China: Stocks plunge to 13-month low amid capital outflow concern

[SHANGHAI] China's stocks tumbled to the lowest levels in 13 months amid concern capital outflows will accelerate as the economy slows and support for the yuan eats into the nation's foreign reserves.

The Shanghai Composite Index plunged 6.4 per cent to 2,749.79 at the close. All industry groups slumped, ranging from commodity companies to new-economy shares such as technology.

Besides data showing outflows hitting an estimated US$1 trillion last year, investors were concerned about a possible liquidity squeeze even as the central bank flooded the financial system with cash before the upcoming Chinese new year holiday. Some of the nation's most accurate forecasters said the stock index may not bottom until it falls to the 2,500 level.

"It's an issue about confidence and there's no confidence in the market now," said Wu Kan, a fund manager at JK Life Insurance Co. in Shanghai.

"The depreciating yuan and slowing economic growth have been haunting the market for a while. We are less than two weeks from the spring festival and it seems that most investors are in no mood to trade any more."

Tuesday's loss was the steepest since Jan 7, when the Shanghai gauge plunged 7 per cent, the second selloff of more than 6 per cent in a week that prompted the government to cancel its circuit-breakers program after four days.

Stocks dropped even as the People's Bank of China injected 440 billion yuan (S$95.5 billion) into the financial system using reverse-repurchase agreements, the most in three years. Policy makers are trying to keep borrowing costs from rising as they contend with the slowest economic growth in a quarter century.

China's gross domestic product growth is seen slowing further to 6.5 per cent this year, from last year's 6.9 per cent.

Outflows jumped in December, with the estimated 2015 total reaching a record US$1 trillion, more than seven times higher than the whole of 2014 based on Bloomberg Intelligence data dating back to 2006.

"Capital outflows and demand for cash before Lunar New Year may weigh on the stock market in spite of recent massive fund injection from the PBOC," said Huang Cendong, a Shanghai-based analyst at Sinolink Securities Co.

The CSI 300 Index plunged 6 per cent, led by industrial, energy and technology shares. XCMG Construction Machinery Co, China's biggest crane maker, and Shenzhen O-film Tech Co plunged by the 10 per cent daily limit. PetroChina Co, the larget energy company, dropped 4.7 per cent.

The Shanghai Composite's 47 per cent rout since June has been accompanied by an economy losing momentum, similar to the global financial crisis, when the gauge lost more than two- thirds of its value from peak to trough over the course of a year.

The gauge will bottom once it falls to 2,500 this year, said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. That matches the target of Bocom International Holding Co's Hao Hong, one of the few forecasters to call both the start and peak of China's last equity boom.

STOCKS OUTLOOK

Thomas Schroeder, the managing director of Chart Partners Group Ltd. who predicted in October that a rebound in Chinese stocks wouldn't last, says the benchmark index will drop to 2,400.

Huang Weimin, whose Chinese stock-index futures wagers returned more than 6,200 per cent last year, advised investors to sell shares as the stock market could drop another 15 per cent in the first half as slowing growth and a weaker yuan fuel capital outflows.

China has been burning through reserves to reduce yuan volatility as the currency lost its status as a one-way bet on appreciation amid an unexpected devaluation in August. The stockpile of reserves plunged US$513 billion last year to US$3.33 trillion, the first annual drop since 1992.

Foreign exchange reserves are seen tumbling US$300 billion this year to the US$3 trillion level, according to a Bloomberg News survey.

The Hang Seng China Enterprises Index decreased 3.4 per cent. The Hang Seng Index lost 2.5 per cent, dragged down by financial and oil shares. The gauge has slumped 14 per cent this year as the city's dollar peg came under pressure and short-term interest rates spiked.

BLOOMBERG