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[TAIPEI] As the state-directed rally in Chinese stocks unravels, traders say the slowing economy has left the government fighting a losing battle.
The Shanghai Composite Index plunged 12 per cent last week, erasing all bar one point of the rebound from July's US$4 trillion selloff. For CMB International Securities Ltd. and KGI Securities Co, the gap between the growth outlook and China's stock valuations, which are the highest among the world's biggest markets, means further declines are inevitable.
While the benchmark stock gauge still traded 57 per cent above the levels of a year earlier through Friday, data from industrial output to exports and retail sales depict a deepening slowdown. China's first major growth indicator for August showed the manufacturing sector is at the weakest since the global financial crisis.
The government is "trying to defy market forces at overvalued levels," said Daniel So, a strategist at CMB International Securities in Hong Kong. Policy makers should "focus on helping the real economy instead of the stock market," he said.
The Shanghai Composite tumbled 6.9 per cent to 3,263.75 at 9.51am local time on Monday, heading for its lowest close since March, after a speculated reserve-ratio cut didn't materialise over the weekend.
Stocks on mainland bourses trade at a median 61 times reported earnings, according to data compiled by Bloomberg. That's the most among the 10 largest markets and more than three times the 19 multiple for the Standard & Poor's 500 Index. Even after tumbling 32 per cent from its June 12 peak through last week, the Shanghai Composite is the best-performing equity index worldwide over the past year.
Economic growth slowed to 6.6 per cent growth in July from 7.4 per cent, according to Bloomberg's monthly GDP tracker. China's factory output expanded 6 per cent last month, down from 9 per cent a year earlier. Retail sales are growing near the slowest pace since 2006. Exports tumbled 8.3 per cent in July, versus a 14.4 per cent increase 12 months ago.
The preliminary Purchasing Managers' Index from Caixin Media and Markit Economics fell to 47.1 in August, the lowest since March 2009 and below the 48.2 estimate in a Bloomberg survey of analysts, data Friday showed.
While the government maintains a raft of unprecedented measures to support the equity market, including a ban on share sales by major shareholders and arming a state agency with more than US$400 billion, officials are failing to convince investors that gains will be sustainable.
"People are too cautious to buy," said Qian Qimin, an analyst at Shenwan Hongyuan Group Co. in Shanghai who predicts the Shanghai Composite will fall below the intraday low of 3,373 on July 8. "Stocks are still not cheap enough."
The number of new investors has tumbled 80 per cent from the peak at the end of May, when more than 1.6 million opened accounts to trade stocks, according to the nation's clearing house. International traders have sold more than US$7 billion of Shanghai shares through an exchange link with Hong Kong since July 3. Chinese equity funds were the biggest contributors to more than US$4 billion of outflows in Asia excluding Japan in the week to Aug 19, data provider EPFR Global said.
China's stock market has detached from economic performance before. Between the start of 2001 and the end of 2005, the Shanghai gauge tumbled more than 40 per cent as the economy grew at an annual average of 9.5 per cent.
For KGI Securities analyst Ken Chen, this month's decision by the Chinese authorities to allow the yuan to devalue underscore the risks to the economy.
The unexpected move by the People's Bank of China led to the currency's biggest weekly depreciation in 21 years, triggering a wave of selling across emerging markets. More than US$5 trillion has been erased from the value of global equities since the central bank's Aug 11 decision.
"Financial risk will likely rise quickly, dampening market sentiment," said Chen, who predicts the Shanghai gauge may fall a further 29 per cent by next year. "Government intervention won't be able to stop the market correction in the long run."