Chinese stock markets fell sharply in the final hour of trading after investors were rattled by fears about the withdrawal of government support for shares and further capital flight following the devaluation of the yuan last week.
The Shanghai composite index dropped 6.12% and Shenzhen 6.6% on Tuesday, their steepest fall since the 8.5% slide on 27 July. By the end of trading about 1,000 companies had plunged by the daily 10% limit, with state-owned firms bearing the brunt of the selling.
Earlier on Tuesday, China’s central bank injected the largest amount of cash into the financial system on a single day in almost 19 months, but analysts said the effect was likely to be short-lived.
Experts also believed the markets were still unsettled by Friday’s statement by the China Securities Regulatory Commission, which said the market should “exercise its function of self-adjustment”.
“If I heard the government saying it plans to stop actively supporting the market I would sell too,” said Francis Cheung, a Hong Kong-based strategist for brokerage firm CLSA.
Shares were also dented by rumours that the expected reform of state-owned industries might not go far enough, said Guo Yanhong, a market strategist for Founder Securities. The anxiety was compounded by concerns that last week’s yuan devaluation may accelerate capital flows out of China. Worries over flagging economic growth in China are also weighing on sentiment.
“The mentality of the investors is still fragile,” said Guo. “They won’t hesitate to sell their holdings and get out of the market fast whenever they expect a big fall.”
Authorities managed to halt large stock market fluctuations in early July when they took a number of dramatic steps to limit losses for investors, including ordering securities firms to buy stocks and telling company shareholders not to sell holdings. The stability proved short-lived, however, as Chinese stocks resumed their slide, rattling financial markets across the world. The fall in shares on Tuesday also involved some profit-taking after a small rally in recent weeks, analysts said.
This latest stock market plunge came a week after China sent shockwaves through global markets with a surprise currency devaluation. The yuan continued to decline against on Tuesday despite its midpoint being raised to 6.3966 a dollar, slightly firmer than the previous fix of 6.3969.
“With today’s unsurprising yuan fixing, volatility [in the yuan] appears to have been put back in its box. However, the internal dynamics of China’s economy continue to flash warnings that this calm will not last,” Angus Nicholson, IG market analyst, wrote in a note.
