No surprise China's inflated stock market is collapsing...

Stock Sell-Off Is Unabated in China

by David Barboza

Stock prices in mainland China fell sharply again on Wednesday, despite another series of government measures meant to restore confidence and stabilize a market that has grown increasingly turbulent in the last month.

The sell-off is putting pressure on the government to take swift action, as losses pile up for the millions of ordinary investors that piled into the market. Just days after Beijing introduced a number of bold measures to prop up share prices, regulators announced new initiatives Wednesday, including allowing insurers to invest more money in stocks and creating a fund to buy up shares in small and midsize companies.

But the slump, which is defying the efforts by Beijing to prop up stocks, presents a serious challenge for the leadership. If stocks continue to fall, it could erode consumer confidence, further weighing on the economy.

The social and political repercussions could also be significant for the government. Many ordinary investors have poured their savings into the stocks, making them especially vulnerable to the market volatility.

The losses have been brutal. And the full extent of the pain may be even steeper, since nearly half of the stocks have stopped trading.

Even after the big sell-offs, though, stock prices in China are still considerably higher than they were a year ago. The Shanghai composite is still up 74 percent from mid-2014, and the Shenzhen composite is up 84 percent since then.

On Wednesday, the main Shanghai index plunged 5.9 percent, and the Shenzhen index fell 2.5 percent. Over all, the Shanghai index is down 32 percent and the Shenzhen is off 40 percent from the highs reached in mid-June.

In Hong Kong, which had escaped much of the mainland market's rout, the Hang Seng index fell 5.8 percent.

The sell-off has also spread to other parts of the Asia-Pacific region. In Japan, the Nikkei 225-stock average dropped 3.1 percent, Australian stocks were down 2 percent and South Korean shares fell 1.2 percent.

Fear is gripping the markets after a phenomenal bull run in which mainland China's major stock indexes doubled, tripled and even quintupled over the last few years. Sentiment has turned down too sharply and investors have lost confidence, analysts said, and because buying shares with borrowed money was a critical part of the increase in prices, there is now pressure to sell.

"China's stock market remains under stress, as investor confidence will take some time to recover," Li Wei, the China economist at the Commonwealth Bank of Australia, wrote in a report to investors.

Panic selling may also be extending the downturn because each day trading is suspended for hundreds of stocks after they drop by 10 percent, under exchange rules. Some companies are even asking that their shares be temporarily suspended, hoping to ride out the downturn.

Since late June, on almost every trading day, there have been more than 900 stock trading suspensions, according to Xinhua, China's official news agency. On Tuesday and Wednesday, 900 to 1,700 stocks were suspended from trading. That means that among the approximately 3,000 listed companies on the two major exchanges, up to half may have been suspended during the first two days of the week.

"This is wrong," said Francis Cheung, the head of China and Hong Kong strategy at CLSA, the brokerage firm. "It just delays the correction. So it delays the downturn."

The Chinese authorities have been moving swiftly, apparently worried about the potential impact the sell-off could have on the financial markets and on a broader economy that is relatively weak. In one of the biggest moves, some of the country's largest brokerage houses created a $19.4 billion stabilization fund.

Although experts say they doubt there could be systemic damage, banks and brokerage firms could be threatened because of the huge amount of margin trading, or borrowing to purchase stocks.

By some estimates, margin trading may have amounted to as much as 3.4 trillion renminbi, or nearly $550 billion. And because some of the borrowing probably took place in the shadow banking sector, no one is quite clear how big it was.

The bubble seems to be bursting on a stock market run that began last summer. In a rally that began roughly a year before the market's high point on June 12, the Shanghai index jumped 157 percent. The Shenzhen index rose even more during that period, rising about 208 percent. A smaller stock market in Shenzhen called the ChiNext, geared toward technology companies and start-ups, began its own bull run much earlier, in late 2012, and soared about 540 percent before the markets began to falter several weeks ago.

Based on company earnings, the prices of many Chinese stocks began looking incredibly expensive, trading at far higher prices than could be found in Hong Kong or the United States, worrying analysts and investors.

"It's gone up too fast, and it's too much borrowed money," said Wendy Liu, an analyst at Nomura Securities in Hong Kong. "A lot of first-time equity buyers were too excited and didn't know how to temper their excitement."

The rally began to fall apart in May. Analysts say investors began to worry that share prices had grown too expensive. With concerns about risk, the government began tightening rules on margin lending. There was a flood of initial public offerings that increased the supply of companies just as demand was weakening. And there were other factors, such as listed companies reporting weaker earnings. Perhaps more troubling, insiders at many listed companies began aggressively selling shares, signaling a lack of confidence in the future price. Buybacks of stock grew less common.

Most analysts believe the bulk of the selling pressure is coming from investors who borrowed to finance their stock-buying binges.

"The market has too much leverage," said Patrick Ho, a market analyst at UBS in Hong Kong. "This leverage needs to come down to a sustainable level."

Mr. Ho added that there had been a "trial and error" approach by the Chinese government to stabilize the market. The authorities are likely to introduce more measures to stimulate the economy and prevent the market from falling too rapidly, he said, like the announcement on Wednesday that a fund would be set up to buy up the shares of small and medium-size companies.

"If it doesn't work, they'll do more," Mr. Ho said.