By Chao Deng
Chinese stocks fell sharply Wednesday, in a volatile session that sent the country’s main benchmark tumbling in the morning before a surge in blue chips led a recovery in the last half hour of trading.
The Shanghai Composite Index /zigman2/quotes/210598127/delayed CN:SHCOMP +0.21% closed down 2.3%, marking its biggest daily percentage drop since late February. It is now down 16% since the beginning of the year.
Meanwhile, China’s smaller Shenzhen Composite Index /zigman2/quotes/210598015/delayed CN:399106 +1.01% plunged 4.4%. The Nasdaq-style ChiNext /zigman2/quotes/210597993/delayed XX:SZX00067 +1.49% benchmark dropped 5.6%.
Investors in China had been enjoying a period of stability with Shanghai gliding higher starting late January and the Chinese yuan /zigman2/quotes/210561991/realtime/sampled USDCNY +0.0940% stabilizing.
But then came Wednesday’s jolt: The Shanghai benchmark took a sudden dive about one hour into trading and by early afternoon was down as much as 4.5%. A late-day rebound in financials wasn’t enough to lift the benchmark above 3,000, a level considered psychologically important for local traders.
“What’s most scary is that everyone is guessing about what’s the negative news,” says Deng Wenyuan, analyst at Soochow Securities, “And this magnifies irrational panic mood.”
Bill Bowler, equities trader at Forsyth Barr Asia Ltd. said that once the Shanghai benchmark dipped below the 3,000 level, “the market acted like it hit an air pocket.” The benchmark closed at 2972.58.
At the beginning of the year, volatility in China drove performance in the Asia region. But increasingly neighboring markets have moved on global factors like oil prices. On Wednesday, the Nikkei Stock Average /zigman2/quotes/210597971/delayed JP:NIK +0.12% and S&P/ASX 200 /zigman2/quotes/210598100/delayed AU:XJO -0.0034% were largely unperturbed, closing up 0.2% and 0.5%, respectively. Japan shares were up for the second day as worries about the impact from earthquakes last week eased, while gains in energy buoyed Australia.
Still stocks in Hong Kong mirrored their mainland counterpart, falling in the morning before a slight lift in the afternoon narrowed the Hang Seng Index’s /zigman2/quotes/210598030/delayed HK:HSI -0.85% loss to 0.9%.
Traders and analysts cited a number of possible reasons for selling in China, from short-term liquidity pressures to worries about less-than-stellar figures as first-quarter earnings results roll in. A lack of confidence in the market’s recent gains and uncertainty as to the timing of potentially more stimulus from Beijing also didn’t help, they said.
Regulators approved a total of 72 companies to go public so far this year, and Chinese firms are continuing to de-list from the U.S. in order to return to the mainland market. Taken together, the market could face a flood of new shares that would weigh on appetite for existing ones.
Over 550 billion ($77.33 billion) yuan of medium-term lending facilities will be due this week, adding liquidity pressure to the market in the near term despite the central bank injection of 250 billion yuan via short-term loans today. The lending facilities and short-term loans are a means for authorities to adjust the level of funding available in the banking system.
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Traders also worry that Chinese authorities may be less inclined to introduce stimulus for the slowing economy.
New loans grew at a pace faster than expected during the first quarter, raising the likelihood that authorities will want to be careful releasing further credit. In an article published late Tuesday by the official Xinhua News Agency, Ma Jun, an economist at China’s central bank called for cautious monetary policy to avoid more company debt and risks of rising inflation.
“The main consideration of the current monetary policy maneuvering is to provide liquidity necessary to stabilize growth,” said Mr. Ma.
His comments followed a separate Xinhua report from earlier in the week that suggested the People’s Bank of China would take a more prudent approach in its easing measures this year.
Analysts say it is likely that China’s “National Team,” a group of state-owned funds, came in during the afternoon to buy financial stocks and lift the overall market. But because Beijing isn’t transparent about its moves, they said that coordinated buying by other large institutional buyers couldn’t be ruled out.
A gauge of Shanghai’s largest 50 stocks finished down only 0.4% by the day’s end. The Shenzhen market, weighted more toward smaller stocks and tech names, suffered heavier losses.
Bank of China Ltd., /zigman2/quotes/204682472/delayed HK:3988 -1.65% one of the four largest banks, was down just 0.6%. Shares of a number of small private banks like Bank of Beijing Co. /zigman2/quotes/204593689/delayed CN:601169 -0.21% and Shanghai Pudong Development Bank Co. /zigman2/quotes/204296742/delayed CN:600000 -0.32% closed up, gaining 1.1% and 0.3%, respectively.
In Japan, the market had its surprises, too: News that Mitsubishi Motors Corp. /zigman2/quotes/202404490/delayed JP:7211 +2.12% violated emissions-related test regulations sent the auto maker’s shares down 15%. At a news conference after the market close, the firm’s executives acknowledged the improprieties and said Mitsubishi would stop producing and selling affected vehicles.