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China: Stocks head for longest losing streak in three weeks

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[SHANGHAI] Chinese stocks fell for a third day as concern slumping commodity prices and a weakening economy will reduce corporate profits overshadowed the biggest cash injection into the financial markets in three years.

The Shanghai Composite Index slipped 0.8 per cent to 2,712.48 at 1:15 pm Industrial and material companies led declines. China Shipbuilding Industry Co dropped 3.6 per cent after a measure of commodity shipping costs slid to a 30-year low. China Southern Airlines Co extended losses to a fourth day after an analyst said the carrier likely swung to a fourth- quarter loss because of yuan depreciation. Angang Steel Co. retreated to a 14-month low.

Chinese stocks headed for their longest losing streak in three weeks amid concern a weakening economy and yuan volatility will spur capital outflows. The week's net injection of 590 billion yuan (S$128.6 billion) into the money markets was the biggest since February 2013, data compiled by Bloomberg show. Short-term lending tools are being used in preference to a more permanent loosening of monetary policy as the People's Bank of China seeks to avoid exacerbating an exodus of funds that's led to costly intervention in support of the exchange rate.

"We'll see consolidation as the index has fallen to approach the 2,600 level," said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai, who's now on the sidelines after cutting the stock holdings to less than 50 per cent of the total assets.

"In the long run, the correction may not be over as the pressure for yuan devaluation is still big." The yuan has retreated 2.7 per cent against the dollar since the International Monetary Fund announced China had secured reserve status for the currency at the end of November, even as intervention to support the currency led to an unprecedented US$108 billion drop in China's reserves last month. Policy makers are increasingly resorting to administrative measures to curb capital outflows and calls are mounting for further restrictions as the defense of the yuan burns through the nation's foreign- exchange reserves.

Stocks fluctuated on Thursday morning as traders weighed the prospect of further losses against state intervention. Strategists and technical analysts surveyed by Bloomberg this week are targeting a bottom of 2,500 for the Shanghai Composite after the index plunged 48 per cent from the June high. The stocks gauge pared a loss of more than 4 per cent on Wednesday as stocks considered favorites of market-rescue funds such as PetroChina Co surged in the afternoon.

Chinese stocks have been the world's worst performers this year among 93 global benchmark indexes tracked by Bloomberg, with the Hang Seng China index and Shanghai Composite losing at least 17 per cent.

The Hang Seng China Enterprises Index added 0.4 percent in Hong Kong, while the Hang Seng Index rose 0.2 per cent. The CSI 300 declined 0.5 per cent.

Nine out of the 10 industry groups in the CSI 300 dropped, with sub-indexes of material and industrial stocks falling at least 1.9 per cent for the biggest losses. China Minmetals Rare Earth Co dropped 4.3 per cent, while Angang Steel slid 4 percent. Shipbuilder China CSSC Holdings Ltd. slumped 3.6 per cent as the Baltic Dry Index dropped to the lowest level since January 1985.

China's stock market could come under an onslaught of forced sales as a drop to around the 2,500 level for the Shanghai index will spur financial institutions to offload shares pledged by major shareholders of publicly traded companies as collateral, according to UBS Group AG.

Stocks that could be dumped in the secondary market as a result of their shareholders' failure to top up margin accounts following the selloff on Tuesday may comprise about 8 per cent of China's floating market capitalization, Gao Ting, the head of China strategy at UBS in Shanghai, wrote in an e-mail on Wednesday. The ratio could rise to 12.6 per cent if the market declines by a further 10 per cent from Tuesday's level, he said.

"If China's stock market continues to fall, equity pledging-related selling pressure could increase significantly, putting further pressure on the stock market," said Mr Gao.

Traders reduced holdings of shares purchased with borrowed money for a record 19th day on Wednesday, with the margin debt balance in Shanghai falling to 546.3 billion yuan for the lowest level since December 2014.

BLOOMBERG