China's stock market tumbled for a second straight day on Wednesday, and turnover shrank, because of fears that a surge in January bank lending could prove negative for the economy rather than signalling a recovery. The Shanghai Composite Index slid 4.72 percent, its biggest drop since mid-November, to close at 2,209.862 points. It sank 2.93 percent on Tuesday.
Turnover in Shanghai A shares shrank to 134.9 billion yuan ($19.8 billion), still heavy but down from 168.8 billion yuan on Tuesday. Falling turnover could indicate flows of fresh money into the market are drying up. The index jumped to a five-month closing high of 2,389.387 points on Monday, up 31 percent this year, after data last week showed new bank lending rising sharply as the government pressed banks to lend in order to stimulate the economy.
But in the past two days, the market has increasingly come to believe that the structure of the lending betrayed weakness in the economy. A large fraction of it was in the form of short-term discounted bill financing, which suggested that both banks and companies remained worried about the long-term outlook for the economy, and that some of the money raised by firms might be fuelling a stock market bubble.
The banking regulator is investigating the jump in discounted bill financing, fearing it could create excessive risks, China Business News reported on Monday. China International Capital Corp said in a report that the rise of discounted bill financing was "clearly unustainable" and that the stock market's rally, which would prove short-term, was the result of growing economic imbalances.
"We expect growth of both money supply and credit may face major downside risks going forward," it said. Losing Shanghai A shares outnumbered gainers by 835 to 107 on Wednesday, with steel and coal particularly hard hit.
Baoshan Iron & Steel sank 5.59 percent to 5.74 yuan while Shenhua Energy lost 7.15 percent to 20.90 yuan. Analysts said a months-long dispute between Chinese coal miners and power generators over annual prices had unexpectedly opened the door to rising coal imports, despite lacklustre demand and a supply glut.
"If turnover does not stay active, the 2,400-point level may be the peak for February," said Li Wenhui, analyst at Huatai Securities. "If there is a problem with money flows into the market and if there is no more supportive policy news soon after the government's package to aid industries, investors may take profits and wait for their next chance."
The index fell back this week from near its 200-day moving average, which is potentially major resistance and now lies at 2,444 points. The index broke on Wednesday below the bottom of an uptrend channel extending back to late January.
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