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Stocks plunge on lending concerns

(China Daily/Agencies)
Updated: 2009-08-20 08:05

China's stocks fell, briefly driving the benchmark index into a so-called bear market, on concern tighter lending will damp economic growth.

The Shanghai Composite Index lost 4.3 percent to 2,785.58, as China Shenhua Energy Co, the nation's largest coal producer, sank 6.8 percent, the most since Feb 18, and CITIC Securities Co, the biggest brokerage, sank 7.8 percent.

The gauge has slumped 19.8 percent since this year's high on Aug 4, after more than doubling from November's low as China rolled out a 4-trillion-yuan stimulus package. A plunge in new bank loans in July, disappointing earnings and concern the government will seek to damp property market speculation have sapped confidence.

"It's irrational selling that has shattered market confidence," said Larry Wan, Shanghai-based deputy chief investment officer at KBC-Goldstate Fund Management Co, which oversees about $583 million in assets. "Some mutual funds have been reducing their stock holdings as they are pessimistic about the economic outlook."

China Everbright Securities Co, which had the smallest first-day gain of any new stock in Shanghai this year, slumped by the 10-percent daily limit yesterday.

"The Chinese market is very trend-oriented because there are many individual investors," said Philippe Zhang, chief investment officer at AXA SPDB Investment Managers in Shanghai, which oversees about $220 million. "It can rally very quickly and go down strongly as well."

Related readings:  Stocks rise on higher metal prices  Stocks slip on recovery doubts  Stocks end down led by commodities  Stocks edge down on slow loan growth concerns

The Shanghai index, the third-best performing market in the world in the first seven months, remains 59 percent below its record level on Oct 16, 2007. Stocks have slumped this month as new loans in July declined to less than a quarter of June's level. The regulator allowed initial share sales after a nine-month moratorium and companies including Yunnan Copper Industry Co reported losses. The gauge remains 53 percent higher this year.

"The current correction is reflecting the tightening in lending," said Andy Xie, a former Asian chief economist at Morgan Stanley, who correctly predicted in April 2007 that China's equities would tumble. "We've seen the peak of this market cycle, though there's likely to be a bounce as the government seeks to stabilize the market."

The market may extend its decline by another 10 percent, Xie said on Aug 17. Even with the recent decline, the Shanghai index is trading at 30.4 times reported earnings, against 17.5 times for shares on the MSCI Emerging Markets Index.

An estimated 1.16 trillion yuan of loans were invested in stocks in the first five months, China Business News reported on June 29, citing Wei Jianing, a deputy director at the Development and Research Center under the State Council.