff is a setback for Chinese authorities, who have been intervening to support both stocks and the yuan after the worst start to a year for mainland markets in at least two decades. As policy makers in Beijing fight to prevent a vicious cycle of capital outflows and a weakening currency, the resulting financial-market volatility has undermined confidence in their ability to manage the deepest economic slowdown since 1990.

While China's high concentration of individual investors makes the nation's stock market notoriously volatile, losses in the Shanghai Composite have become one of the most visible symbols of waning investor confidence in the world's second-largest economy.

After cheerleading by state media helped fuel an unprecedented boom in mainland shares last summer, the market crashed as regulators failed to manage a surge in leveraged bets by individual investors.

A state-sponsored market rescue campaign sparked a 25 per cent rally in the Shanghai Composite through December, but those gains were wiped out on Friday as the index closed at its lowest level since late 2014.

Losses this year were fueled by the controversial circuit-breaker system, which authorities scrapped in the first week of January after finding that it spurred investors to rush for the exits on big down days.

"The bottom has fallen out of the market in the last two weeks," said Francis Lun, chief executive officer at Geo Securities Ltd. in Hong Kong  "Investors have lost confidence after two weeks of meddling by government officials."

Investors aren't likely to move back to the market unless the Shanghai Composite breaches the intraday low of 2,850 set in the August rout, and selling pressure still exists after last week's halt to the new circuit-breaker system, said Zhang Gang, a Shanghai-based strategist at Central China Securities Co. Stocks extended losses on Friday.