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Shanghai - China’s stocks fell to the lowest level in two months, led by material and technology stocks, amid signs of a slowing economy and rising odds of a Federal Reserve interest-rate increase.
The Shanghai Composite Index declined 1.9% and was poised to close below 2 800 for the first time since March 1. The ChiNext index of smaller companies trading in Shenzhen slid the most in a week on concern Chinese authorities are preparing to crack down on reverse mergers.
Hainan Mining dropped 5.4% among material companies, while Dr. Peng Telecom & Media Group fell to the lowest level since February.
President Xi Jinping this week vowed to press ahead with plans to cut capacity at state-owned enterprises, even as data over the weekend showed industrial production, fixed-asset investment and retail sales all missed estimates.
Strong consumer price data in the US and statements from regional Fed presidents pushed up the odds of a June rate increase. A US rate rise may exacerbate Chinese capital outflows, while signs of faster inflation in China may reduce the chances of stimulus.
“The weak market sentiment is still related to economic fundamentals,” said Zhang Haidong, chief strategist at Jinkuang Investment Management in Shanghai. “The government is still pretty determined to reduce leverage and over-capacity, so growth may slide further.”
Backdoor listings
The Shanghai equity gauge slid to 2 790.41 at 07:07. The ChiNext slumped 2.6%, while the CSI 300 Index lost 1.5%. Hong Kong’s Hang Seng China Enterprises Index dropped 1.6% and the Hang Seng Index fell 1.7%.
The Shanghai Composite has slumped 21% this year, the worst performer among the 93 benchmarks tracked by Bloomberg, on concern slowing economic growth will curb corporate earnings and trigger capital outflows.
Gauges of technology and material shares in the CSI 300 dropped at least 2.5% for the steepest declines among 10 industry groups. Beijing Shiji Information Technology and Neusoft fell more than 4%. Wuhan Iron & Steel declined 3.4%, while Xiamen Tungsten slumped 3.7%.
The China Securities Regulatory Commission told some brokerages during a recent meeting that reverse mergers will be strictly regulated, according to a Securities Times report that cited an investment banker it didn’t name.
The CSRC is adopting the same requirement for reverse mergers as that for initial public offerings and banning backdoor listings through companies on the ChiNext, the report said. The agency said earlier this month that it is conducting “in-depth” analysis of how companies returning to Chinese exchanges via IPOs or mergers and acquisitions affect the stock market.
Investors should position for a stock link between bourses in Hong Kong and Shenzhen because it’s a matter of when and not if the program will start, said Freeman Tsang, director of business development at Legg Mason Asset Management Hong Kong. He added that investors shouldn’t hold too high an expectation for a possible announcement of the Shenzhen link during Zhang Dejiang’s ongoing visit to Hong Kong.
Zhang, the Communist Party’s No. 3 official and the highest-ranking state leader to visit Hong Kong in four years, urged greater integration with the mainland’s development plans.
The existing stock connect between Shanghai and Hong Kong enjoyed a bumper day on Tuesday, with southbound volume - orders from the mainland into Hong Kong Exchanges & Clearing's market - hitting a 13-month high.
Chinese investors used up 2.6 billion yuan of their daily quota for buying Hong Kong shares, the most since April 2015, according to data compiled by Bloomberg.
