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China Stock Bulls Hit Breaking Point as State Dials Back Support

Image: China Stock Bulls Hit Breaking Point as State Dials Back Support

Friday, 27 Nov 2015 10:19 AM

For three weeks, China’s stock investors have kept their cool as the government dialed back an unprecedented campaign to prop up share prices. On Friday, they suddenly decided to head for the exits.

While the Shanghai Composite Index had barely flinched since Nov. 6 as authorities lifted a freeze on initial public offerings, raised margin requirements and scrapped an order for securities firms to hold net-long positions, news of a widening regulatory probe into the brokerage industry sparked a 5.5 percent tumble on Friday.

“The sharp decline will raise questions about whether authorities’ confidence that we are seeing stability in the Chinese markets may be a tad premature,” said Bernard Aw, a strategist at IG Asia Pte in Singapore. “The rally since the August collapse was not fundamentally supported. The removal of restrictions for large brokers to sell and the IPO resumptions may not have been announced at an opportune time.”

While some of the triggers for the plunge were out of authorities’ hands — a report showed industrial profits slumped in October and two companies said they might not be able to make debt repayments — the plunge illustrates the challenge facing Chinese officials as they seek to wean the equity market off government support without precipitating another crash.

That feat will be made even harder by fresh signs that the economy is weakening. The earliest economic indicators for November show a deterioration from the previous month, while industrial profits slid 4.6 percent last month.

Friday’s losses pared the Shanghai Composite’s gain since its Aug. 26 low to 17 percent. Citic Securities Co. and Guosen Securities Co. led declines after saying they were under investigation for alleged rule violations. The two stocks had rallied at least 38 percent in the past three months. Haitong Securities Co. is also being probed, the company said after the market closed.

An initial hunt for culprits for China’s market slump appears to have evolved into a broader clean-up of the financial industry, said Paul Gillis, a professor at the Guanghua School of Management at Peking University.

China’s $5 trillion stock rout from mid-June through August was only halted after the government took a series of measures to backstop the market, including banning major stakeholders from offloading shares, ordering state funds to buy and restricting short selling. Policy makers also armed one state agency with more than $480 billion to prop up shares.

On Friday, there was little sign that government-run funds had stepped in to ease the selloff. PetroChina Co., long suspected to be a target of state-backed fund buying because of its large weighting in the Shanghai Composite, sank 5.7 percent. While government intervention has typically showed up in the last hour of trading, the Shanghai Composite extended losses in the final 60 minutes to close near its lows of the day.

“I don’t think any government can support the stock market forever," said Paul Chan, the Hong Kong-based chief investment officer for Asia excluding Japan at Invesco Ltd., which oversees $791 billion globally. "The government is not committed to selling now, but eventually. That’s the overhang."

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For three weeks, China's stock investors have kept their cool as the government dialed back an unprecedented campaign to prop up share prices. On Friday, they suddenly decided to head for the exits.While the Shanghai Composite Index had barely flinched since Nov. 6 as...
china, stock bulls, state, invest
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2015-19-27
Friday, 27 Nov 2015 10:19 AM
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