Stocks plunge on deleveraging calls

Market spooked by moves against speculation at National Financial Work Conference

The Chinese mainland's two main stock markets in Shanghai and Shenzhen slumped by 1.43 percent and 3.57 percent respectively on Monday, while the tech-heavy start-up board ChiNext plunged by 5.11 percent, the biggest slide since January 2015.

Analysts read the plunge as a rush for cash after the government put deleveraging at the core of its financial work at the recently launched National Financial Work Conference.

The two markets started to plunge shortly after the opening of the two bourses on Monday morning before picking up a little. The Shanghai market closed at 3,176.46 points, while the Shenzhen market closed at 10,055.8 points.

Meanwhile, the ChiNext board slumped by more than 5 percent to 1,656.43 points as of closing time.

In comparison, the SSE 50, the blue-chip stocks on the Shanghai market, sailed against the falling current by gaining 0.32 percent on Monday.

Nearly 500 stocks dropped dramatically by the daily trading limit of 10 percent when the markets closed in the afternoon.

However, a big rallying force on Monday's stock markets was banking shares.

China Citic Bank stocks surged by 6.14 percent as of closing time, while China Everbright Bank shares surged by 3.59 percent.

Speculators retreat

Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology, said that the market slump is a direct reaction to the National Financial Work Conference, which has put deleveraging as the first priority.

"The conference has made clear that in the future, the focus of government financial management is to make finance return to its origin, which is a supportive force behind the real economy. The central government's firm attitude against speculation has caused some speculative investors to start withdrawing capital, " Dong told the Global Times on Monday.

According to him, this is a "positive phenomenon" as the mainland stock markets have been overwhelmed by a large amount of speculative capital since 2015, with companies abandoning their main business and turning to mergers and private placements in order to get windfalls on the stock markets.

"The average price earnings ratio on the ChiNext board has fallen to about 50 currently, from about 80 around 2015, but still is at a relatively high level. So we can see that deleveraging is not such an easy thing to do," Dong noted, adding that despite short-term fluctuations, it would bring the mainland markets into a new situation.

Yang Delong, chief economist at First Seafront Fund, agreed, saying that the conference's notes about increasing the proportion of direct financing has caused people to have concerns that the financial sector might shrink. "After all, the markets are badly frightened after several stock disasters," Yang told the Global Times on Monday.

Dong also said that although withdrawal of speculative capital should continue, it would happen step by step. "It's unlikely to cause an earthquake on markets," he noted.

According to Yang, the fact that some major companies on the ChiNext bourse have lower-than-expected business performance so far this year also fueled the plunge.

For example, shares of Guangdong-based Wens Co dropped by 8.14 percent on Monday, after the company disclosed last week that its profits fell by more than 73.7 percent in the first half of this year.

"I think that the ChiNext board's performance might continue to worsen, and blue-chip stocks will be a much safer harbor for capital," Yang said.

Positive factors

But he stressed that there are also positive factors for the markets' future performance, and one of them is overseas capital's increasing inflow into the mainland markets.

A report sent by UBS strategist Gao Ting to the Global Times on Monday showed that overseas investors are paying more attention to A shares, and they prefer "quality" A-share companies like industrial leaders or those with unique brand values like liquor.

The government might turn to a looser monetary policy given the economic stability, and that would boost liquidity on the stock markets, Yang said.

The plunge came despite the release of forecast-beating GDP growth figures, up 6.9 percent in the second quarter, the National Bureau of Statistics showed.