China stocks plumb 7-month low on deleveraging fears
SHANGHAI - Chinese stocks dropped to their lowest levels in seven months on Thursday, continuing a month-long slide sparked primarily by a government crackdown on massive overleveraging in the economy that has spooked investors and dried up liquidity.
The stocks fall has revived some memories of a 2015 meltdown that saw the Shanghai index plunge more than 40 percent in less than three months, but analysts said the government was unlikely to allow a repeat of that carnage.
The benchmark Shanghai index had risen nearly five percent this year until a steady slide began in early April that has given back all of the year's gains.
The market has been battered by government moves to address mounting credit risks in the financial system, massive unregulated lending and speculative activities.
"The market is facing certain pressure in the short run. Investors are worried that regulators will continue to strengthen supervision," Citic Securities analyst Zhang Qun said.
"But the regulators want to keep the market stable and not fluctuate too much, so the downside risk is limited."
It closed down at its lowest levels since October 2016 on Wednesday, putting it among the bottom three performers in the 40-plus countries tracked by Wall Street Journal's Market Data Center.
Authorities have implemented a slew of measures in recent weeks to strengthen financial-institution transparency and chronically weak internal controls, tighten balance sheets, halt risky lending, and dispose of bad loans. Big fines have been meted out and corporate figures arrested.
Official heads have rolled too, including the country's insurance regulator Xiang Junbo, whose tenure coincided with a surge in speculative investments by Chinese insurers. He was sacked last month and faces a likely corruption investigation.
But while economists say the crackdown is long overdue, the torrent of back-channel funding sloshing through China is a key lubricant of the economy and investment activity, and the clampdown has hammered sentiment.
Analysts say the investment climate has been further weakened by slowing economic growth and measures to cool a red-hot property market to prevent a bubble.
Zheshang Securities analyst Zhang Yanbing said the strong regulatory hand has also forced huge funds from asset management products, an industry that is estimated to have tripled in size in just three years to reach $3.8 trillion last year, to pull back from investing in markets to avoid risks.
