China's highly volatile shares ended lower again on Wednesday after plunging on Tuesday, taking losses in 2016 to about 22 percent or 12 trillion yuan ($1.8 trillion). The benchmark Shanghai Composite Index ended down 0.5 percent, having been up in the morning and as much as 4 percent lower during the day. It tumbled 6.4 percent on Tuesday to its lowest close since December 1, 2014.
The CSI300 index of the largest listed companies in Shanghai and Shenzhen ended down 0.3 percent after a similar rollercoaster ride. China markets began the year with precipitous falls and a sharp depreciation in the yuan currency, and selling pressure has persisted as economic data confirmed slowing growth and deteriorating business conditions, hammering confidence in stocks.
Gu Yongtai, analyst at Cinda Securities, said the prospect of investors having to sell stocks they bought with borrowed money in order to cover margin calls has also hurt sentiment. "There's fear that stock price falls would trigger margin calls, which then adds further pressure on prices, although the actual amount of forced liquidation is not as big as people would imagine," Gu said.
Four listed companies suspended trading in their shares on Wednesday, saying major shareholders who had pledged shares as collateral faced margin calls and would seek ways to avoid forced liquidation. "If the market continues to fall, equity pledging-related selling pressure could increase significantly, putting further pressure on the stock market," said Gao Ting, the Head of China Strategy with UBS Securities.
Trading volumes have thinned, making prices more volatile, as many investors have given up on Chinese stocks since last summer, when shares crashed 40 percent. Beijing intervened to stem that rout and orchestrate a recovery of sorts, but anyone who mistook that for a bottom and bought back in is nursing losses again.
There was a glimmer of light in that buyers in Hong Kong ploughed 4.5 billion yuan into the Shanghai bourse through the Stock Connect mechanism during the day, the largest inflow since September. China's woes have damaged risk appetite in global markets, along with tumbling oil prices. Investors across the world will hang on whether the market chaos of the last few weeks and concerns over China's slowing economy might blow the US Federal Reserve off its proposed course of gradual interest rate hikes.
The Fed is expected to leave rates unchanged later on Wednesday and acknowledge that financial market turmoil threatens its upbeat view of the US economy, lowering the chances of a March hike. Companies also say they are having a tougher time, among them Apple Inc, which said overnight that while its revenue in Greater China was still rising, it was seeing "some signs of economic softness". The broader dilemma for Chinese policymakers is that measures to boost growth are delaying reforms to rebalance the economy to more efficient industries, cut debt and reduce overcapacity, Moody's Investor Service said in a note.
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