China: Stocks post biggest two-day loss in three weeks on economy

[SHANGHAI] China's stocks fell for the steepest two-day loss in three weeks amid concern investors will continue to pull funds from the nation's equities as data show a deepening economic slowdown.

The Shanghai Composite Index dropped 2.6 per cent to 3,032.68 at 1:06 pm, led by material and industrial shares. The net value of mainland equity funds plunged 44 per cent last month, while traders withdrew US$15 million from the biggest US exchange-traded fund tracking mainland stocks in the five days through Sept 11, according to data compiled by Bloomberg. Yuan positions at the central bank and financial institutions fell by the most on record in August, a sign that policy makers stepped up intervention to support the currency.

"The economy has not shown signs of a pick-up after a series of cuts in interest rates and reserve requirements, while expectations about yuan depreciation are still there," said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. "Yuan-denominated assets face downward pressure. The market is still weak." The Shanghai Composite plunged 2.7 per cent on Monday after weekend data showed industrial output missed economists' forecasts and investment in the first eight months increased at the slowest pace since 2000. The benchmark gauge has tumbled 41 percent from its June high to erase US$5 trillion in value on mainland bourses as leveraged investors fled amid concerns valuations weren't justified given the weakening economy. Margin debt in Shanghai slumped to a nine-month low on Monday.

The Shanghai index may fall to 2,700 as stocks are still expensive, said Francis Cheung, CLSA head of China and Hong Kong strategy, said in a briefing on Tuesday. The gauge is valued at 11.9 times 12-month projected earnings, compared with the five-year average multiple of 10.3, Bloomberg data show. Trading volumes in Shanghai were 46 per cent below the 30-day average.

The CSI 300 Index declined 2.9 per cent. Hong Kong's Hang Seng China Enterprises Index was little changed, while the Hang Seng Index retreated 0.3 per cent.

Gauges of technology and material stocks on the CSI 300 slumped more than 4 per cent for the biggest declines among industry groups. Searainbow Holding Corp. and Yunnan Copper Co. both tumbled by the 10 per cent daily limit.

The 569 open-ended mainland Chinese stock funds had combined net asset values of 724.8 billion yuan (S159.7 billion) in August, compared with 1.3 trillion in July, according to data posted on the website of the Asset Management Association of China on Monday. The industry body didn't explain the reason for the decline.

"After the recent slump in equity prices it is normal that some funds have redemptions, particularly mutual funds, which are mostly sold to retail investors in the mainland," said Gerry Alfonso, a sales trader at Shenwan Hongyuan Group Co. in Shanghai. "Retail investors tend to be slightly late compared to institutional investors because of less investment discipline. There is also less appetite by investors." Margin traders reduced holdings of shares purchased with borrowed money on Monday, with the outstanding balance of margin debt on the Shanghai Stock Exchange falling to a nine-month low of 599.9 billion yuan. The China Securities Regulatory Commission cleared 3,255 non- brokerage margin funding accounts, or 61 per cent of the total, spokesman Deng Ge said on the regulator's website.

The total for the People's Bank of China dropped by 318.4 billion yuan from the end of July, according to a report Monday on what the monetary authority calls positions for foreign exchange purchases. Yuan positions at Chinese financial institutions accumulated from foreign-exchange purchases tumbled 723.8 billion yuan, the data showed.

BLOOMBERG