SHANGHAI: China and Hong Kong shares slumped on Monday, as relentless foreign outflows and a surge in short selling pummelled confidence already hurt by the region’s creaking economy.
China’s bluechip CSI300 Index dropped 1.6% to its lowest closing level in nearly five years. The Shanghai Composite Index sank 2.7% to record its biggest one-day fall since April 2022 and pierced through the psychologically important 2,800-point mark.
In Hong Kong, the benchmark Hang Seng Index shed 2.3% to its lowest level in 14 months, with investors dumping property and tech shares.
As stocks tumbled, state-owned banks were seen actively supporting the yuan offshore and onshore, in efforts analysts saw as aimed at countering a spillover from equities into the currency market.
“Investor confidence remains weak toward domestic economic policies,” Minsheng Royal Fund Management Co said in a note to clients, referring to disappointment over the lack of aggressive stimulus measures for an economy that grew slightly more than the government’s official target last year, but remains shaky.
Overseas funds have sold roughly $1.6 billion in Chinese equities collectively so far this year, driven mainly by European active funds and Hong Kong passive money, Morgan Stanley said in a report last week.
Citing “significant” downward revision pressure on corporate earnings, the investment bank estimates that EU investors could sell another $1.8 billion in Chinese stocks, while Hong Kong passive funds could sell an additional $250 million.
‘STAMPEDE’
Chinese investors are shunning stocks too.
Pierre Hoebrechts, head of macro research at East Eagle Asset Management, said that Chinese households are saving rather than buying stocks as Beijing is unlikely to use “bazooka style” policies to support the equity market.
“Market technicals have also been dreadful, reinforced by selling by structured products in Hong Kong, China and Korea.”
China’s small-cap CSI 1000 Index lost 5.8% on Monday, but its index futures contract for September delivery tumbled a maximum 10%, registering a record discount to spot prices.
“Many quant funds are linked to CSI 1000 so we’re seeing a stampede,” said Yuan Yuwei, hedge fund manager at Water Wisdom Asset Management, calling Chinese small-caps still frothy.
In Hong Kong, some analysts linked the share selloff to an investigation in South Korea into the sale by banks of derivatives pegged to the Hang Seng China Enterprise index.
Korea’s financial regulator said in January it would look into any mis-selling of such products in which trillions of won of retail money had been invested and which are now deeply loss-making.
With the HSCE Index slumping below the so-called “knock-in” level, securities firms are rushing to hedge, which will “accelerate the decline of the Hong Kong index”, said Lee Hyo Seob, head of the financial services industry at the Korea Capital Market Institute.
Stocks fell across the board. An index tracking Hong Kong-listed Chinese developers plunged 7% to record lows, while the Hang Seng Tech Index lost 3%.
Chinese investors are scrambling for exposure to overseas markets such as Japan and India.
Reflecting that, several mainland exchange-traded funds (ETFs) tracking Japanese stocks trade at or near record premiums to their net asset values, prompting warnings from money managers to investors.
Meanwhile, a Chinese fund targeting India stocks has restricted subscriptions, joining a growing number of outbound funds that are curbing investment, partly owing to Beijing’s controls on capital outflows.
