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As China intervenes to prop up stocks, foreigners head for exits
[SINGAPORE] Foreign investors are selling Shanghai shares at a record pace as China steps up government intervention to combat a stock-market rout that many analysts say was inevitable.
Sales of mainland shares through the Shanghai-Hong Kong exchange link swelled to an all-time high on Monday, dual- listed shares in Hong Kong fell by the most since at least 2006 versus mainland counterparts. Options traders in the US are paying near-record prices for insurance against further losses after Chinese stocks traded in the US plunged Monday by the most since 2011.
The latest attempts to stem the country's US$3.2 trillion equity rout, including stock purchases by state-run financial firms and a halt to initial public offerings, have undermined government pledges to move to a more market-based economy, according to Aberdeen Asset Management. They also risk eroding confidence in policy makers' ability to manage the financial system if the rout in stocks continues, said BMI Research, a unit of Fitch.
"It's coming to a point where you're covering one bad policy with another," said Tai Hui, the Hong Kong-based chief Asia market strategist at JPMorgan Asset Management, which oversees about US$1.7 trillion. "A lot of investors are still concerned about another correction."
Strategists at BlackRock, Credit Suisse, Bank of America and Morgan Stanley last month warned the nation's equities were in a bubble. When the Shanghai Composite reached its high on June 12, shares were almost twice as expensive as they were when the gauge peaked in October 2007 and more than three times pricier than any of the world's top 10 markets, on a median estimated earnings basis.
A 29 per cent plunge by the gauge through Friday, the steepest three-week rout since 1992, prompted a flurry of measures to stabilize the market. A group of 21 brokerages pledged Saturday to invest at least 120 billion yuan (S$26.13 billion) in a stock-market fund, executives from 25 mutual funds vowed to buy shares and hold them for at least a year, while Central Huijin Investment Ltd, a unit of China's sovereign wealth fund, said it was buying exchange-traded funds.
"The more resources authorities commit to propping up the stock market, the more they ratchet up the potential fall-out risks should the market continue to collapse," said Andrew Wood, an analyst at BMI Research.
"This could give rise to a crisis of confidence in the authorities' ability to support both the stock market and the real economy." While the efforts spurred a 2.4 per cent rally in the Shanghai index Monday, largely due to gains by the nation's biggest firms, they failed to convince investors outside the mainland. Overseas investors were net sellers of 13.4 billion yuan of mainland shares through the Hong Kong link on Monday, the most since the programme began in November.
A Hang Seng index tracking the mainland premium on dual- listed shares surged 10 per cent Monday, the most since the data began, as shares in Hong Kong plunged. The MSCI China Index sank 4.1 per cent and the Bloomberg China-US Equity Index plunged 5.1 per cent.
Shares of PetroChina Co., the nation's largest company by market value, fell 1.9 per cent in Hong Kong Monday, even as they jumped by the daily limit of 10 per cent on the mainland amid speculation of buying by state-directed funds. The Hong Kong shares are now 48 per cent cheaper than their yuan-denominated peers, the biggest discount in six years."The A-share market is now trading well beyond common sense," said Sam Le Cornu, Hong Kong-based co-head of Asian listed equities at Macquarie Investment Management, which oversees about US$264 billion globally. The government's support measures have "done little to stabilize and a lot to spook," he said.
Le Cornu said his Asian New Stars fund is now "significantly" underweight China after being overweight for seven years.
Even after the slump, the median valuation of stocks on the Shanghai and Shenzhen exchanges amounts to 59 times reported earnings, almost triple the Standard & Poor's 500 Index.
"It's too soon to say that the correction is over," said Tim Schroeders, a portfolio manager who helps oversee about US$1 billion in equities at Pengana Capital Ltd in Melbourne. "Investors are increasingly concerned about high valuations and are focusing on risk mitigation."
For Aberdeen Asset Management's Nicholas Yeo, China needs to let fundamentals govern its stock market, not state directives."International investors are skeptical that all the government measures are short-term, cosmetic," said Yeo, the Hong Kong-based head of Chinese equities at Aberdeen Asset, which oversees about US$491 billion worldwide. "If you want it to be a proper market, there should be less interference."