Relief for China's markets proves short-lived as stocks slump

[HONG KONG] Hopes for a sustained rebound in Chinese stocks faded on Monday as selling resumed amid concern about a falling currency, housing curbs and the impact of trade tariffs.

The Shanghai Composite Index dropped 1.1 per cent at the midday break, led by real estate companies and energy producers. The gauge rallied 2.2 per cent on Friday, paring its worst month since January 2016. The yuan retreated 0.2 per cent after depreciating by a record in June. The pace of the currency's descent has surprised analysts, with ING Groep NV cutting its forecast for the second time in days.

Shanghai stocks tumbled into a bear market last week amid concern the economy will struggle to withstand rising tensions with the US Purchasing manager index readings for June released on Saturday showed a gauge of export orders shrinking, suggesting the trade war is already weighing on growth. Domestic issues are also hurting sentiment, with a gauge of property shares falling to the lowest since November 2016 on Monday.

"Expectations that China will impose more property controls are weighing on developer shares as the market is still overheated," said Jiang Yining, a Shanghai-based analyst with Capital Securities.

Shanghai's property stock index fell 3.3 per cent. Poly Real Estate Group tumbled 6 per cent, while Gemdale lost 3.8 per cent. Developers have been under pressure as the government stepped up measures to curb real estate speculation and restrict developers' international bond issuance.

The yuan traded at 6.6340 per US dollar. ING cut its forecast to 7 from 6.6 in a note, saying the depreciation reflects the risks of a trade war, while the central bank is allowing market forces to dictate the speed of the declines.

Bonds also started July on a weaker note, with the yield on 10-year government debt rising 2 basis points to 3.5 per cent, after ending Friday at its lowest level since April 2017.

Hong Kong's markets are closed for a holiday.

BLOOMBERG