China shares tumble again as global markets await Fed statement

(Reuters) – Chinese shares fell sharply again on Wednesday after plunging in the previous session, taking no comfort from a rise in global markets, with sentiment fragile ahead of a policy statement later from the U.S. Federal Reserve.

The benchmark Shanghai Composite Index was down 2.8 percent by midday. On Tuesday, it tumbled 6.4 percent to its lowest close since Dec. 1, 2014.

The CSI300 index of the largest listed companies in Shanghai and Shenzhen was down 2.2 percent.

China’s stock markets have slumped 23-24 percent so far this year, knocking nearly 12 trillion yuan ($1.8 trillion) off the value of the indexes as of Tuesday night.

Stocks on Wall Street were given a lift overnight as crude prices, bounced back over the $30 mark overnight on hopes of output cuts. Oil had hit a 12-year low last week due to oversupply and concerns about faltering global growth, particularly in China.

Investor sentiment 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 U.S. Fed off its proposed course of gradual interest rate hikes.

It raised interest rates in December for the first time in a decade, and the prospect of more such hikes has been unsettling currency and equity markets.

Selling in China has been spurred by concerns about deteriorating business conditions, fears of currency weakness and a broader loss of confidence in risky assets.

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.

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Four listed companies suspended trading in their shares on Wednesday, saying 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, the Head of China Strategy with UBS Securities.

Trading volumes have thinned 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 will be nursing losses again.

CURRENCY BETS

Investors are also wary of further weakness in the yuan, though the People’s Bank of China (PBOC) has kept the currency’s daily midpoint fixing little changed since setting it sharply weaker in early January.

Spot yuan was at 6.5797 on Wednesday, a little firmer than Tuesday’s close, while offshore it was 6.6129, a 0.5 percent discount to the onshore rate.

China’s central bank has jolted global financial markets twice in six months by allowing sharp, sudden slides in the currency, only to step in aggressively to stabilise it and deter speculation.

The central bank has been making plenty of liquidity available to the banking system to avoid any cash squeeze ahead of long Lunar New Year celebrations beginning in early February.

But those funds are largely of a short term nature, and the massive injections may have dashed some investors’ hopes that the PBOC would cut banks’ reserve requirements (RRR) soon to free up more money for longer term lending which could boost economic activity.

The decline in the yuan and concerns about the country’s growth prospects have fuelled a flight of capital out of the world’s second-largest economy which policymakers are struggling to contain.

Some hedge funds are still betting that Beijing won’t be able to stem the outflow and the yuan will have to fall, pressuring other emerging market currencies.

China posted its slowest growth in 25 years in 2015, and the new year has seen a slew of weak economic indicators, including data on Wednesday that showed profits at Chinese industrial firms fell 4.7 percent in December from year earlier, the seventh straight month of declines.

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. ($1 = 6.5782 Chinese yuan renminbi) (SHANGHAI, Jan 27/2016)

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