Last updated: June 24, 2013 10:36 am

China stocks fall into bear market territory

Chinese stocks suffered their worst day in more than three years on Monday, falling into bear market territory as concerns about the country’s financial sector continued to weigh.

The Shanghai Composite index sank 5.3 per cent to close at 1,963 points, its first finish below 2,000 since December last year and its lowest closing level since the depths of the global financial crisis in January 2009.

The CSI 300 – an index of shares listed in Shanghai and Shenzhen – lost 6.3 per cent, and has now fallen 21 per cent from its February peak, putting it into bear market territory. The Hang Seng China enterprises index of mainland companies listed in Hong Kong dropped 3 per cent to its lowest since April 2009.

The dramatic falls came despite an attempt by the People’s Bank of China to provide further clarity on the recent spike in interbank lending rates. The central bank broke its silence on Monday, telling banks to manage their balance sheets better and pay closer attention to their own liquidity positions.

China’s seven-day bond repurchase rate – a key gauge of liquidity – jumped as high as 28 per cent last week, which analysts said was a sign of a stand-off between the country’s commercial lenders and its central bank. Many Chinese banks are heavily exposed to the shadow finance system, which authorities want to bring under control.

Mid-sized lenders were the worst hit in the sell-off, with the Shanghai financials index shedding 7.4 per cent. Shanghai Pudong Development Bank and China Minsheng both dropped 10 per cent, while China Everbright lost 5.8 per cent. The big four Chinese banks also suffered, with ICBC, Bank of China and Agricultural Bank of China all losing 3 per cent.

Many Chinese financials now trade at a price to earnings ratio of under five, and a price to book ratio of less than one, an indication that the market does not believe the companies’ assets are worth their stated value.

Erwin Sanft, China equities strategist at Standard Chartered, said that the market had reacted to the “clear signal” that authorities were now focused on reining in growth in lending, and the knock-on effect that might have on corporate earnings.

“We’ve been in a fairly loose credit environment for the last 12 months. There have been a few shots fired across the bows, but this is the first time we’ve had a real move to slow down credit growth,” he said.

“On a valuation basis the China market has been in a derating for four years already. We’re in a bit of capitulation mode.”

However, Mr Sanft pointed out that Chinese equities were now at their cheapest level since the Sars epidemic a decade ago. The Hang Seng Chinese enterprises index now trades at 7.3 times forward earnings and 1.1 times price to book – the lowest for both measures of value since June 2003, the height of the outbreak.

“These are always the moments to buy the stocks that people like, because valuation gets dragged down and we’ve seen some indiscriminate selling,” he said.

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