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China Stocks Plunge as State Support Fails to Revive Confidence

... Bloomberg:

China’s benchmark stock index tumbled to a three-month low as another round of government support measures failed to allay concern that margin trades will keep unwinding at a record pace.

The Shanghai Composite Index slid 5.9 percent to 3,507.19 at the close. With at least 1,331 companies halted on mainland exchanges and another 747 falling by the 10 percent daily limit, sellers were locked out of 72 percent of the Chinese market. 

Policy makers’ latest attempts to stop the selling, including measures to prop up small-cap stocks, were overshadowed by data showing an unprecedented liquidation of margin trades on Tuesday. Foreign investors extended a record three-day exodus as some said government meddling is making matters worse.

While the median price-to-earnings ratio in China has dropped to 53 from 108 at the height of the rally, valuations are more than twice as high as those on the Standard & Poor’s 500 Index.

President Xi Jinping’s government is ramping up efforts to combat the rout as policy makers seek to maintain confidence in the nation’s leadership and prevent a crash from weighing on an the weakest economic expansion since 1990. China now has more than 90 million individual investors, a constituency that’s larger than the Communist Party.

“The market is now falling on the assumption that both China’s economy and financial markets face systemic risk,” said Wang Zheng, the Shanghai-based chief investment officer at Jingxi Investment Management Co.

Among the latest support measures, the China Financial Futures Exchange raised margin requirements for shorting contracts on the small-cap CSI 500 Index. China Securities Finance Corp. said it will buy more shares of small- and mid-cap companies, while people familiar with the matter said the government agency is seeking at least 500 billion yuan in liquidity to support equities. The government also ordered state-owned firms not to cut holdings in their listed companies.

The trading suspensions, which cast doubt on authorities’ pledge to give markets a greater role in the world’s second-largest economy, mean that the Shanghai Composite’s drop was probably understated.On the Shanghai exchange, 365 companies suspended trading, equivalent to 33 percent of all listings. A further 992 were halted in Shenzhen, or 56 percent of the total.

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