China’s stock rout has reached a tipping point.
Losses in Shanghai and Shenzhen spilled across Asia Wednesday, sending the region’s benchmark gauge toward its steepest drop in two years. The eight biggest Asian markets fell at least 1 percent, with Hong Kong shares posting their biggest decline since the financial crisis. Gauges of equity volatility in the city and Tokyo surged.
Even as the first three weeks of China’s stock slump wiped out $3.2 trillion in value, developments in the Greece crisis and the Federal Reserve’s latest prognostications took center stage for many asset managers. That’s changing as the deepening rout forces investors to weigh what the losses mean for the global growth outlook.
“Chinese equities are transitioning from a period where we’ve had weak economic growth and a very strong equity market, to an equity market which is looking for confirmation of economic strength,” said Stephen Corry, Hong Kong-based chief investment strategist at the private-bank unit of LGT Group, which oversees about $136 billion. “It has failed to materialize so far. The selloff is therefore an indication that investors have lost confidence in policy makers’ ability to reflate the economy.”
Shares across Asia tumbled and the yen gained after markets in China and Hong Kong plunged more than 5 percent. The MSCI Asia Pacific Index fell 3.2 percent as of 4:15 p.m. in Hong Kong, set for a correction and heading for a five-month low. Australia’s S&P/ASX 200 Index lost 2 percent. U.S. stock-index futures slid 1.2 percent.
Wednesday morning saw another flurry of government support measures for the market, with the central bank promising “ample liquidity.” State-backed China Securities Finance Corp. is seeking at least 500 billion yuan ($81 billion) in liquidity to bolster equities, people familiar with the matter said.
At least 1,300 companies aren’t waiting for a white knight, instead halting trading in their shares. Between those and stocks that fell by their daily limit, sellers are locked out of more than 70 percent of the market.
So far, the rescue efforts aren’t working. The Shanghai Composite fell as much as 8.2 percent before closing 5.9 percent lower. Japan’s Topix index posted its steepest decline since February 2014, sliding 3.3 percent.
‘Bigger Than Greece’
“Until now this thing in China had not caused any impact in the U.S. or in other markets,” said Alex Wong, Hong Kong- based asset-management director at Ample Capital Ltd., which oversees about $129 million. “People worry about how the Chinese economy would affect Japan. Gradually this will drag other markets lower because the magnitude of a China crisis would be far bigger than anything happening in Greece.”
The equity losses in Shanghai and Shenzhen equate to 15 times Greece’s gross domestic product last year.
Koji Toda, chief fund manager at Resona Bank Ltd. in Tokyo, says he’s watching China’s economy, not its stocks. Manufacturing gauges for June missed estimates, reports showed last week. Auto sales slid 3.2 percent last month from a year earlier, according to figures published Wednesday.
“Up until now the authorities were managing to control the slowing of the Chinese economy, but now there’s a bit of anxiety as to whether they can really control it,” Toda said. “Today we’re seeing profit taking as anxiety spreads that it could negatively impact Japanese corporate earnings.”
Companies across Asia that do business in China fell. Fanuc Corp., a maker of robots for Chinese factories, dropped 4.5 percent. Fortescue Metals Group Ltd., an Australian iron-ore developer that gets 96 percent of sales from China, tumbled 6.2 percent. Tata Motors Ltd., an Indian carmaker that counts China as its biggest market, slumped as much as 7.3 percent. Korea’s LG Chem Ltd., which relies on China for 36 percent of revenue from its petrochemicals, sank 8.7 percent.
Mainland policy makers are worried the rout will shake overall financial stability, dent household wealth and consumption, UBS Group AG economists wrote in a note. Investors who made unprecedented bets with borrowed money are now unwinding them at a record pace. Individuals make up about 80 percent of trading in China’s equity market.
“If retail investors — who are central to personal spending — are getting wiped out by the stock market rout and won’t be able to buy anything,” China’s efforts to transition to a consumer-led economy are at risk, said Tatsushi Maeno, head of Japanese equities at Pinebridge Investments Japan. “If Chinese consumers stop spending, then all the products the world sells to them will no longer be bought, and that could impact the fundamentals of the global economy.”
Written by Kana Nishizawa, Adam Haigh, and Yuji Nakamura of Bloomberg