SHANGHAI/HONG, KONG – Chinese stocks fell Tuesday in volatile trading, extending the biggest one-day loss since 2007, as concern grew unprecedented government intervention will fail to shore up equities.
The Shanghai Composite Index dropped 1.7 percent to 3,663 at the close, after sinking as much as 5.1 percent and gaining 1 percent. About three stocks slid for each one that rose. Energy and technology shares slumped, while brokerages led an advance by financial companies. The gauge tumbled 8.5 percent on Monday amid concern a three-week rally sparked by unprecedented government intervention is unsustainable.
Chinese traders reduced leveraged stock bets on Monday by the most in two weeks as the stock plunge erased $613 billion in value. The securities regulator assured investors in a statement after the market closed the government hasn’t withdrawn support for equities.
“Confidence is very weak and the market will probably still seek a lower level of support,” said Wu Kan, a Shanghai- based fund manager at Dragon Life Insurance Co., which oversees about $3.3 billion. “If the market falls to or approaches the previous low, the government will take further rescue measures.”
The Hang Seng China Enterprises Index dropped 0.5 percent in Hong Kong, while the Hang Seng Index climbed 0.6 percent. The CSI 300 Index retreated 0.2 percent, paring a loss of as much as 5 percent. A measure of 30-day volatility in the Shanghai Composite jumped to its highest level since 1997 on Monday.
Trading volumes were 3.8 percent below the 30-day average on Tuesday. Data on Tuesday showed the number of new stock investors fell 26 percent to 391,500 in the week ended July 24, down from 1.5 million in the first week of June.
Monday’s retreat shattered the sense of calm that had fallen over mainland markets last week and raised questions over the viability of government efforts to prop up share prices as the economy slows. The International Monetary Fund has urged China to eventually unwind its support measures, according to a person familiar with the matter.
China Securities Finance Corp., a state-backed agency that provides margin financing and liquidity, hasn’t exited the stock market, China Securities Regulatory Commission spokesman Zhang Xiaojun said in a statement after the close of trading on Monday. The CSRC said Tuesday it’s investigating the previous day’s stocks selloff.
The Shanghai gauge had rebounded 16 percent from its July 8 low through Friday as officials went to extreme lengths to halt a rout that erased $4 trillion from the nation’s equities. Officials allowed more than 1,400 companies to halt trading, banned major shareholders from selling stakes and armed a state- run financing vehicle with more than $480 billion to support the market.
“I do think they will reduce intervention which is what the market is afraid of these days,” Steve Yang, strategist at UBS Group AG, said in phone interview in Shanghai on Monday. “The process will be very long. They do not need to rush to sell their positions in the short term.”
Gauges of energy, industrial and technology shares in the CSI 300 dropped more than 3 percent for the steepest losses among 10 industry groups. China Railway Group Ltd. slumped 8 percent for a three-day, 20 percent retreat.
PetroChina Co., long considered a favorite holding of state-linked rescue funds, declined 4.2 percent. The oil producer had been one of the biggest sources of support for the Shanghai Composite on big down days in late June and early July.
Hundsun Technologies Inc., which runs a financial investment trading platform known as HOMS, plunged by the daily limit of 10 percent for a second day. The company denied online speculation that HOMS’ connection to brokerages will be halted after Tuesday and investors will only be able to sell positions.
The outstanding balance of loans backed by share purchases fell by 21.4 billion yuan ($3.4 billion) to 919.4 billion yuan on the Shanghai exchange on Monday, according to bourse data.
Margin financing from official and unofficial channels may end 2015 at less than half its June record high as deleveraging continues, according to the median estimate of nine analysts surveyed by Bloomberg.
Chinese stocks will decline by an additional 14 percent over the next three weeks as the market demonstrates a trading pattern that mimics that of the U.S. crash in 1929, according to Tom DeMark, who predicted the bottom of the Shanghai Composite in 2013.
“The die has been cast,” DeMark, 68, the founder of DeMark Analytics in Scottsdale, Arizona, who has spent more than 40 years developing indicators to identify market turning points, said by phone. “You just cannot manipulate the market. Fundamentals dictate markets.”
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