China's Stocks Drop After Factory Gauge Sinks to Six-Year Low

Beijing (Sept 23)  Chinese stocks trading in Hong Kong slid the most in three weeks after a preliminary manufacturing gauge unexpectedly fell to a six-year low and concern grew the government will pare back support for equities.

Hong Kong’s Hang Seng China Enterprises Index slumped 2.7 percent to 9,570.25 at the close. The Caixin Media and Markit Economics’ manufacturing Purchasing Managers’ Index fell to 47 in September, the lowest level since the depths of the global financial crisis. Citic Securities Co. dropped to the lowest level in 18 months after people familiar with the matter said a government probe has found evidence of insider trading. The benchmark Shanghai Composite Index declined 2.2 percent at the close.

President Xi Jinping said in a speech in the U.S. that the country’s stock market has reached a “phase of self-recovery and self-adjustment”. The Shanghai Composite has tumbled 40 percent from its June high as leveraged investors fled the stock market amid concerns valuations weren’t justified amid a weakening economy. The Hang Seng China Enterprises Index has slumped 36 percent.

“The market is reacting to the bad economic data, which seem to show no improvement,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co. “Xi’s comment indicates that the government’s rescue measures will be phased out and the state won’t buy as much as it did before to ramp up the market.”

High Valuations

Equities on mainland bourses still trade at a median 49.5 times reported earnings. That’s the highest among the world’s 10 largest markets and more than twice the multiple of 18 for the Standard & Poor’s 500 Index. The Shanghai Composite, where low-priced banks have some of the biggest weightings, is valued at 15.6.

Trading volumes in the Shanghai gauge were 37 percent lower than the 30-day average. The CSI 300 Index declined 2.3 percent. The Hang Seng Index retreated 2.3 percent.

Citic Probe

Citic Securities dropped more than 4 percent in Hong Kong and Shanghai. People familiar with the matter said the official investigation into the company uncovered evidence to suggest it was engaged in insider trading connected to the state’s support for the equity market.

A Citic spokeswoman said the company hasn’t received any formal notification regarding the nature of the investigation.

Haitong Securities Co. slid 4 percent in Hong Kong, while Dongfeng Motor Group Co. lost 3.7 percent.

All 10 industry groups on the CSI 300 fell, led by energy and material stocks. China Shenhua Energy Co., the nation’s biggest coal producer, slid 3.9 percent and Jiangxi Copper Co. slumped 4.1 percent.

The decline in manufacturing followed data earlier in September showing that overseas shipments fell for a second month. Readings of output, new orders and employment all declined at a faster rate, according to the survey, known as the flash PMI.

Yuan Weakens

The yuan in Hong Kong dropped as much as 0.42 percent, the most since Sept. 2, before it traded at 6.4282, down 0.33 percent, according to data compiled by Bloomberg. The spot rate in Shanghai weakened 0.13 percent to 6.3840, China Foreign Exchange Trade System prices show.

The nation won’t devalue the yuan to boost exports, Xi said in his speech in Seattle, adding that China is opposed to currency wars.

As Chinese policy makers try to sell the message that the stock market is stabilizing, data suggests their biggest challenge will be persuading the richest investors.

The number of accounts holding shares worth more than 10 million yuan ($1.6 million) almost halved in the past three months, the biggest decline among four categories of investor wealth tracked by the nation’s clearing agency. While accounts with less than 100,000 yuan rose by 3.8 percent in August, those with the biggest funds fell 17 percent -- partly due to a 12 percent drop in the Shanghai Composite during the period.

Source: Bloomberg