China stocks slump again as rout continues

Wednesday’s 3 percent falls take 2016 losses to nearly 25 percent, or $2 trillion.

An investor looks at an electronic screen showing stock in Beijing China
The prospect of investors having to sell stocks they bought with borrowed money to cover margin calls has hurt sentiment [Reuters]

Chinese shares fell sharply again on Wednesday after plunging in the previous session, taking losses in 2016 to nearly 25 percent, or $2 trillion.

The benchmark Shanghai Composite Index was down 3 percent in afternoon trading, having tumbled 6.4 percent on Tuesday to its lowest close since December 1, 2014.

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Chinese markets began the year with a series of 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 investors’ 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 that their major shareholders, who have pledged shares as collateral, face 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, head of China strategy with UBS Securities.

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Trading volumes have thinned, making price moves even more volatile, as many investors have given up on Chinese stocks since last summer, when shares crashed 40 percent.

Beijing then intervened to stem the rout and orchestrate a recovery of sorts, but those that bought back in would again be nursing losses. 

China’s woes have also damaged risk appetite in global markets, which have also been hit by tumbling oil prices.

Source: Reuters