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Chinese stocks slump as cash injection fails to lift markets

Hong Kong - Chinese stocks tumbled as the central bank’s biggest cash injection in the financial system in three years failed to ease concern that the economic slowdown will deepen.

The Shanghai Composite Index slid 2.6% to 2 897.99 at 2:45 p.m. Hong Kong’s Hang Seng China Enterprises dropped 2.1% to the lowest since March 2009, extending Wednesday’s 4.3% plunge.

Market interest rates are surging in both the mainland and Hong Kong, where the three-month Hong Kong Inter-Bank Offered Rate climbed to the highest level in more than six years.

A gauge of interbank funding availability in China jumped the most in 13 months on Wednesday, ahead of next month’s Chinese New Year holiday.

China is trying to hold borrowing costs down to support its economy without spurring an exodus of funds that drove the yuan to a five-year low this month. The People’s Bank of China said on Thursday it conducted 110bn yuan ($16.7bn) of seven- day reverse-repurchase agreements and 290bn yuan of 28-day contracts.

“The PBOC’s largest cash injection in 3 years is just part of the liquidity management in China where they are shifting towards shorter-term tweaking as compared to longer-term management tools,” said Bernard Aw, a strategist at IG Asia Pte. in Singapore. “But it does suggest that capital outflow is still a huge problem.”

The Shanghai Composite and Hang Seng China indexes have both fallen 18% this year, making them the worst- performing global benchmark measures out of the 93 tracked by Bloomberg.

 Chinese policy makers are fighting to prevent a vicious cycle of capital outflows and a weakening currency with the resulting financial-market volatility heightening concern that China’s deepest economic slowdown since 1990 will worsen.

“H shares retreated fast as Hibor continued to spike,” said Clement Cheng, a trader at RBC Investment Management in Hong Kong. The three-month Hibor in Hong Kong climbed to 0.63%, the highest level since May 2009.

Chinese stocks in Hong Kong are poised for a fresh wave of selling, according to Bank of America Corporation. The H-shares gauge is approaching a level that forces investment banks to pare back their bullish futures positions, said William Chan, the head of Asia Pacific equity derivatives research at BofA’s Merrill Lynch unit in Hong Kong.

“As the market goes lower from here, the downward move may accelerate,” Chan said. “There will be a large amount of hedging in futures which dealers need to unwind.”

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