Panic wipes £2tn off Chinese shares- Stock Market Panic

 Stock Market Panic
July 3, 2015

China’s efforts this week to stem the tide of losses on its main stock market failed on Friday when the Shanghai Composite index plunged a further 5.8%, taking the drop in share values to 28% since their June peak.

Panic selling wiped more than £2tn off the value of Chinese-listed companies and traders signalled the rout would extend into next week.

The authorities had cut fees and eased borrowing rules that make it cheaper to buy shares in the hope it would cheer investors battered by the relentless selling since 12 June. 

A promise by the main stock market regulator to tackle concerns of market manipulation, which has sapped investor confidence in recent days, also failed to halt the slide.

The China Securities Regulatory Commission, the market watchdog, said it would launch an investigation into suspected stock market manipulation, without giving details of how long the probe would take or which organisations were under suspicion.

In a further effort to shore up prices, the regulator cut the number of new companies coming on to the stock market by two-thirds.

Ten initial public offerings will be allowed in July, the commission said on its blog account. It gave no details of which companies would be allowed to list but said the amount of money raised also would be reduced from June’s level.

Hexun.com, a financial news website, said 28 companies had planned to go public in the next two weeks.

The latest moves followed a surprise interest rate cut on 27 June that was interpreted as a clear signal that Beijing wanted to shore up investor confidence.

The explosive price rises that saw the stock market double in value began after the official media said last summer that stocks were cheap. Companies rushed to raise money with share offerings to take advantage of investor enthusiasm.

Some analysts said the fall since last month was a belated symptom of China’s economic woes after a slowdown in activity dating back to early last year. Manufacturing output and exports have slowed, while the finance ministry has clamped down on lending by state enterprises and local authorities for property speculation. 

Officially, GDP growth is expected to remain at 7% this year, in line with the government’s target, but many analysts say that official figures overestimate actual growth and it is in fact nearer 3%.

Stuart Kirk, a strategy analyst at Deutsche Bank, queried why regulators eased lending rules this week.

He said: “After all, shares are still up 90% since the lows in 2013 and valuations remain frothy. The reality, however, is most investors are in the red – in fact, it is likely no money has been made during this equity boom whatsoever. The reason is because peak inflows occurred just before the recent selloff; money lost by latecomers is greater than gains made by earlier investors.”

More than 20m trading accounts were opened between mid-April and mid-June to invest in the rising market and it is these accounts that have seen the biggest losses, he said.

A prolonged slump could disrupt Communist party plans to use stock markets to make China’s state-dominated economy more productive. The party wants state companies to raise money through share sales to reduce debt and hopes they will compete harder if they have to answer to shareholders.

Party leaders also hope stock investing can provide an ageing population with more options to save for retirement and ease demand for social spending.