Move to prop up index and halt sell-off stops abruptly, throwing doubt on Beijing’s plan to stave off deeper crash

This article is more than 5 years old

This article is more than 5 years old

Chinese shares has tumbled more than 8% after an unprecedented state rescue effort to prop up valuations abruptly stopped, raising doubts about the viability of Beijing’s plan to stave off a deeper crash.

Major indexes had their largest one-day drop since 2007, shattering three weeks of relative calm in China’s volatile stock markets since Beijing moved to arrest a slump that started in mid-June.

“The lesson from China’s last equity bubble is that, once sentiment has soured, policy interventions aimed at shoring up prices have only a short-lived effect,” said Capital Economics analysts.

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The CSI300 index of the largest-listed companies in Shanghai and Shenzhen plunged 8.6%, to 3,818.73 points, while the Shanghai Composite Index lost 8.5%, to 3,725.56 points.

Stocks fell across the board on Monday, with 2,247 companies falling, leaving only 77 gainers.

More than 1,500 shares listed in Shanghai and Shenzhen dived by their 10 percentage point daily limit, led by index heavyweights such as China Unicom, Bank of Communications and PetroChina.

The biggest fallers on the Shanghai stock market on Monday Photograph: Thomson Reuters

Analysts struggled to explain the severity of the sell-off, which accelerated sharply in the afternoon session, long after investors had had time to digest the latest economic releases.

Markets had opened down more than 2%, following lacklustre data on profit at Chinese industrial firms on Monday and a disappointing private factory sector survey on Friday.

Chinese stock investors have been celebrating bad economic news for months on the basis it would provoke more aggressive policy easing, which is viewed as positive for stocks because it pushes cheap money into the market.

Some view the government-induced recovery in share pricesas provoking the crash.

“After two weeks of steady rebound, both foreign investors and domestic institutions are gradually taking profits, increasing selling pressures,” said Yu Jun, strategist at Bosera Asset Management Co.

China’s main stock indexes had more than doubled over the year to mid-June, when a sudden fall wiped almost a third off the value of shares during course of a few weeks.

The Shanghai stock market over the last three months Photograph: Thomson Reuters

Markets began stabilising again in the second week of July, due almost entirely to an all-out effort from Beijing to pump liquidity into the market while barring investors from selling.

China’s central bank cut interest rates, brokerages formed stabilisation funds and regulators lifted restrictions on pensions and insurers investing in stocks, an implied combined total verbal commitment of almost $800bn (£515bn).

Beijing also cracked down on “malicious” short-sellers in the futures market, froze IPOs to prevent a liquidity drain and looked the other way as about 40% of companies suspended trading in their shares to escape the rout.

The campaign even acquired nationalistic tones, with local governments calling on retail investors to “defend the stock market” and domestic media and popular commentators expressing suspicions that the crash had been engineered by a foreign cabal.

But analysts were sceptical of how long the campaign could be sustained, given the fright that investors took at the speed and scale of a slump that wiped out up to $4tn in stock market capitalisation.

Some analysts say the main problem is that a market that rose so sharply on the expectations of aggressive easing from Beijing is now seeing diminishing returns from future loosening, especially if the US adapts its monetary policy.

“The main factor of today’s fall is attributable to the uncertainty of the future monetary policy,” said Du Changchun, stock analyst at Northeast Securities. “The rising CPI, particularly the rising pork price, has made it harder for the monetary authorities to roll out more easing measures.”